8.3 Post-Issuance Federal Tax Law Requirements

8.3 Post-Issuance Federal Tax Law Requirements

The opinion of bond counsel that interest on municipal debt securities is excluded from gross income for federal income tax purposes is premised upon, among other things, statements made by the issuer with regard to the expected use of the proceeds of the bonds. These expectations and related covenants and agreements are generally memorialized for a tax exempt debt issuance in a tax certificate. See Chapter 4, Federal and State Tax Law Requirements. Compliance with tax covenants is required while the bonds are outstanding in order to maintain the bonds’ “tax exempt” status.

Post issuance tax compliance generally falls into two broad categories: (1) qualified use of bond proceeds and bond financed property, and (2) arbitrage rebate and yield restriction. The qualified use requirements necessitate monitoring the uses of bond financed property over the life of the bonds and the arbitrage requirements necessitate monitoring certain investment activities over the life of the bonds and may require filings with the Internal Revenue Service (IRS).