Tribal refunding bonds needed volume cap only for excess issue price

Plain-English summary

A tribal government wanted to issue $76 million of current refunding bonds, using $75 million to retire outstanding Tribal Economic Development Bonds and $1 million for issuance costs. Notice 2019-39 permits refunding without new volume cap up to the outstanding stated principal amount when the original bonds used a proper allocation and the other requirements are met. Chief Counsel advised that no new allocation was needed for the $75 million principal refunding. The tribe needed an additional $1 million allocation for the portion financing issuance costs above the refunded principal.

Ruling snapshot

• Question: How much Tribal Economic Development Bond volume cap is required when a current refunding also finances issuance costs?
• Outcome: advice given, allocation is required only for the refunding issue price above the refunded bonds’ outstanding principal
• Key authorities: IRC §§ 103 and 7871(f); Notice 2019-39; Treas. Reg. §§ 1.148-1, 1.148-4, and 1.150-1

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           Memorandum
           Number: 201937016
           Release Date: 9/13/2019
           CC:FIP:B5
           PRESP-115522-19

 UILC:     7871.03-00

  date:    August 09, 2019

     to:   Patricia P. Wang
           Area Counsel
           Pacific Coast Area (Tax Exempt & Government Entities Division Counsel)

  from:    Johanna Som de Cerff
           Senior Technician Reviewer
           Branch 5 (Financial Institutions & Products)


subject:   Tribal Economic Development Bond volume cap allocation


           This Chief Counsel Advice may not be used or cited as precedent.

           ISSUE

           What amount of volume cap allocation is needed for an issue of Tribal Economic
           Development Bonds that will currently refund the outstanding stated principal amount of
           an issue of original Tribal Economic Development Bonds and also finance issuance
           costs of the refunding issue?

           CONCLUSION

           A Tribal Economic Development Bond volume cap allocation is needed in an amount
           equal to the amount by which the issue price of the refunding bond issue exceeds the
           outstanding stated principal amount of the refunded bonds.

           FACTS

           An Indian tribal government (“Tribe”) applied for and received an allocation of volume
           cap pursuant to § 7871(f) of the Internal Revenue Code (the “Code”) to issue Tribal
           Economic Development Bonds. Tribe timely used its volume cap allocation to issue
           bonds (the “Original Bonds”) and designated the Original Bonds as Tribal Economic
           Development Bonds. The amount of the Original Bonds did not exceed the amount of

PRESP-115522-19                             2

the volume cap allocation received. The Original Bonds were not issued with more than
a de minimis amount of original issue discount or premium. Tribe would now like to
currently refund the Original Bonds, which have an outstanding stated principal amount
of $75 million. Tribe also wants to finance the $1 million issuance costs of the refunding
bonds. The current refunding issue will meet all applicable requirements for the
issuance of Tribal Economic Development Bonds excluding bond volume cap.

LAW AND ANALYSIS

Section 103(a) provides that gross income does not include interest on a State or local
bond. Section 103(c)(1) provides that the term “State or local bond” means an
obligation of a State or political subdivision thereof.

Section 7871(a)(4) treats an Indian tribal government as a State for purposes of § 103,
subject to § 7871(c). Section 7871(f)(1) provides that the Treasury Department shall
allocate the $2 billion national volume cap for Tribal Economic Development Bonds
among the Indian tribal governments in such manner as the Treasury Department, in
consultation with the Secretary of the Interior, determines appropriate. Section
7871(f)(2)(A) provides that notwithstanding the provisions of § 7871(c), Tribal Economic
Development Bonds are treated for purposes of the Code as if they were issued by a
State. Sections 7871(f)(2)(B) and (C) provide that an Indian tribal government issuing a
Tribal Economic Development Bond shall be treated as a State for purposes of § 141
and that the volume cap requirement of § 146 does not apply. Section 7871(f)(3)(A)
defines a Tribal Economic Development Bond generally to mean any bond the interest
on which would be exempt from tax under § 103 if issued by a State or local
government, and which is designated by the Indian tribal government as a Tribal
Economic Development Bond for purposes of § 7871(f). Section 7871(f)(3)(C) provides
that the maximum aggregate face amount of bonds that may be designated by an
Indian tribal government shall not exceed the amount of national tribal economic
development bond limitation allocated to such government.

Notice 2019-39, 2019-24 I.R.B. 1322, provides guidance regarding the issuance of
Tribal Economic Development Bonds under § 7871 in current refunding issues (as
defined in § 1.150-1(d)(3) of the Income Tax Regulations) to refund original Tribal
Economic Development Bonds. Section 4 of Notice 2019-39 provides in part that any
current refunding issue the proceeds of which are used to refund original Tribal
Economic Development Bonds may be issued without regard to volume cap if (1) the
original Tribal Economic Development Bonds were issued with any required volume cap
allocation, (2) the issue price of the current refunding issue is no greater than the
outstanding stated principal amount of the refunded bonds, and (3) the current
refunding issue meets all applicable requirements for the issuance of Tribal Economic
Development Bonds excluding bond volume cap. For refunded bonds originally issued
with more than a de minimis amount of original issue discount or premium (as defined in
§ 1.148-1(b)), the present value of the refunded bonds (as determined under § 1.148-

PRESP-115522-19                              3

4(e)), must be used in lieu of the outstanding stated principal amount to determine the
maximum issue price of the refunded issue.

Tribe wants to issue a total of $76 million of refunding Tribal Economic Development
Bonds that includes $75 million to pay off the outstanding stated principal amount of the
Original Bonds plus $1 million to pay for the issuance costs of the refunding Tribal
Economic Development Bonds. The issue raised is whether Tribe needs an additional
Tribal Economic Development Bond volume cap allocation of $76 million or only $1
million. Section 4 of Notice 2019-39 permits current refunding bonds “without regard to
any volume cap” if the issue price of the current refunding bonds is no greater than the
outstanding stated principal amount (or present value, if applicable) of the prior bonds.
We conclude that Notice 2019-39 does not require Tribe to obtain additional Tribal
Economic Development Bond volume cap allocation for the amount needed to pay off
the outstanding stated principal amount of the Original Bonds ($75 million). However,
any portion of a refunding issue used to finance costs in excess of the outstanding
stated principal amount of the refunded Tribal Economic Development Bonds (or
present value, if applicable), such as costs of issuance, would need a Tribal Economic
Development Bond volume cap allocation. Thus, we conclude that, under Notice 2019-
39, Tribe would need an additional Tribal Economic Development Bond volume cap
allocation of $1 million for the amount of bonds issued to finance the issuance costs of
the refunding bonds.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call Johanna Som de Cerff at (202) 317-4567 or David White at (202) 317-4562
if you have any further questions.