Issue Price Definition for Tax-Exempt Bonds, 88999-89004 [2016-29486]

Download as PDF Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Rules and Regulations and Budget. As required by the Regulatory Flexibility Act, TVA certifies that these regulatory amendments will not have a significant impact on small business entities. Since this rule is nonsubstantive, it is being made effective December 9, 2016. List of Subjects in 18 CFR Part 1301 Freedom of Information, Government in the Sunshine, Privacy. For the reasons stated in the preamble, TVA amends 18 CFR part 1301 as follows: PART 1301—PROCEDURES 1. The authority citation for part 1301 continues to read as follows: ■ Authority: 16 U.S.C. 831–831dd, 5 U.S.C. 552. Subpart B—Privacy Act 2. In § 1301.12, revise paragraphs (d) and (f) to read as follows: ■ § 1301.12 Definitions. mstockstill on DSK3G9T082PROD with RULES * * * * * (d) The term TVA system notice means a notice of a TVA system published in the Federal Register pursuant to the Act. 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Nuclear Access Authorization and Fitness for Duty Records—TVA. * * * * * VerDate Sep<11>2014 16:13 Dec 08, 2016 Jkt 241001 (f) The term reviewing official means TVA’s Senior Vice President, Chief Human Resources Officer (or incumbent of a successor position), or another TVA official designated by the Senior Vice President in writing to decide an appeal pursuant to § 1301.19; * * * * * ■ 3. In § 1301.24, revise paragraph (a) to read as follows: § 1301.24 Specific exemptions. (a) The TVA system Nuclear Access Authorization and Fitness for Duty Records is exempt from subsections (d); (e)(4)(H); and (f)(2), (3), and (4) of 5 U.S.C. 522a (section 3 of the Privacy Act of 1974) to the extent that disclosure of material would reveal the identity of a source who furnished information to the Government under an express promise that the identity of the source would be held in confidence, and to the extent that disclosure of testing or examination material would compromise the objectivity or fairness of the testing or examination process. This exemption is pursuant to 5 U.S.C. 552a (k)(5) and (6). * * * * * Philip D. Propes, Director, Enterprise Information Security and Policy. [FR Doc. 2016–29457 Filed 12–8–16; 8:45 am] BILLING CODE 8120–08–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9801] RIN 1545–BM46 Issue Price Definition for Tax-Exempt Bonds Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations on the definition of issue price for purposes of the arbitrage investment restrictions that apply to taxexempt bonds and other tax-advantaged bonds. These final regulations affect State and local governments that issue tax-exempt bonds and other taxadvantaged bonds. DATES: Effective date: These regulations are effective on December 9, 2016. Applicability date: For the date of applicability, see § 1.148–11(m). FOR FURTHER INFORMATION CONTACT: Lewis Bell at (202) 317–6980 (not a tollfree number). SUMMARY: PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 88999 SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545– 1347. The collection of information in these final regulations is in § 1.148– 1(f)(2)(ii), which requires the underwriter to provide to the issuer a certification and reasonable supporting documentation for use of the initial offering price to the public, § 1.148– 1(f)(2)(iii), which requires the issuer to obtain a certification from the underwriter for competitive sales, and § 1.148–1(f)(2)(iv), which requires the issuer to identify in its books and records the rule used to determine the issue price of the bonds. The respondents are issuers of tax-exempt bonds that want to apply the special rules in § 1.148–1(f)(2) to determine the issue price of the bonds. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by section 6103. Background This document contains amendments to the Income Tax Regulations (26 CFR part 1) on the arbitrage investment restrictions under section 148 of the Internal Revenue Code (Code). On June 18, 1993, the Department of the Treasury (Treasury Department) and the IRS published comprehensive final regulations in the Federal Register (TD 8476, 58 FR 33510) on the arbitrage investment restrictions and related provisions for tax-exempt bonds under sections 103, 148, 149, and 150. Since that time, those final regulations have been amended in various limited respects, including most recently in final regulations published in the Federal Register (TD 9777, 81 FR 46582) on July 18, 2016 (the regulations issued in 1993 and the various amendments thereto are collectively referred to as the Existing Regulations). A notice of proposed rulemaking was published in the Federal Register (78 FR 56842; REG–148659–07) on E:\FR\FM\09DER1.SGM 09DER1 89000 Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Rules and Regulations September 16, 2013 (the 2013 Proposed Regulations), which, among other things, proposed to amend the definition of ‘‘issue price.’’ Subsequently, the Treasury Department and the IRS withdrew § 1.148–1(f) of the 2013 Proposed Regulations regarding the definition of issue price and published another notice of proposed rulemaking in the Federal Register (80 FR 36301; REG–138526–14) on June 24, 2015, which re-proposed a definition of issue price (the 2015 Proposed Regulations). Comments were received and a public hearing was held on October 28, 2015. After consideration of all of the public comments, the Treasury Department and the IRS adopt the 2015 Proposed Regulations, with revisions, by this Treasury decision (the Final Regulations). mstockstill on DSK3G9T082PROD with RULES Summary of Comments and Explanation of Provisions This section discusses the comments received from the public regarding the 2015 Proposed Regulations. The comments are available for public inspection at www.regulations.gov. This section also explains revisions made in the Final Regulations. 1. Introduction Under section 103, interest received by investors on eligible State and local bonds is exempt from Federal income tax. As a result, tax-exempt bonds tend to have lower interest rates than taxable obligations. Section 148 generally limits investment of proceeds of tax-exempt bonds to investment yields that are not materially higher than the yield on the bond issue. Section 148 also generally requires that excess investment earnings be paid to the Federal Government at periodic intervals. For purposes of these arbitrage investment restrictions, section 148(h) provides that yield on an issue is to be determined on the basis of the issue price (within the meaning of sections 1273 and 1274). The reason for using issue price (rather than sales proceeds less the costs of issuance) to determine yield for purposes of section 148(h) is to ensure that issuers bear the costs of issuance, rather than recover these costs through arbitrage profits. See H. Rep. No. 99–426, at 517 (1985). The report of the Committee on Ways and Means states that the Committee believed that this requirement would encourage issuers to scrutinize costs of issuance more closely and would encourage better targeting of the federal subsidy associated with tax-exempt bonds. Id., at 517–518. In general, the lower the issue price for bonds bearing a stated interest rate, the higher the yield. An issuer has an economic VerDate Sep<11>2014 16:13 Dec 08, 2016 Jkt 241001 incentive to receive the highest price for bonds and to pay the lowest yield. This aligns with the purpose of the arbitrage restrictions, which is to minimize arbitrage investment benefits and remove incentives to issue more taxexempt bonds, and thus to limit the federal revenue cost of the tax subsidy for tax-exempt bonds. The issue price definition under the Existing Regulations generally follows the issue price definition used for computing original issue discount on debt instruments under sections 1273 and 1274, with certain modifications. The definition of issue price under the Existing Regulations provides generally that the issue price of bonds that are publicly offered is the first price at which a substantial amount of the bonds is sold to the public. The Existing Regulations define a substantial amount to mean ten percent. Further, the Existing Regulations include a special rule that applies a reasonable expectations standard (rather than a standard based on actual sales) to determine, as of the sale date,1 the issue price for bonds for which a bona fide public offering is made, based on reasonable expectations regarding the initial offering price. The issue prices of bonds with different payment and credit terms are determined separately. Taxexempt bond issues often include bonds with different payment and credit terms that generally sell at different prices. The special rule in the Existing Regulations that provides for the determination of issue price as of the sale date based on reasonable expectations about the initial public offering price aims, in part, to provide certainty that the bonds will qualify as tax-exempt bonds and meet State or local requirements for debt issuance. Generally, the sale date is the date when the syndicate or sole underwriter in contractual privity with the issuer signs the agreement to buy the bonds from the issuer and when the terms of the bond issue are set. In the municipal bond market, due largely to the serial maturity structure and, in many cases, an inability to sell a substantial amount of each of the different maturities of the bonds with different terms (for which issue price must be determined separately) by the sale date, issuers may have difficulties in establishing the issue price of all of the bonds included 1 Under § 1.150–1(c)(6), the sale date of a bond is the first day on which there is a binding contract in writing for the sale or exchange of the bond. By comparison, under § 1.150–1(b), the issue date for a bond is the date on which the issuer receives the purchase price in exchange for that bond, commonly referred to as the closing date or settlement date. PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 within an issue by the sale date, unless a special rule is available. 2. General Rule: Actual Sale of a Substantial Amount of Bonds Consistent with section 148(h), the 2015 Proposed Regulations proposed to retain the rule that issue price generally will be determined under the rules of sections 1273 and 1274. The 2015 Proposed Regulations also proposed a general rule similar to that in the regulations under section 1273 that the issue price of bonds issued for money is the first price at which a substantial amount of the bonds is sold to the public. The 2015 Proposed Regulations proposed to retain the rule in the Existing Regulations that ten percent is the measure of a substantial amount. The 2015 Proposed Regulations also proposed to retain the rule that the issue prices of bonds with different payment and credit terms are determined separately. Commenters recommended adding an express rule to address the treatment of private placements (for example, bank loans), which in the municipal bond industry typically do not involve underwriters. Commenters also recommended clarifying that an issuer may use the general rule to determine issue price even if the issuer had sought to use the special rule based on the initial offering price to the public discussed in section 3 of this preamble. The Treasury Department and the IRS agree with these recommendations. The Final Regulations retain the rules in the Existing Regulations and the general rule of the 2015 Proposed Regulations that, for bonds issued for money, the issue price is the first price at which a substantial amount of the bonds is sold to the public, and a substantial amount is ten percent. In addition, in response to comments, the Final Regulations expressly provide that, for a bond issued for money in a private placement to a single buyer that is not an underwriter or a related party (as defined in § 1.150–1(b)) to an underwriter, the issue price of the bond is the price paid by that buyer. Further, the Final Regulations clarify that for bonds for which more than one rule for determining issue price is available, for example, the general rule and one of the special rules discussed in sections 3 and 4 of this preamble, an issuer may select the rule it will use to determine the issue price for the bonds at any time on or before the issue date of the bonds. On or before the issue date of the bonds, the issuer must identify the rule selected in its books and records maintained for the bonds. E:\FR\FM\09DER1.SGM 09DER1 Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES A commenter suggested that a specific time on the sale date should be established as the proper time for determining issue price. The Treasury Department and the IRS understand that it has been a longstanding practice to determine issue price on the sale date without regard to a specific time and that it is unlikely for bonds to be sold to the public at different prices on that date. Thus, the imposition of a specific time deadline for such determination seems unnecessary and would add to the administrative burden. The Final Regulations do not adopt this comment. 3. Special Rule for Use of the Initial Offering Price to the Public The 2015 Proposed Regulations proposed a special rule that would allow an issuer to treat the initial offering price to the public as the issue price as of the sale date, provided certain requirements were met. That proposed special rule (referred to as the ‘‘alternative method’’ in the 2015 Proposed Regulations) proposed to require that the lead underwriter (or sole underwriter, if applicable) certify certain matters, including that no underwriter would sell bonds after the sale date and before the issue date at a price higher than the initial offering price except if the higher price was the result of a market change for the bonds after the sale date (for example, due to a change in market interest rates), and that the lead underwriter provide the issuer with supporting documentation for the matters covered by the certifications, including a justification for any higher price based on a market change. (This proposed requirement for underwriters generally to hold the price at no higher than the initial offering price to the public until the issue date is sometimes referred to herein as the ‘‘hold-the-offering-price’’ requirement.) Commenters favored a special rule to allow use of the initial offering price to the public to set the issue price as of the sale date. Numerous commenters, however, expressed concerns about various aspects of the eligibility requirements for this proposed special rule. One concern expressed by underwriters was that the requirement for the lead underwriter to provide certification as to the actions of the entire underwriting syndicate or selling group was overly broad. Instead, underwriters recommended allowing members of an underwriting syndicate or a selling group to agree individually to act in accordance with the specific matters required under the special rule. The Final Regulations adopt the comment that each underwriter is individually or severally responsible for VerDate Sep<11>2014 16:13 Dec 08, 2016 Jkt 241001 its agreement (rather than jointly responsible with other underwriters). Several commenters suggested that the hold-the-offering-price requirement would result in lower offering prices and should not be included in the special rule. One concern expressed related to the differing time periods between the sale date and the issue date for various issuers. One commenter recommended limiting the time period for holding the price to six business days after the sale date. Further, notwithstanding the potential flexibility in pricing afforded by the proposed market change exception to the holdthe-offering-price requirement, commenters overwhelmingly objected to this exception as unworkable because of the absence of meaningful benchmarks for municipal bond prices. Commenters also expressed concern that use of this exception could lead to audit disputes over appropriate documentation to support such price changes. Accordingly, the Final Regulations adopt a modified hold-the-offering-price requirement that requires underwriters to hold the price for offering and selling unsold bonds at a price that is no greater than the initial offering price to the public for a shorter time period that ends on the earlier of (1) the close of the date that is the fifth (5th) business day after the sale date or (2) the date on which the underwriters have sold a substantial amount of the bonds to the public. Further, in response to the overwhelming negative comments about the proposed market change exception to the proposed hold-the-offering-price requirement, the Final Regulations omit the market change exception. The modified hold-the-offering-price requirement in the Final Regulations provides a standardized time period for application of the requirement to bonds regardless of the differing time periods among issuers between sales and closings of municipal bond issues. Further, the shorter time period for this requirement should reduce potential associated risks to underwriters and thereby limit the effects of this requirement on initial pricing to issuers and, at the same time, ensure that market pricing behavior is consistent with the initial offering price used for issue price determinations. Two commenters suggested confirming that, for purposes of the hold-the-offering-price requirement, an underwriter may sell bonds to anyone at a price that is lower (rather than higher) than the initial offering price to the public under this special rule. This special rule expressly provides for this result under the Final Regulations. One commenter sought clarification that PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 89001 underwriters may sell bonds to other underwriters at prices that are higher than the initial offering price to the public under this special rule. Sales to underwriters at such higher prices are inconsistent with a purpose of this special rule to use the initial offering price to the public as a proxy for the issuer’s agreement with the underwriters about the maximum amount of underwriters’ compensation that is reflected in setting the issue price. Thus, the Final Regulations clarify that underwriters may not sell the bonds at a price that is higher than the initial offering price to the public. Several commenters recommended a different special rule that would base determinations of issue price on sales of an aggregate percentage of all of the bonds included within an issue, as distinguished from the bond-by-bond method required to determine issue price for bonds with different interest rates, maturities, credits, or payment terms under the Existing Regulations and the 2015 Proposed Regulations. Commenters recommended different percentages of sales of aggregate principal amounts of bonds within an issue to determine issue price, including 25 percent, 50 percent, and 65 percent. Although a rule that would focus on actual sales of greater percentages of the aggregate principal amounts of bonds included within an issue to determine issue price has potential utility, the Treasury Department and the IRS have concerns about the comparability of the terms of unsold bonds with the terms of sold bonds, which would serve as a proxy for setting the issue price of the unsold bonds, and about the attendant potential complexity to ensure appropriate comparability. Further, the Treasury Department and the IRS have concerns about selection of an appropriate percentage of aggregate sales for such a rule and whether issuers would be able to sell the required percentage of the aggregate principal amount of bonds within the issue. The public comments did not reflect any consensus on an appropriate percentage of aggregate sales for such a rule. In addition, several of the comments in favor of such a rule focused particularly on the need for a more workable rule for competitive sales. In response to this concern, the Final Regulations provide a simplified special rule for competitive sales, as described in section 4 of this preamble. Accordingly, the Final Regulations do not adopt a rule that would focus on actual sales of greater percentages of the aggregate principal amounts of bonds included within an issue. E:\FR\FM\09DER1.SGM 09DER1 89002 Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES In summary, the Final Regulations provide a special rule under which an issuer may treat the initial offering price to the public as the issue price of the bonds as of the sale date if: (1) The underwriters offered the bonds to the public at a specified initial offering price on or before the sale date, and the lead underwriter in the underwriting syndicate or selling group (or, if applicable, the sole underwriter) provides, on or before the issue date, a certification to that effect to the issuer, together with reasonable supporting documentation for that certification, such as a copy of the pricing wire or equivalent communication; and (2) each underwriter agrees in writing that it will neither offer nor sell the bonds to any person at a price that is higher than the initial offering price during the period starting on the sale date and ending on the earlier of the close of the fifth (5th) business day after the sale date, or the date on which the underwriters have sold a substantial amount of the bonds to the public at a price that is no higher than the initial offering price to the public. 4. Special Rule for Competitive Sales Numerous commenters, including four States, strongly urged a streamlined special rule for competitive sales to allow the reasonably expected initial offering price to the public reflected in the winning bid in a competitive sale to establish the issue price without a holdthe-offering-price requirement or other restrictions. Commenters suggested that the public bidding process for pricing municipal bonds in competitive sales itself provides a sufficient basis to achieve the best pricing for issuers. The Treasury Department and the IRS recognize that competitive sales favor competition and price transparency that may result in better pricing for issuers. The Final Regulations adopt these comments and provide that, for bonds issued for money pursuant to an eligible competitive sale, an issuer may treat the reasonably expected initial offering price to the public of the bonds as the issue price of the bonds as of the sale date if the issuer obtains a certification from the winning bidder regarding the reasonably expected initial offering price to the public of the bonds upon which the price in the winning bid is based. For purposes of this special rule, the Final Regulations define competitive sale to mean a sale of bonds by an issuer to an underwriter that is the winning bidder in a bidding process in which the issuer offers the bonds for sale to underwriters at specified written terms and that meets the following VerDate Sep<11>2014 16:13 Dec 08, 2016 Jkt 241001 requirements: (1) The issuer disseminates the notice of sale to potential underwriters in a manner reasonably designed to reach potential underwriters; (2) all bidders have an equal opportunity to bid; (3) the issuer receives bids from at least three underwriters of municipal bonds who have established industry reputations for underwriting new issuances of municipal bonds; and (4) the issuer awards the sale to the bidder who offers the highest price (or lowest interest cost). 5. Definitions The 2015 Proposed Regulations proposed to define the term ‘‘public’’ for purposes of determining the issue price of tax-exempt bonds to mean any person other than an underwriter or a related party to an underwriter. Several commenters recommended expanding the definition of public to include related parties to underwriters. This recommended change would allow various affiliates of underwriters, such as entities involved in proprietary trading, to qualify as members of the public for purposes of determining issue price. The Final Regulations do not adopt this comment. The Final Regulations retain this related party restriction on the definition of the public as a safeguard to protect against potential abuse. The 2015 Proposed Regulations proposed to define ‘‘underwriter’’ to include: (1) Any person that contractually agrees to participate in the initial sale of the bonds to the public by entering into a contract with the issuer or into a contract with a lead underwriter to form an underwriting syndicate and (2) any person that, on or before the sale date, directly or indirectly enters into a contract or other arrangement with any of the foregoing to sell the bonds. Numerous commenters expressed significant concern that the phrase ‘‘other arrangement’’ in the definition of underwriter was vague and unworkable. One commenter asked if distribution arrangements (for example, a retail distribution contract between a member of an underwriting syndicate or selling group and another dealer that is not in the syndicate or selling group) were included. Another commenter suggested changes to clarify that a contract to sell the bonds be limited to a contract with respect to the initial sale of the bonds to the public. In response to these comments, the Final Regulations omit the phrase ‘‘or other arrangement’’ from the definition of underwriter. The Final Regulations also clarify that covered agreements must relate to the initial sale of the bonds to PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 the public and that these agreements include retail distribution agreements. 6. Standard for Reliance on Certifications and Consequences of Violations The 2015 Proposed Regulations proposed a standard that would limit an issuer’s ability to rely on certifications from underwriters to circumstances in which an issuer did not know or have reason to know, after exercising due diligence, that the certifications were false. Several commenters expressed concerns about this proposed standard for reliance on certifications. One commenter expressed particular concern that the proposed standard appeared to be higher than or different from the general due diligence standard for determining reasonable expectations that bonds are not arbitrage bonds under § 1.148–2(b) of the Existing Regulations. The existing definition of reasonable expectations, found in § 1.148–1(b) of the Existing Regulations, treats an issuer’s expectations or actions as reasonable only if a prudent person in the same circumstances as the issuer would have those same expectations or take those same actions, based on all the objective facts and circumstances. One commenter also sought confirmation that issuers could rely on certifications from underwriters without independent verification. In response to the comments, the Final Regulations omit the proposed special standard for reliance on underwriters’ certifications. Instead, the existing due diligence standard under the Existing Regulations for reasonable expectations or reasonableness will apply to any certification under the Final Regulations. For example, this existing due diligence standard will apply under the special rule on competitive sales to an issuer’s reliance on a certification from the winning bidder regarding the reasonably expected initial offering price to the public of the bonds upon which the price in the winning bid is based. Several commenters urged providing conclusive legal certainty for issue price determinations as of the sale date based on receipt of required underwriter certifications without regard to whether such certifications subsequently proved to be false. Although the Final Regulations generally will allow issuers to establish the issue price as of the sale date, the Final Regulations do not adopt this comment. Accordingly, a failure to meet a specific eligibility requirement of a rule for determining issue price, such as an underwriter’s breach of its holdthe-offering-price agreement under the special rule for use of initial offering E:\FR\FM\09DER1.SGM 09DER1 Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES price, will result in a failure to establish issue price under that rule and a redetermination of issue price under a different rule. The potential invalidation of an issue price determination is important to ensure compliance with the arbitrage restrictions and the legal availability of penalties against underwriters for false statements. A false statement by an underwriter in a certification or in the agreement among underwriters under one of these special rules may result in a penalty against the underwriter under section 6700, depending on the facts and circumstances. In accordance with section 6001, the issuer must maintain reasonable documentation in its books and records to support its issue price determinations. In addition, the Final Regulations require that the issuer obtain from the underwriter certain certifications and other reasonable supporting documentation such as a pricing wire to establish its issue price determination under a specific rule in the Final Regulations. A certification from the underwriter of the first price at which ten percent of the bonds were sold to the public is an example of reasonable supporting documentation to establish the issue price of the bonds under the general rule in the Final Regulations. 7. Other Comments A commenter requested a special rule under section 148 to determine issue price in a debt-for-debt exchange, including an exchange resulting from a significant modification under § 1.1001– 3. Under the special rule, an issuer would have the option to use a taxexempt bond’s stated principal amount as the issue price rather than the issue price that otherwise would apply under section 1273 or 1274. The commenter requested the rule because, in the commenter’s experience, the stated interest rate on a tax-exempt bond issued in a debt-for-debt exchange was generally less than the adjusted applicable Federal rate (AAFR) used under section 1288 to determine whether the bond has adequate stated interest for purposes of section 1274. In this situation, the issue price of the bond would be less than the bond’s stated principal amount, resulting in an arbitrage yield that is higher than it otherwise would be if the bond were treated as issued for an amount equal to the bond’s stated principal amount. The Final Regulations do not include such a rule because, since the date of the commenter’s request, the method to determine the AAFR has been modified in TD 9763, 81 FR 24482 (April 26, VerDate Sep<11>2014 16:13 Dec 08, 2016 Jkt 241001 89003 2016). As a result of this modification, it is more likely that the issue price of a tax-exempt bond issued in a debt-fordebt exchange will be the bond’s stated principal amount under section 1273 or 1274 (for example, because the AAFR will not be greater than the corresponding applicable Federal rate for taxable bonds, as it was in certain years before the modification). In addition, some commenters recommended allowing the use of issue price as defined for arbitrage purposes in applying various limitations for other tax-exempt bond purposes, such as those based on principal amounts, face amounts, and sale proceeds. The Final Regulations do not adopt this recommendation because it raises issues that are beyond the scope of the 2015 Proposed Regulations, and the recommended extension of the application of the definition of issue price beyond arbitrage purposes appropriately warrants a separate opportunity for public comment. The Treasury Department and the IRS, however, expect to consider this recommendation in connection with future guidance. bonds for audit and other purposes. Any economic impact of obtaining this information is minimal because most of the information already is provided to issuers by the underwriters under existing industry practices. Accordingly, these changes do not add to the impact on small entities imposed by the statutory provision. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the 2015 Proposed Regulations preceding these Final Regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received. Applicability Date The Final Regulations apply to bonds that are sold on or after June 7, 2017. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Special Analyses Certain IRS regulations, including these Final Regulations, are exempt from the requirements of Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory impact assessment is not required. It is hereby certified that these Final Regulations will not have a significant economic impact on a substantial number of small entities. This certification is based generally on the fact that any effect on small entities by these rules generally flows from section 148 of the Code. Section 148(h) of the Code requires the yield on an issue of bonds to be determined on the basis of issue price (within the meaning of sections 1273 and 1274). Under section 1273(b), the issue price is the first price at which a substantial amount of the bonds is sold to the public. Section 1.148–1(f)(2) of the Final Regulations gives effect to the statute by requiring the issuer to (1) obtain certain documentation from the underwriter, which is the party that sells the bonds to the public, to support the issuer’s determination of issue price and (2) indicate in its books and records the rule used by the issuer to determine issue price. This information will be used to support the issue price of the Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 Drafting Information The principal authors of these regulations are Johanna Som de Cerff and Lewis Bell, Office of Associate Chief Counsel (Financial Institutions and Products), IRS. However, other personnel from the Treasury Department and the IRS participated in their development. PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.148–0(c) is amended by adding entries for §§ 1.148–1(f) and 1.148–11(m) to read as follows: ■ § 1.148–0 * Scope and table of contents. * * (c) * * * § 1.148–1 * * Definitions and elections. * * * * * (f) Definition of issue price. (1) In general. (2) Bonds issued for money. (3) Definitions. (4) Other special rules. * * * * * § 1.148–11 Effective/applicability dates. * * * * * (m) Definition of issue price. ■ Par. 3. Section 1.148–1 is amended by revising the definition of ‘‘Issue price’’ in paragraph (b) and adding paragraph (f) to read as follows: E:\FR\FM\09DER1.SGM 09DER1 89004 § 1.148–1 Federal Register / Vol. 81, No. 237 / Friday, December 9, 2016 / Rules and Regulations Definitions and elections. mstockstill on DSK3G9T082PROD with RULES * * * * * (b) * * * Issue price means issue price as defined in paragraph (f) of this section. * * * * * (f) Definition of issue price—(1) In general. Except as otherwise provided in this paragraph (f), ‘‘issue price’’ is defined in sections 1273 and 1274 and the regulations under those sections. (2) Bonds issued for money—(i) General rule. Except as otherwise provided in this paragraph (f)(2), the issue price of bonds issued for money is the first price at which a substantial amount of the bonds is sold to the public. If a bond is issued for money in a private placement to a single buyer that is not an underwriter or a related party (as defined in § 1.150–1(b)) to an underwriter, the issue price of the bond is the price paid by that buyer. Issue price is not reduced by any issuance costs (as defined in § 1.150–1(b)). (ii) Special rule for use of initial offering price to the public. The issuer may treat the initial offering price to the public as of the sale date as the issue price of the bonds if the requirements of paragraphs (f)(2)(ii)(A) and (B) of this section are met. (A) The underwriters offered the bonds to the public for purchase at a specified initial offering price on or before the sale date, and the lead underwriter in the underwriting syndicate or selling group (or, if applicable, the sole underwriter) provides, on or before the issue date, a certification to that effect to the issuer, together with reasonable supporting documentation for that certification, such as a copy of the pricing wire or equivalent communication. (B) Each underwriter agrees in writing that it will neither offer nor sell the bonds to any person at a price that is higher than the initial offering price to the public during the period starting on the sale date and ending on the earlier of the following: (1) The close of the fifth (5th) business day after the sale date; or (2) The date on which the underwriters have sold a substantial amount of the bonds to the public at a price that is no higher than the initial offering price to the public. (iii) Special rule for competitive sales. For bonds issued for money in a competitive sale, an issuer may treat the reasonably expected initial offering price to the public as of the sale date as the issue price of the bonds if the issuer obtains from the winning bidder a certification of the bonds’ reasonably expected initial offering price to the VerDate Sep<11>2014 16:13 Dec 08, 2016 Jkt 241001 public as of the sale date upon which the price in the winning bid is based. (iv) Choice of rule for determining issue price. If more than one rule for determining the issue price of the bonds is available under this paragraph (f)(2), at any time on or before the issue date, the issuer may select the rule it will use to determine the issue price of the bonds. On or before the issue date of the bonds, the issuer must identify the rule selected in its books and records maintained for the bonds. (3) Definitions. For purposes of this paragraph (f), the following definitions apply: (i) Competitive sale means a sale of bonds by an issuer to an underwriter that is the winning bidder in a bidding process in which the issuer offers the bonds for sale to underwriters at specified written terms, if that process meets the following requirements: (A) The issuer disseminates the notice of sale to potential underwriters in a manner that is reasonably designed to reach potential underwriters (for example, through electronic communication that is widely circulated to potential underwriters by a recognized publisher of municipal bond offering documents or by posting on an Internet-based Web site or other electronic medium that is regularly used for such purpose and is widely available to potential underwriters); (B) All bidders have an equal opportunity to bid (within the meaning of § 1.148–5(d)(6)(iii)(A)(6)); (C) The issuer receives bids from at least three underwriters of municipal bonds who have established industry reputations for underwriting new issuances of municipal bonds; and (D) The issuer awards the sale to the bidder who submits a firm offer to purchase the bonds at the highest price (or lowest interest cost). (ii) Public means any person (as defined in section 7701(a)(1)) other than an underwriter or a related party (as defined in § 1.150–1(b)) to an underwriter. (iii) Underwriter means: (A) Any person (as defined in section 7701(a)(1)) that agrees pursuant to a written contract with the issuer (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the bonds to the public; and (B) Any person that agrees pursuant to a written contract directly or indirectly with a person described in paragraph (f)(3)(iii)(A) of this section to participate in the initial sale of the bonds to the public (for example, a retail distribution agreement between a national lead underwriter and a regional firm under PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 which the regional firm participates in the initial sale of the bonds to the public). (4) Other special rules. For purposes of this paragraph (f), the following special rules apply: (i) Separate determinations. The issue price of bonds in an issue that do not have the same credit and payment terms is determined separately. The issuer need not apply the same rule to determine issue price for all of the bonds in the issue. (ii) Substantial amount. Ten percent is a substantial amount. (iii) Bonds issued for property. If a bond is issued for property, the adjusted applicable Federal rate, as determined under section 1288 and § 1.1288–1, is used in lieu of the applicable Federal rate to determine the bond’s issue price under section 1274. ■ Par. 4. Section 1.148–11 is amended by adding paragraph (m) to read as follows: § 1.148–11 Effective/applicability dates. * * * * * (m) Definition of issue price. The definition of issue price in § 1.148–1(b) and (f) applies to bonds that are sold on or after June 7, 2017. John Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: November 22, 2016. Mark J. Mazur, Assistant Secretary of the Treasury for Tax Policy. [FR Doc. 2016–29486 Filed 12–8–16; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301 [TD 9802] RIN 1545–BN64 Disclosures of Return Information Reflected on Returns to Officers and Employees of the Department of Commerce for Certain Statistical Purposes and Related Activities Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulations. AGENCY: This document contains temporary regulations that authorize the disclosure of certain items of return information to the Bureau of the Census (Bureau) in conformance with section 6103(j)(1) of the Internal Revenue Code (Code). These temporary regulations are SUMMARY: E:\FR\FM\09DER1.SGM 09DER1

Agencies

[Federal Register Volume 81, Number 237 (Friday, December 9, 2016)]
[Rules and Regulations]
[Pages 88999-89004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29486]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9801]
RIN 1545-BM46


Issue Price Definition for Tax-Exempt Bonds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the definition of 
issue price for purposes of the arbitrage investment restrictions that 
apply to tax-exempt bonds and other tax-advantaged bonds. These final 
regulations affect State and local governments that issue tax-exempt 
bonds and other tax-advantaged bonds.

DATES: Effective date: These regulations are effective on December 9, 
2016.
    Applicability date: For the date of applicability, see Sec.  1.148-
11(m).

FOR FURTHER INFORMATION CONTACT: Lewis Bell at (202) 317-6980 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1347. The collection of information 
in these final regulations is in Sec.  1.148-1(f)(2)(ii), which 
requires the underwriter to provide to the issuer a certification and 
reasonable supporting documentation for use of the initial offering 
price to the public, Sec.  1.148-1(f)(2)(iii), which requires the 
issuer to obtain a certification from the underwriter for competitive 
sales, and Sec.  1.148-1(f)(2)(iv), which requires the issuer to 
identify in its books and records the rule used to determine the issue 
price of the bonds. The respondents are issuers of tax-exempt bonds 
that want to apply the special rules in Sec.  1.148-1(f)(2) to 
determine the issue price of the bonds.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally tax returns and 
tax return information are confidential, as required by section 6103.

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) on the arbitrage investment restrictions under section 148 
of the Internal Revenue Code (Code). On June 18, 1993, the Department 
of the Treasury (Treasury Department) and the IRS published 
comprehensive final regulations in the Federal Register (TD 8476, 58 FR 
33510) on the arbitrage investment restrictions and related provisions 
for tax-exempt bonds under sections 103, 148, 149, and 150. Since that 
time, those final regulations have been amended in various limited 
respects, including most recently in final regulations published in the 
Federal Register (TD 9777, 81 FR 46582) on July 18, 2016 (the 
regulations issued in 1993 and the various amendments thereto are 
collectively referred to as the Existing Regulations).
    A notice of proposed rulemaking was published in the Federal 
Register (78 FR 56842; REG-148659-07) on

[[Page 89000]]

September 16, 2013 (the 2013 Proposed Regulations), which, among other 
things, proposed to amend the definition of ``issue price.'' 
Subsequently, the Treasury Department and the IRS withdrew Sec.  1.148-
1(f) of the 2013 Proposed Regulations regarding the definition of issue 
price and published another notice of proposed rulemaking in the 
Federal Register (80 FR 36301; REG-138526-14) on June 24, 2015, which 
re-proposed a definition of issue price (the 2015 Proposed 
Regulations). Comments were received and a public hearing was held on 
October 28, 2015. After consideration of all of the public comments, 
the Treasury Department and the IRS adopt the 2015 Proposed 
Regulations, with revisions, by this Treasury decision (the Final 
Regulations).

Summary of Comments and Explanation of Provisions

    This section discusses the comments received from the public 
regarding the 2015 Proposed Regulations. The comments are available for 
public inspection at www.regulations.gov. This section also explains 
revisions made in the Final Regulations.

1. Introduction

    Under section 103, interest received by investors on eligible State 
and local bonds is exempt from Federal income tax. As a result, tax-
exempt bonds tend to have lower interest rates than taxable 
obligations. Section 148 generally limits investment of proceeds of 
tax-exempt bonds to investment yields that are not materially higher 
than the yield on the bond issue. Section 148 also generally requires 
that excess investment earnings be paid to the Federal Government at 
periodic intervals. For purposes of these arbitrage investment 
restrictions, section 148(h) provides that yield on an issue is to be 
determined on the basis of the issue price (within the meaning of 
sections 1273 and 1274). The reason for using issue price (rather than 
sales proceeds less the costs of issuance) to determine yield for 
purposes of section 148(h) is to ensure that issuers bear the costs of 
issuance, rather than recover these costs through arbitrage profits. 
See H. Rep. No. 99-426, at 517 (1985). The report of the Committee on 
Ways and Means states that the Committee believed that this requirement 
would encourage issuers to scrutinize costs of issuance more closely 
and would encourage better targeting of the federal subsidy associated 
with tax-exempt bonds. Id., at 517-518. In general, the lower the issue 
price for bonds bearing a stated interest rate, the higher the yield. 
An issuer has an economic incentive to receive the highest price for 
bonds and to pay the lowest yield. This aligns with the purpose of the 
arbitrage restrictions, which is to minimize arbitrage investment 
benefits and remove incentives to issue more tax-exempt bonds, and thus 
to limit the federal revenue cost of the tax subsidy for tax-exempt 
bonds.
    The issue price definition under the Existing Regulations generally 
follows the issue price definition used for computing original issue 
discount on debt instruments under sections 1273 and 1274, with certain 
modifications. The definition of issue price under the Existing 
Regulations provides generally that the issue price of bonds that are 
publicly offered is the first price at which a substantial amount of 
the bonds is sold to the public. The Existing Regulations define a 
substantial amount to mean ten percent. Further, the Existing 
Regulations include a special rule that applies a reasonable 
expectations standard (rather than a standard based on actual sales) to 
determine, as of the sale date,\1\ the issue price for bonds for which 
a bona fide public offering is made, based on reasonable expectations 
regarding the initial offering price. The issue prices of bonds with 
different payment and credit terms are determined separately. Tax-
exempt bond issues often include bonds with different payment and 
credit terms that generally sell at different prices.
---------------------------------------------------------------------------

    \1\ Under Sec.  1.150-1(c)(6), the sale date of a bond is the 
first day on which there is a binding contract in writing for the 
sale or exchange of the bond. By comparison, under Sec.  1.150-1(b), 
the issue date for a bond is the date on which the issuer receives 
the purchase price in exchange for that bond, commonly referred to 
as the closing date or settlement date.
---------------------------------------------------------------------------

    The special rule in the Existing Regulations that provides for the 
determination of issue price as of the sale date based on reasonable 
expectations about the initial public offering price aims, in part, to 
provide certainty that the bonds will qualify as tax-exempt bonds and 
meet State or local requirements for debt issuance. Generally, the sale 
date is the date when the syndicate or sole underwriter in contractual 
privity with the issuer signs the agreement to buy the bonds from the 
issuer and when the terms of the bond issue are set. In the municipal 
bond market, due largely to the serial maturity structure and, in many 
cases, an inability to sell a substantial amount of each of the 
different maturities of the bonds with different terms (for which issue 
price must be determined separately) by the sale date, issuers may have 
difficulties in establishing the issue price of all of the bonds 
included within an issue by the sale date, unless a special rule is 
available.

2. General Rule: Actual Sale of a Substantial Amount of Bonds

    Consistent with section 148(h), the 2015 Proposed Regulations 
proposed to retain the rule that issue price generally will be 
determined under the rules of sections 1273 and 1274. The 2015 Proposed 
Regulations also proposed a general rule similar to that in the 
regulations under section 1273 that the issue price of bonds issued for 
money is the first price at which a substantial amount of the bonds is 
sold to the public. The 2015 Proposed Regulations proposed to retain 
the rule in the Existing Regulations that ten percent is the measure of 
a substantial amount. The 2015 Proposed Regulations also proposed to 
retain the rule that the issue prices of bonds with different payment 
and credit terms are determined separately.
    Commenters recommended adding an express rule to address the 
treatment of private placements (for example, bank loans), which in the 
municipal bond industry typically do not involve underwriters. 
Commenters also recommended clarifying that an issuer may use the 
general rule to determine issue price even if the issuer had sought to 
use the special rule based on the initial offering price to the public 
discussed in section 3 of this preamble. The Treasury Department and 
the IRS agree with these recommendations.
    The Final Regulations retain the rules in the Existing Regulations 
and the general rule of the 2015 Proposed Regulations that, for bonds 
issued for money, the issue price is the first price at which a 
substantial amount of the bonds is sold to the public, and a 
substantial amount is ten percent. In addition, in response to 
comments, the Final Regulations expressly provide that, for a bond 
issued for money in a private placement to a single buyer that is not 
an underwriter or a related party (as defined in Sec.  1.150-1(b)) to 
an underwriter, the issue price of the bond is the price paid by that 
buyer. Further, the Final Regulations clarify that for bonds for which 
more than one rule for determining issue price is available, for 
example, the general rule and one of the special rules discussed in 
sections 3 and 4 of this preamble, an issuer may select the rule it 
will use to determine the issue price for the bonds at any time on or 
before the issue date of the bonds. On or before the issue date of the 
bonds, the issuer must identify the rule selected in its books and 
records maintained for the bonds.

[[Page 89001]]

    A commenter suggested that a specific time on the sale date should 
be established as the proper time for determining issue price. The 
Treasury Department and the IRS understand that it has been a 
longstanding practice to determine issue price on the sale date without 
regard to a specific time and that it is unlikely for bonds to be sold 
to the public at different prices on that date. Thus, the imposition of 
a specific time deadline for such determination seems unnecessary and 
would add to the administrative burden. The Final Regulations do not 
adopt this comment.

3. Special Rule for Use of the Initial Offering Price to the Public

    The 2015 Proposed Regulations proposed a special rule that would 
allow an issuer to treat the initial offering price to the public as 
the issue price as of the sale date, provided certain requirements were 
met. That proposed special rule (referred to as the ``alternative 
method'' in the 2015 Proposed Regulations) proposed to require that the 
lead underwriter (or sole underwriter, if applicable) certify certain 
matters, including that no underwriter would sell bonds after the sale 
date and before the issue date at a price higher than the initial 
offering price except if the higher price was the result of a market 
change for the bonds after the sale date (for example, due to a change 
in market interest rates), and that the lead underwriter provide the 
issuer with supporting documentation for the matters covered by the 
certifications, including a justification for any higher price based on 
a market change. (This proposed requirement for underwriters generally 
to hold the price at no higher than the initial offering price to the 
public until the issue date is sometimes referred to herein as the 
``hold-the-offering-price'' requirement.)
    Commenters favored a special rule to allow use of the initial 
offering price to the public to set the issue price as of the sale 
date. Numerous commenters, however, expressed concerns about various 
aspects of the eligibility requirements for this proposed special rule. 
One concern expressed by underwriters was that the requirement for the 
lead underwriter to provide certification as to the actions of the 
entire underwriting syndicate or selling group was overly broad. 
Instead, underwriters recommended allowing members of an underwriting 
syndicate or a selling group to agree individually to act in accordance 
with the specific matters required under the special rule. The Final 
Regulations adopt the comment that each underwriter is individually or 
severally responsible for its agreement (rather than jointly 
responsible with other underwriters).
    Several commenters suggested that the hold-the-offering-price 
requirement would result in lower offering prices and should not be 
included in the special rule. One concern expressed related to the 
differing time periods between the sale date and the issue date for 
various issuers. One commenter recommended limiting the time period for 
holding the price to six business days after the sale date. Further, 
notwithstanding the potential flexibility in pricing afforded by the 
proposed market change exception to the hold-the-offering-price 
requirement, commenters overwhelmingly objected to this exception as 
unworkable because of the absence of meaningful benchmarks for 
municipal bond prices. Commenters also expressed concern that use of 
this exception could lead to audit disputes over appropriate 
documentation to support such price changes.
    Accordingly, the Final Regulations adopt a modified hold-the-
offering-price requirement that requires underwriters to hold the price 
for offering and selling unsold bonds at a price that is no greater 
than the initial offering price to the public for a shorter time period 
that ends on the earlier of (1) the close of the date that is the fifth 
(5th) business day after the sale date or (2) the date on which the 
underwriters have sold a substantial amount of the bonds to the public. 
Further, in response to the overwhelming negative comments about the 
proposed market change exception to the proposed hold-the-offering-
price requirement, the Final Regulations omit the market change 
exception.
    The modified hold-the-offering-price requirement in the Final 
Regulations provides a standardized time period for application of the 
requirement to bonds regardless of the differing time periods among 
issuers between sales and closings of municipal bond issues. Further, 
the shorter time period for this requirement should reduce potential 
associated risks to underwriters and thereby limit the effects of this 
requirement on initial pricing to issuers and, at the same time, ensure 
that market pricing behavior is consistent with the initial offering 
price used for issue price determinations.
    Two commenters suggested confirming that, for purposes of the hold-
the-offering-price requirement, an underwriter may sell bonds to anyone 
at a price that is lower (rather than higher) than the initial offering 
price to the public under this special rule. This special rule 
expressly provides for this result under the Final Regulations. One 
commenter sought clarification that underwriters may sell bonds to 
other underwriters at prices that are higher than the initial offering 
price to the public under this special rule. Sales to underwriters at 
such higher prices are inconsistent with a purpose of this special rule 
to use the initial offering price to the public as a proxy for the 
issuer's agreement with the underwriters about the maximum amount of 
underwriters' compensation that is reflected in setting the issue 
price. Thus, the Final Regulations clarify that underwriters may not 
sell the bonds at a price that is higher than the initial offering 
price to the public.
    Several commenters recommended a different special rule that would 
base determinations of issue price on sales of an aggregate percentage 
of all of the bonds included within an issue, as distinguished from the 
bond-by-bond method required to determine issue price for bonds with 
different interest rates, maturities, credits, or payment terms under 
the Existing Regulations and the 2015 Proposed Regulations. Commenters 
recommended different percentages of sales of aggregate principal 
amounts of bonds within an issue to determine issue price, including 25 
percent, 50 percent, and 65 percent.
    Although a rule that would focus on actual sales of greater 
percentages of the aggregate principal amounts of bonds included within 
an issue to determine issue price has potential utility, the Treasury 
Department and the IRS have concerns about the comparability of the 
terms of unsold bonds with the terms of sold bonds, which would serve 
as a proxy for setting the issue price of the unsold bonds, and about 
the attendant potential complexity to ensure appropriate comparability. 
Further, the Treasury Department and the IRS have concerns about 
selection of an appropriate percentage of aggregate sales for such a 
rule and whether issuers would be able to sell the required percentage 
of the aggregate principal amount of bonds within the issue. The public 
comments did not reflect any consensus on an appropriate percentage of 
aggregate sales for such a rule. In addition, several of the comments 
in favor of such a rule focused particularly on the need for a more 
workable rule for competitive sales. In response to this concern, the 
Final Regulations provide a simplified special rule for competitive 
sales, as described in section 4 of this preamble. Accordingly, the 
Final Regulations do not adopt a rule that would focus on actual sales 
of greater percentages of the aggregate principal amounts of bonds 
included within an issue.

[[Page 89002]]

    In summary, the Final Regulations provide a special rule under 
which an issuer may treat the initial offering price to the public as 
the issue price of the bonds as of the sale date if: (1) The 
underwriters offered the bonds to the public at a specified initial 
offering price on or before the sale date, and the lead underwriter in 
the underwriting syndicate or selling group (or, if applicable, the 
sole underwriter) provides, on or before the issue date, a 
certification to that effect to the issuer, together with reasonable 
supporting documentation for that certification, such as a copy of the 
pricing wire or equivalent communication; and (2) each underwriter 
agrees in writing that it will neither offer nor sell the bonds to any 
person at a price that is higher than the initial offering price during 
the period starting on the sale date and ending on the earlier of the 
close of the fifth (5th) business day after the sale date, or the date 
on which the underwriters have sold a substantial amount of the bonds 
to the public at a price that is no higher than the initial offering 
price to the public.

4. Special Rule for Competitive Sales

    Numerous commenters, including four States, strongly urged a 
streamlined special rule for competitive sales to allow the reasonably 
expected initial offering price to the public reflected in the winning 
bid in a competitive sale to establish the issue price without a hold-
the-offering-price requirement or other restrictions. Commenters 
suggested that the public bidding process for pricing municipal bonds 
in competitive sales itself provides a sufficient basis to achieve the 
best pricing for issuers. The Treasury Department and the IRS recognize 
that competitive sales favor competition and price transparency that 
may result in better pricing for issuers. The Final Regulations adopt 
these comments and provide that, for bonds issued for money pursuant to 
an eligible competitive sale, an issuer may treat the reasonably 
expected initial offering price to the public of the bonds as the issue 
price of the bonds as of the sale date if the issuer obtains a 
certification from the winning bidder regarding the reasonably expected 
initial offering price to the public of the bonds upon which the price 
in the winning bid is based.
    For purposes of this special rule, the Final Regulations define 
competitive sale to mean a sale of bonds by an issuer to an underwriter 
that is the winning bidder in a bidding process in which the issuer 
offers the bonds for sale to underwriters at specified written terms 
and that meets the following requirements: (1) The issuer disseminates 
the notice of sale to potential underwriters in a manner reasonably 
designed to reach potential underwriters; (2) all bidders have an equal 
opportunity to bid; (3) the issuer receives bids from at least three 
underwriters of municipal bonds who have established industry 
reputations for underwriting new issuances of municipal bonds; and (4) 
the issuer awards the sale to the bidder who offers the highest price 
(or lowest interest cost).

5. Definitions

    The 2015 Proposed Regulations proposed to define the term 
``public'' for purposes of determining the issue price of tax-exempt 
bonds to mean any person other than an underwriter or a related party 
to an underwriter. Several commenters recommended expanding the 
definition of public to include related parties to underwriters. This 
recommended change would allow various affiliates of underwriters, such 
as entities involved in proprietary trading, to qualify as members of 
the public for purposes of determining issue price. The Final 
Regulations do not adopt this comment. The Final Regulations retain 
this related party restriction on the definition of the public as a 
safeguard to protect against potential abuse.
    The 2015 Proposed Regulations proposed to define ``underwriter'' to 
include: (1) Any person that contractually agrees to participate in the 
initial sale of the bonds to the public by entering into a contract 
with the issuer or into a contract with a lead underwriter to form an 
underwriting syndicate and (2) any person that, on or before the sale 
date, directly or indirectly enters into a contract or other 
arrangement with any of the foregoing to sell the bonds. Numerous 
commenters expressed significant concern that the phrase ``other 
arrangement'' in the definition of underwriter was vague and 
unworkable. One commenter asked if distribution arrangements (for 
example, a retail distribution contract between a member of an 
underwriting syndicate or selling group and another dealer that is not 
in the syndicate or selling group) were included. Another commenter 
suggested changes to clarify that a contract to sell the bonds be 
limited to a contract with respect to the initial sale of the bonds to 
the public. In response to these comments, the Final Regulations omit 
the phrase ``or other arrangement'' from the definition of underwriter. 
The Final Regulations also clarify that covered agreements must relate 
to the initial sale of the bonds to the public and that these 
agreements include retail distribution agreements.

6. Standard for Reliance on Certifications and Consequences of 
Violations

    The 2015 Proposed Regulations proposed a standard that would limit 
an issuer's ability to rely on certifications from underwriters to 
circumstances in which an issuer did not know or have reason to know, 
after exercising due diligence, that the certifications were false. 
Several commenters expressed concerns about this proposed standard for 
reliance on certifications. One commenter expressed particular concern 
that the proposed standard appeared to be higher than or different from 
the general due diligence standard for determining reasonable 
expectations that bonds are not arbitrage bonds under Sec.  1.148-2(b) 
of the Existing Regulations. The existing definition of reasonable 
expectations, found in Sec.  1.148-1(b) of the Existing Regulations, 
treats an issuer's expectations or actions as reasonable only if a 
prudent person in the same circumstances as the issuer would have those 
same expectations or take those same actions, based on all the 
objective facts and circumstances. One commenter also sought 
confirmation that issuers could rely on certifications from 
underwriters without independent verification.
    In response to the comments, the Final Regulations omit the 
proposed special standard for reliance on underwriters' certifications. 
Instead, the existing due diligence standard under the Existing 
Regulations for reasonable expectations or reasonableness will apply to 
any certification under the Final Regulations. For example, this 
existing due diligence standard will apply under the special rule on 
competitive sales to an issuer's reliance on a certification from the 
winning bidder regarding the reasonably expected initial offering price 
to the public of the bonds upon which the price in the winning bid is 
based.
    Several commenters urged providing conclusive legal certainty for 
issue price determinations as of the sale date based on receipt of 
required underwriter certifications without regard to whether such 
certifications subsequently proved to be false. Although the Final 
Regulations generally will allow issuers to establish the issue price 
as of the sale date, the Final Regulations do not adopt this comment. 
Accordingly, a failure to meet a specific eligibility requirement of a 
rule for determining issue price, such as an underwriter's breach of 
its hold-the-offering-price agreement under the special rule for use of 
initial offering

[[Page 89003]]

price, will result in a failure to establish issue price under that 
rule and a redetermination of issue price under a different rule. The 
potential invalidation of an issue price determination is important to 
ensure compliance with the arbitrage restrictions and the legal 
availability of penalties against underwriters for false statements. A 
false statement by an underwriter in a certification or in the 
agreement among underwriters under one of these special rules may 
result in a penalty against the underwriter under section 6700, 
depending on the facts and circumstances.
    In accordance with section 6001, the issuer must maintain 
reasonable documentation in its books and records to support its issue 
price determinations. In addition, the Final Regulations require that 
the issuer obtain from the underwriter certain certifications and other 
reasonable supporting documentation such as a pricing wire to establish 
its issue price determination under a specific rule in the Final 
Regulations. A certification from the underwriter of the first price at 
which ten percent of the bonds were sold to the public is an example of 
reasonable supporting documentation to establish the issue price of the 
bonds under the general rule in the Final Regulations.

7. Other Comments

    A commenter requested a special rule under section 148 to determine 
issue price in a debt-for-debt exchange, including an exchange 
resulting from a significant modification under Sec.  1.1001-3. Under 
the special rule, an issuer would have the option to use a tax-exempt 
bond's stated principal amount as the issue price rather than the issue 
price that otherwise would apply under section 1273 or 1274. The 
commenter requested the rule because, in the commenter's experience, 
the stated interest rate on a tax-exempt bond issued in a debt-for-debt 
exchange was generally less than the adjusted applicable Federal rate 
(AAFR) used under section 1288 to determine whether the bond has 
adequate stated interest for purposes of section 1274. In this 
situation, the issue price of the bond would be less than the bond's 
stated principal amount, resulting in an arbitrage yield that is higher 
than it otherwise would be if the bond were treated as issued for an 
amount equal to the bond's stated principal amount. The Final 
Regulations do not include such a rule because, since the date of the 
commenter's request, the method to determine the AAFR has been modified 
in TD 9763, 81 FR 24482 (April 26, 2016). As a result of this 
modification, it is more likely that the issue price of a tax-exempt 
bond issued in a debt-for-debt exchange will be the bond's stated 
principal amount under section 1273 or 1274 (for example, because the 
AAFR will not be greater than the corresponding applicable Federal rate 
for taxable bonds, as it was in certain years before the modification).
    In addition, some commenters recommended allowing the use of issue 
price as defined for arbitrage purposes in applying various limitations 
for other tax-exempt bond purposes, such as those based on principal 
amounts, face amounts, and sale proceeds. The Final Regulations do not 
adopt this recommendation because it raises issues that are beyond the 
scope of the 2015 Proposed Regulations, and the recommended extension 
of the application of the definition of issue price beyond arbitrage 
purposes appropriately warrants a separate opportunity for public 
comment. The Treasury Department and the IRS, however, expect to 
consider this recommendation in connection with future guidance.

Applicability Date

    The Final Regulations apply to bonds that are sold on or after June 
7, 2017.

Special Analyses

    Certain IRS regulations, including these Final Regulations, are 
exempt from the requirements of Executive Order 12866, as supplemented 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required.
    It is hereby certified that these Final Regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based generally on the fact that any effect on 
small entities by these rules generally flows from section 148 of the 
Code. Section 148(h) of the Code requires the yield on an issue of 
bonds to be determined on the basis of issue price (within the meaning 
of sections 1273 and 1274). Under section 1273(b), the issue price is 
the first price at which a substantial amount of the bonds is sold to 
the public. Section 1.148-1(f)(2) of the Final Regulations gives effect 
to the statute by requiring the issuer to (1) obtain certain 
documentation from the underwriter, which is the party that sells the 
bonds to the public, to support the issuer's determination of issue 
price and (2) indicate in its books and records the rule used by the 
issuer to determine issue price. This information will be used to 
support the issue price of the bonds for audit and other purposes. Any 
economic impact of obtaining this information is minimal because most 
of the information already is provided to issuers by the underwriters 
under existing industry practices. Accordingly, these changes do not 
add to the impact on small entities imposed by the statutory provision. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required.
    Pursuant to section 7805(f) of the Code, the 2015 Proposed 
Regulations preceding these Final Regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business, and no comments were received.

Drafting Information

    The principal authors of these regulations are Johanna Som de Cerff 
and Lewis Bell, Office of Associate Chief Counsel (Financial 
Institutions and Products), IRS. However, other personnel from the 
Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.148-0(c) is amended by adding entries for Sec. Sec.  
1.148-1(f) and 1.148-11(m) to read as follows:


Sec.  1.148-0  Scope and table of contents.

* * * * *
    (c) * * *


Sec.  1.148-1  Definitions and elections.

* * * * *
    (f) Definition of issue price.
    (1) In general.
    (2) Bonds issued for money.
    (3) Definitions.
    (4) Other special rules.
* * * * *


Sec.  1.148-11  Effective/applicability dates.

* * * * *
    (m) Definition of issue price.

0
Par. 3. Section 1.148-1 is amended by revising the definition of 
``Issue price'' in paragraph (b) and adding paragraph (f) to read as 
follows:

[[Page 89004]]

Sec.  1.148-1  Definitions and elections.

* * * * *
    (b) * * *
    Issue price means issue price as defined in paragraph (f) of this 
section.
* * * * *
    (f) Definition of issue price--(1) In general. Except as otherwise 
provided in this paragraph (f), ``issue price'' is defined in sections 
1273 and 1274 and the regulations under those sections.
    (2) Bonds issued for money--(i) General rule. Except as otherwise 
provided in this paragraph (f)(2), the issue price of bonds issued for 
money is the first price at which a substantial amount of the bonds is 
sold to the public. If a bond is issued for money in a private 
placement to a single buyer that is not an underwriter or a related 
party (as defined in Sec.  1.150-1(b)) to an underwriter, the issue 
price of the bond is the price paid by that buyer. Issue price is not 
reduced by any issuance costs (as defined in Sec.  1.150-1(b)).
    (ii) Special rule for use of initial offering price to the public. 
The issuer may treat the initial offering price to the public as of the 
sale date as the issue price of the bonds if the requirements of 
paragraphs (f)(2)(ii)(A) and (B) of this section are met.
    (A) The underwriters offered the bonds to the public for purchase 
at a specified initial offering price on or before the sale date, and 
the lead underwriter in the underwriting syndicate or selling group 
(or, if applicable, the sole underwriter) provides, on or before the 
issue date, a certification to that effect to the issuer, together with 
reasonable supporting documentation for that certification, such as a 
copy of the pricing wire or equivalent communication.
    (B) Each underwriter agrees in writing that it will neither offer 
nor sell the bonds to any person at a price that is higher than the 
initial offering price to the public during the period starting on the 
sale date and ending on the earlier of the following:
    (1) The close of the fifth (5th) business day after the sale date; 
or
    (2) The date on which the underwriters have sold a substantial 
amount of the bonds to the public at a price that is no higher than the 
initial offering price to the public.
    (iii) Special rule for competitive sales. For bonds issued for 
money in a competitive sale, an issuer may treat the reasonably 
expected initial offering price to the public as of the sale date as 
the issue price of the bonds if the issuer obtains from the winning 
bidder a certification of the bonds' reasonably expected initial 
offering price to the public as of the sale date upon which the price 
in the winning bid is based.
    (iv) Choice of rule for determining issue price. If more than one 
rule for determining the issue price of the bonds is available under 
this paragraph (f)(2), at any time on or before the issue date, the 
issuer may select the rule it will use to determine the issue price of 
the bonds. On or before the issue date of the bonds, the issuer must 
identify the rule selected in its books and records maintained for the 
bonds.
    (3) Definitions. For purposes of this paragraph (f), the following 
definitions apply:
    (i) Competitive sale means a sale of bonds by an issuer to an 
underwriter that is the winning bidder in a bidding process in which 
the issuer offers the bonds for sale to underwriters at specified 
written terms, if that process meets the following requirements:
    (A) The issuer disseminates the notice of sale to potential 
underwriters in a manner that is reasonably designed to reach potential 
underwriters (for example, through electronic communication that is 
widely circulated to potential underwriters by a recognized publisher 
of municipal bond offering documents or by posting on an Internet-based 
Web site or other electronic medium that is regularly used for such 
purpose and is widely available to potential underwriters);
    (B) All bidders have an equal opportunity to bid (within the 
meaning of Sec.  1.148-5(d)(6)(iii)(A)(6));
    (C) The issuer receives bids from at least three underwriters of 
municipal bonds who have established industry reputations for 
underwriting new issuances of municipal bonds; and
    (D) The issuer awards the sale to the bidder who submits a firm 
offer to purchase the bonds at the highest price (or lowest interest 
cost).
    (ii) Public means any person (as defined in section 7701(a)(1)) 
other than an underwriter or a related party (as defined in Sec.  
1.150-1(b)) to an underwriter.
    (iii) Underwriter means:
    (A) Any person (as defined in section 7701(a)(1)) that agrees 
pursuant to a written contract with the issuer (or with the lead 
underwriter to form an underwriting syndicate) to participate in the 
initial sale of the bonds to the public; and
    (B) Any person that agrees pursuant to a written contract directly 
or indirectly with a person described in paragraph (f)(3)(iii)(A) of 
this section to participate in the initial sale of the bonds to the 
public (for example, a retail distribution agreement between a national 
lead underwriter and a regional firm under which the regional firm 
participates in the initial sale of the bonds to the public).
    (4) Other special rules. For purposes of this paragraph (f), the 
following special rules apply:
    (i) Separate determinations. The issue price of bonds in an issue 
that do not have the same credit and payment terms is determined 
separately. The issuer need not apply the same rule to determine issue 
price for all of the bonds in the issue.
    (ii) Substantial amount. Ten percent is a substantial amount.
    (iii) Bonds issued for property. If a bond is issued for property, 
the adjusted applicable Federal rate, as determined under section 1288 
and Sec.  1.1288-1, is used in lieu of the applicable Federal rate to 
determine the bond's issue price under section 1274.

0
Par. 4. Section 1.148-11 is amended by adding paragraph (m) to read as 
follows:


Sec.  1.148-11  Effective/applicability dates.

* * * * *
    (m) Definition of issue price. The definition of issue price in 
Sec.  1.148-1(b) and (f) applies to bonds that are sold on or after 
June 7, 2017.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: November 22, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury for Tax Policy.
[FR Doc. 2016-29486 Filed 12-8-16; 8:45 am]
 BILLING CODE 4830-01-P