New IRS Issue Price Rules Go Into Effect June 7

Friday, May 5, 2017

Establishing the issue price of a tax-exempt bond is important to issuers of tax-exempt debt as it:

  • determines the arbitrage yield restriction for rebate compliance purposes; and
  • determines the maximum allowable escrow yield for advance refunding bonds.

The new IRS Issue Price regulations are significantly different than prior regulations, which determined issue price by a reasonable expectation standard – established as the “first price at which a substantial amount of the bonds is reasonably expected to be sold to the public.” This new definition applicable to all bonds sold on or after June 7, 2017 is the price at which bonds are actually sold to the public.

Ultimately the documentation to accompany the debt issue, including underwriter certifications, Notice of Sale and pricing wires, will be required to establish issue price and should be discussed between the issuer, the issuer’s municipal advisor, bond counsel, and the underwriter in advance of the sale. Various trade groups, such as SIFMA and NABL have offered model documentation for consideration and use by their members. Some of these documents may not be favorable to issuers or certain types of bonds.

Issuers should be aware of the information contained in this GFOA alert when speaking with their financing team.