Are municipal put bonds investment capital, and how does the put date affect their classification under Article 9-A?

Plain-English summary

Price Waterhouse asked whether municipal put bonds are investment capital under 20 NYCRR 3-4.2. Municipal put bonds finance long-term assets and usually have a stated long-term maturity of more than ten years, but the structure includes a put -- a right to tender the bond for repayment at set dates -- so the bond effectively turns over on a short-term basis until the investor fixes the coupon to the long-term date.

The put date is a "date of maturity." Although the regulation does not define "date of maturity," the term means the date an obligation becomes due and payable. Exercising a put effectively creates a new debt instrument, so the put date functions as a maturity date -- consistent with the regulation's own example, in which buying a short-term qualifying debt and rolling it creates successive maturities.

Classification:
- A municipal put bond is generally investment capital.
- But under the six-months-and-one-day rule of section 3-4.2, it must be classified as cash -- not investment capital -- for the six months and one day immediately before its date of maturity.
- That maturity date is the put date while the investor can still put or redeem the bond. If the investor fixes the coupon to the final long-term maturity and can no longer put or redeem, the relevant date becomes that final long-term maturity date, and only the six months and one day before it is treated as cash.

What this means for you

A put date is treated as a maturity date

For investment-capital purposes, exercising a put creates a new instrument, so the put date is a date of maturity under section 3-4.2.

The six-months-and-one-day rule reclassifies near-maturity bonds as cash

A municipal put bond is investment capital except for the six months and one day before its maturity (put or final), when it is classified as cash.

Fixing the coupon shifts the relevant maturity date

If the investor locks the bond to its long-term maturity and loses the put/redemption right, the long-term date becomes the maturity date for this test.

Common questions

Q: Are municipal put bonds investment capital?
A: Generally yes, except for the six months and one day before their date of maturity, when they are classified as cash.

Q: Which date is the "maturity" date -- the put date or the long-term date?
A: The put date while you can still put or redeem the bond; the final long-term maturity date once you fix the coupon and lose the put/redemption right.

Q: Why does the put date count as a maturity date?
A: Because exercising a put effectively creates a new debt instrument, so the put date functions as a date of maturity under the regulation.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.5 (investment capital)
- 20 NYCRR 3-4.2 (investment capital; date of maturity; six-months-and-one-day rule)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a92_15c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (15) C
Corporation Tax
October 13, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C920610C

On June 10, 1992, a Petition for Advisory Opinion was received from Price Waterhouse, 153
East 53rd Street, New York, New York 10022.
The issue raised by Petitioner, Price Waterhouse, is whether municipal put bonds constitute
investment capital as defined by section 3-4.2 of the Business Corporation Franchise Tax
Regulations (hereinafter "Regulations").
The type of bonds at issue are municipal put bonds normally issued to finance long term
assets. Accordingly, the bonds' maturity will generally coincide with the estimated life of the asset
being financed. The maturity date of the bonds is usually in excess of ten years.
At the underwriting, the issuer, usually a governmental agency, can opt to either fix a rate on
the bond until its final maturity or elect to use the short-term put financing structure. A put allows
investors the opportunity to redeem their bonds, at par, on a specified date in the future. The put
structure allows the issuer to select any number of successive short-term put or financing periods if
rates are believed to be declining or the ability to lock in a fixed rate if rates are believed to be in an
upward trend. The put bonds can be classified into three major categories as follows: Mandatory
Puts, Optional Puts and Third Party Puts.
Mandatory Put ("MP") - Requires the automatic redemption of all investors' bond
holdings for par value on the put date. Prior to the MP date, investors will be notified
of the issuer's intentions to select another MP period or to fix the bond's coupon to
its stated long term maturity. Current owners will then be given the opportunity to
renew their ownership until the new put date or fixed maturity date.
Optional Put ("OP") - Requires the investor to initiate the redemption of their bonds
for par value on the put date. If the investor does not initiate the redemption, the
investor will continue to hold the bond at the new rate that is determined for the new
holding period.
Third Party Put ("TPP") - Can either be similar to MP bonds or OP bonds. Unlike
the traditional MP or OP bonds where bonds are redeemed at par from the primary
issuer, TPPs require bond owners to put their bonds to a third party, on a prescribed
date, for par redemption. The unorthodox structure of the TPP causes these types of
bonds to yield approximately 10 to 25 basis points more than their conventional MP
and OP counterparts.
TP-9 (9/88)

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TSB-A-92 (15) C
Corporation Tax
October 13, 1992
Section 3-4.2(a)(1) of the Regulations provides, in part, that:
The term "investment capital" means the taxpayer's investments in stocks,
bonds and other securities issued by a corporation ... or by the United States, any
state, territory or possession of the United States, the District of Columbia, or any
foreign country, or any political subdivision or governmental instrumentality of any
of the foregoing ... Any debt instrument ... which is payable by its terms on demand
or within six months and one day from the date on which the debt was incurred is
deemed to be cash on hand or on deposit. Any such debt instrument which is payable
by its terms more than six months and one day from the date on which the debt was
incurred is deemed to be cash on hand or on deposit on any day which is not more
than six months and one day prior to its date of maturity .... [emphasis added]
Although section 3-4.2 of the Regulations does not define the term "date of maturity", the
term "maturity" has been defined as follows: "the date at which an obligaeion, such as the principal
of a bond or note, becomes due." [emphasis added] Black's Law Dictionary 883 (Sth ed. 1979).
Since the MP bond structure requires the automatic redemption of such a bond on a put date
(unless the MP is renewed as discussed below), the MP bond, in essence, becomes due at each put
date during the life of the bond. Thus, the put date of an MP bond represents the "date of maturity"
as that term is contemplated pursuant to section 3-4.2 of the Regulations.
In addition, an MP bond requires the automatic redemption of a bond on a put date for par
value unless the investor renews the bond (presumably under new terms) until a new put date or
maturity date. Example 1 in section 3-4.2 (a)(1) of the Regulations includes, in part, the following
example:
[o]n July 1, 1990, Corporation A purchased a four month qualifying corporate debt
instrument on the day it was issued and renewed it, with the identical terms on
November 1, 1990 ... The renewal of the four month debt instrument purchased on
July 1, 1990 is treated as the creation of a second, separate debt instrument, each of
the two instruments being due within six months and one day of the date on which
the debt was incurred. [emphasis added]
This example suggests that by renewing a debt on a certain date, such renewal causes such
date to become the maturity date for the first debt since a second debt is created under such
circumstances. In applying this example to the MP bond instrument, if an investor of an MP bond
renews the bond on a put date such renewal is treated as the creation of a second, separate debt
instrument, and, therefore, causes such put date to become a maturity date. Thus, this example
supports the proposition that a put date represents a maturity date.
Based on the foregoing conclusion that a put date represents a maturity date and on section
3-4.2 of the Regulations, if a put date of an MP bond is within six months and one day from the date
on which the MP bond was issued, such bond is deemed to be cash on hand or on deposit during
such period of time. Furthermore, an MP bond is deemed to be cash on hand or on deposit on any

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TSB-A-92 (15) C
Corporation Tax
October 13, 1992
day which is not more than six months and one day prior to each put date thereafter. In addition, an
MP bond is deemed to be cash on hand or on deposit on any day which is not more than six months
and one day prior to the long term date of maturity stated on the bond. However, if an investor fixes
an MP bond coupon to its long term maturity date, and thereafter is not allowed to either redeem or
renew such bond on any put date during the balance of the term of the bond, the MP bond will then
be deemed to be investment capital except for the six months and one day period prior to such final
maturity date, during which period it will be classified as cash.
The OP bond requires an investor to initiate the redemption of such a bond on a put date, and
if such redemption does not occur then the investor will continue to hold the OP bond at a new rate
for a new holding period. Thus, if an investor redeems an OP bond on a particular put date such
bond should be treated as cash for the six months and one day period prior to such put date for
reasons stated above. If, on the other hand, the investor does not redeem an OP bond on a put date,
by holding such bond at new terms (new rate and holding period) such debt is renewed and,
therefore, it should be treated as a second debt instrument, pursuant to Example 1 of section B­
4.2(a)(1) of the Regulations. Thus, under such circumstances, the OP bond should be classified as
cash for the six months and one day period prior to the put date in question.
A TPP bond can either be similar to a MP bond or an 0P bond, however, TPPs require bond
owners to put their bonds to a third party, on a prescribed date for par redemption. Thus, a TPP bond
could be treated as either an MP or OP bond depending upon whether it has the features of an MP
or OP bond, and, therefore, the same rules as discussed above should be applied to the particular TPP
bond in question.
In conclusion the MP, OP or TPP bonds as described herein should be classified as cash
during each six months and one day period prior to each put date in such bonds (except when an MP
bond coupon is fixed to the maturity date as discussed above). Furthermore, the bonds should be
classified as cash for the six months and one day period prior to the final long term maturity date
stated on such bonds if a bond is redeemed on such date. At all other times such bonds should be
classified as investment capital.

DATED: October 13, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.