Proposed Repeal of Tax Exemption for Advance Refunding Bonds

Earlier this year, draft legislation referred to as the Tax Reform Act of 2014 (the “Tax Reform Act”), was released that proposes to amend major portions of the Internal Revenue Code to provide for comprehensive tax reform. We have focused on proposed changes affecting the tax-exempt bond provisions of the Internal Revenue Code, specifically, the proposed repeal (section 3433 of the draft legislation) of tax exemption for advance refunding bonds issued after December 31, 2014.

The proposed provision would end the federal exemption on the interest that bondholders currently receive on all advance refunding bonds. An advance refunding bond is a bond that is issued more than 90 days prior to the redemption of the refunded bond.  Currently, with some restrictions, tax-exempt bonds can to be issued to advance refund another bond.  Interest on current refunding bonds would remain tax-exempt.