MEMORANDUM
FROM
Orrick Public Finance Tax Group
DATE
February 28, 2008
RE
New Reissuance Guidance – IRS Notice 2008-27
A.
Overview
On February 19, 2008, the Treasury Department and the Internal Revenue Service (the
“IRS”) issued Notice 2008-27, which provides guidance on when tax-exempt tender bonds will be
treated as reissued for federal income tax purposes. Notice 2008-27 supplements prior guidance
provided by the Treasury Department and the IRS in Notice 88-130. Notice 2008-27 generally is
more liberal than Notice 88-130 in allowing issuers to avoid a reissuance. In particular, Notice 200827 clarifies that elimination or modification of credit enhancement in respect of multi-modal taxexempt bonds in an auction rate mode, together with a conversion to another interest rate mode,
generally will not give rise to a reissuance unless the credit rating on the bonds changes from
investment grade to non-investment grade, or vice versa. Notice 2008-27 may be relied on for
actions taken with respect to tax-exempt bonds after November 1, 2007 and until regulations are
promulgated on this subject. In addition, issuers may also continue to rely on Notice 88-130 until
regulations are issued.
If bonds are treated as reissued for federal income tax purposes, the existing bonds are
deemed to be retired and new bonds deemed issued. A reissuance requires a retesting of all of the
tax requirements of issuing new bonds, and may have a number of significant effects on the bonds,
including adjustments to the arbitrage yield, the deemed termination of any associated qualified
hedge, and a requirement to make a final rebate payment. Additionally, a new tax certificate will be
required, supported by updated tax due diligence, and a new IRS Form 8038 (or 8038-G) must be
filed.
B.
Summary of Notice 2008-27
1. Auction Rate Bonds May Be Qualified Tender Bonds
Qualified tender bonds receive special, favorable treatment. Under Notice 2008-27, a
change in interest rate mode (e.g., from auction rate to variable rate demand bonds) on a
qualified tender bond is not, by itself, treated as a reissuance. Some market participants had
been concerned that multi-modal bonds in an auction rate mode could not be treated as
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qualified tender bonds. Notice 2008-27 clarifies that multi-modal bonds in an auction rate
mode can be treated as qualified tender bonds.
2. Elimination of Hair-trigger Rule
Notice 88-130 provides that qualified tender bonds will be treated as reissued if there is any
change in connection with a conversion of interest rate mode from a period between tender
dates of greater than one year to one-year or less, or vice versa. Notice 2008-27 does not
include this hair-trigger rule. Under Notice 2008-27, one or more changes in connection
with a change of interest rate mode that is authorized under the terms of the bonds as
originally issued generally will not give rise to a reissuance unless those other changes on
their own are deemed to be “significant” modifications. For this purpose, changes to credit
enhancement generally will not be considered “significant” so as to trigger a reissuance
unless the changes cause the payment expectation on the bonds to shift from investment
grade to non-investment grade, or vice versa.
3. Term Not Longer than 40 Years
Notice 2008-27 allows qualified tender bonds to have a term of up to 40 years. Notice 88130 requires qualified tender bonds to have a term of not longer than 35 years.
4. Issue Price and Remarketing Price
Notice 2008-27, like Notice 88-130, generally applies only to multi-modal bonds remarketed
upon conversion at par. One exception to this par remarketing at conversion rule under
Notice 2008-27 is that bonds converted to a fixed rate for the remaining term to maturity
may be resold at a premium or discount. Notice 2008-27, unlike Notice 88-130, permits
qualified tender bonds to be originally issued or remarketed within a mode at prices other
than par.
5. Remarketing of the Bonds No Later than 90 Days After Purchase
Notice 2008-27 provides that bonds purchased pursuant to their terms, by or for the
account of the issuer or a governmental conduit borrower (other than pursuant to a credit
enhancement agreement), must be remarketed within 90 days to avoid a reissuance. This
rule may also apply to nongovernmental conduit borrowers. This is a relaxation of the
requirement under Notice 88-130 that the remarketing must occur within 30 days.
6. Interest Rate Mode Changes Are Not Tested
Notice 2008-27 clarifies that any change in interest rate on the bonds directly related to a
qualified interest rate mode change, or directly related to a change in credit enhancement,
does not need to be separately tested to determine whether the change is a “significant”
modification of the bonds.
7. Exchanges of Bonds Might Avoid a Reissuance
In an example in Notice 2008-27, an issuer with a credit rating of A issued bonds which
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were enhanced by AAA-rated bond insurance. The bond insurer was later downgraded.
The example explains that no reissuance would occur if the issuer were to issue new bonds
with new CUSIP numbers, not backed by any bond insurance, and if the issuer were to
actually exchange these new un-enhanced bonds for the outstanding insured bonds. The
example goes on to provide that the analysis would be the same if (1) the outstanding bonds
were acquired by an intermediary purchaser who is not an agent or otherwise related to the
issuer, (2) the issuer exchanged its new bonds for the bonds held by the intermediary
purchaser, followed by (3) the intermediary purchaser's sale of the new bonds to different
bondholders. Government officials have indicated that this example was not intended to
suggest that the only permissible changes in an exchange context are changes in insurance;
rather, any changes must simply be tested for “significance.” Note, however, that this
example requires an “actual exchange” of new bonds for outstanding bonds—a traditional
refunding (new bonds issued for cash which is used to retire outstanding bonds) is not
covered by this example.
8. Temporary Relief for Waivers of Maximum Interest Rates on Auction Rate Bonds
Notice 2008-27 provides temporary relief for certain waivers of maximum interest rates on
auction rate bonds. Without this relief, any waiver of a maximum interest rate would
generally be treated as a “significant” modification and a reissuance if the waiver results in
more than a 0.25% change in interest rate. Notice 2008-27 provides that a waiver of a
maximum interest rate on auction rate bonds will be disregarded to the extent that both the
agreement to waive and the effective period of the waiver are between November 1, 2007
and July 1, 2008.
9. Special Rule for Modification of Qualified Hedges
Under generally applicable federal income tax rules, hedges are treated as terminated if they
are significantly modified. Solely for arbitrage yield restriction purposes, Notice 2008-27
allows minor modifications to be made to a hedge without giving rise to a deemed
termination. It provides that modification of a qualified hedge will not result in a deemed
termination of the hedge for this purpose if (1) as of the date of the modification, the
modification is not reasonably expected to change the yield on the hedged bonds over the
remaining term of the bonds by more than 0.25%, and (2) the yield on the hedged bonds is
adjusted to take into account the payments and receipts on the qualified hedge, as modified.
For example, if multi-modal tax-exempt bonds are changed to a new interest rate mode,
minor modifications can be made to a qualified hedge associated with the bonds in order to
make it a better match to the new interest rate mode without giving rise to a deemed
termination of the hedge.
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C.
Orrick Public Finance Tax Group
This summary of the changes in law under Notice 2008-27 is designed to inform the reader,
in a general manner, of the substance of the Notice. Anyone with questions on the Notice is urged
to contact one of the members of our Public Finance Tax Group listed below:

Chas Cardall (415) 773-5449

Scott Schickli (503) 937-7599

Richard Chirls (212) 506-5250

Andrea Ball (212) 506-5089

Dean Criddle (415) 773-5783

Michael Larsen (202) 339-8406

Ed Oswald (202) 339-8438

Richard Moore (415) 773-5938

Larry Sobel (213) 612-2421

John Stanley (415) 773-5713

George Wolf (415) 773-5988

Winnie Tsien (213) 612-2336
Circular 230 Disclaimer: To insure compliance with requirements imposed by the IRS, please
note that any tax advice contained in this memorandum was not intended or written to be used, and
cannot be used, for the purpose of avoiding tax-related penalties that may be imposed on the
taxpayer.
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