An issuer that wants to refund post-2003 commercial paper before the end of the year can take advantage of a stimulus provision that allows those refunding notes to be exempt from the alternative minimum tax, the Internal Revenue Service recently ruled.
In a recent private-letter ruling, the IRS informed the unidentified issuer that since it established the master legal document governing the commercial paper after Dec. 31, 2003, and since it planned to refund all the outstanding notes between Dec. 31, 2008, and Jan. 1, 2011, the refunding would be exempt from the AMT under the American Recovery and Reinvestment Act.
The PLR was dated June 25, but was not publicly released until this week. As is standard with private-letter rulings, the IRS redacted all information identifying the parties involved before releasing it to the public.
Until 2008, the individual AMT applied to all non-housing and non-501(c)(3) private-activity bonds. Although the interest on the bonds was exempt from federal income tax, it was includible for purposes of calculating the alternative minimum tax.
In 2008, housing bonds were permanently exempted from the AMT by the Housing and Economic Recovery Act.
Then in February 2009, the ARRA exempted new-money bonds issued in 2009 and 2010 from the AMT. The stimulus act also stipulated that bonds issued during those two years to refund debt that had been sold from Dec. 31, 2003, to Jan. 1, 2009, also would be AMT-exempt.
While there are several bills pending in Congress that would extend these ARRA provisions by one year, they are currently slated to expire at the end of the year.
The question in this particular case is whether the bonds issued to refund the notes would be exempt from the AMT under the temporary ARRA provisions.
At least one lawyer said it is not clear from the redacted ruling why the issuer was seeking the ruling.
According to the ruling, after the initial issuance of more than $50,000 of notes, the issuer issued both new-money and refunding notes within 18 months.
Since then, the issuer has only issued refunding notes such that the principal amount of the outstanding notes has not changed.
The issuer told the IRS that it has elected to treat the notes as a single issue in its tax certificates, with the first date of issuance serving as the issue date for all the notes.
Tax rules state that notes with a maturity of 270 days or less issued as part of the same commercial paper program can be treated as a single issue. The issue date under those rules is the date when the aggregate amount of commercial paper issued exceeds the lesser of $50,000 or 5% of the aggregate issue price of the commercial paper in the program.
In this case, the issuer contends the issue date is the first date of issuance, since the notes issued at the time exceeded $50,000.
The IRS agreed that the issue date of the notes is the date when they were first issued, which falls within the time frame of the ARRA provision permitting bonds to be refunded with debt exempt from the AMT.
The agency also noted that the refunding bonds will be issued before the expiration of the ARRA provision.
As a result, the refunding bonds will be exempt from the alternative minimum tax, the IRS said.
Private-letter rulings are supposed to be applicable only to the issuers that request them and to the particular facts and circumstances underlying the requests. The IRS explicitly states that the rulings cannot be cited or used as precedent in other tax matters.
Nevertheless, market participants often look to the rulings for insight into the agency’s thinking, particularly on tax matters where little guidance exists and questions have arisen.