The Internal Revenue Service has proposed changes to the long-standing definition of “issue price” for tax advantaged obligations that, if adopted, will place additional burdens on underwriters by requiring them to adopt new pricing and document production procedures.

Issue price needs to be calculated pursuant to applicable IRS rules for a variety of reasons. An issuer needs assurance that the issue price of its tax advantaged obligations has been calculated correctly in order to ensure its compliance with tax rules that depend on issue price. These include yield-based rules (such as advance refunding escrow yield limitations, arbitrage and rebate requirements), rules focused on use of proceeds (such as the two percent cost of issuance limitation and the ninety-five percent exempt facility requirement), and information reporting requirements. Bond counsel may be unable to give an unqualified opinion regarding the tax advantaged status of the bonds if their issue price has not been determined in accordance with the applicable IRS rules and supported with required documentation.

The key change is that reasonable expectations as of the sale date may no longer be used to establish issue price. Instead, actual sales (at least 10% of each maturity) must be used, unless the underwriter can justify and document that post-sale date sales above the initial offering price are the result of a market change.

While the proposed issue price regulations will not be binding upon underwriters and issuers until at least 2016, issuers may elect to use them for any issue of tax advantaged obligations issued from this point forward. Because issuers have this option, it is essential for underwriters to understand the proposed issue price regulations and be prepared to satisfy their obligations under them if necessary.