The Internal Revenue Service recently released Notice 2019-39, clarifying the scope of permitted current refundings of bonds issued under special governmental bond programs. Issuers may rely on this Notice to issue tax-exempt bonds to currently refund any bonds that are issued pursuant to such targeted programs, subject to some limitations.

The ability to issue such tax-exempt current refunding bonds often will arise because at the time the current refunding bonds will be issued, the program under which the original bonds were issued will have expired, whether through the passage of time, the exhaustion of a volume cap allocation, or both, and the statute authorizing the creation of the  program did not explicitly address the permissibility of issuing current refunding bonds after such expiration. IRS guidance is therefore necessary to clarify whether a current refunding issue may qualify as tax-exempt if the proceeds are applied to refund bonds originally issued under the expired program.

Previously, the approach of the IRS has been to issue guidance that is applicable only to a specific program. However, Notice 2019-39 is intended as a definitive statement from the IRS on this issue; the IRS will no longer issue guidance on this issue in the event additional targeted bond programs are enacted into law.

Notice 2019-39 applies to “existing and future tax-exempt targeted bond programs that impose bond volume caps, issuance time deadlines, or both, on the issuance of the original bonds and that operate under statutory parameters that do not address the permissibility of current refunding bonds.” In order for a current refunding issue to qualify as tax-exempt, it must meet each of the following three requirements:

• The original bonds must have been issued with any required volume cap allocation and before any applicable deadline for issuance;
• The issue price of the refunding bonds is no greater than the outstanding stated principal amount of the bonds being refunded (the 2% de minimis rule for original issue premium or discount applies); and
• the refunding bonds meet all requirements for the issuance of bonds under the original bond program (other than volume cap or the deadline for issuance.

Notice 2019-39 applies to any bonds issued on or after May 22, 2019, although issuers may elect to apply it to current refunding bonds issued before that date.