The IRS has promulgated new regulations governing the “issue price” of tax-exempt bonds, which will apply to bonds sold on or after June 7, 2017. The regulations were finalized after two earlier versions were proposed and significant feedback was received by the IRS.
The general rule contained in the new regulations provides that the issue price of a bond is the first price at which a “substantial amount” (defined as 10%) of the bonds of a particular maturity are sold to the “public” (defined as purchasers who are not underwriters of the bond or legally related to such underwriters). Additionally, the regulations state that the issue price of bonds issued in a private placement is the price paid by the purchaser for those bonds.
The regulations also set forth a new special rule, under which the initial offering price of the bonds to the public for each maturity can be treated as the issue price of the bonds if certain requirements are met. These requirements include an obligation that 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 for five business days after the sale date or, if earlier, until the date on which the underwriters have sold at least 10% of the bonds to the public at a price that is no higher than the initial offering price.
The new regulations also contain a special rule for competitive sales of bonds, which allows issuers to 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 as to the reasonably expected initial offering price. Certain other requirements must also be satisfied under this special rule, including the need for the issuer to receive bids from at least three underwriters.
Finally, the regulations provide that, if more than one of the foregoing rules for determining the issue price of bonds is available, then 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. This provision offers issuers and bond counsel some flexibility in determining a bond’s issue price under the regulations.