Background.

Earlier this year, in response to turmoil in the market for tax-exempt auction rate bonds, the IRS issued Notice 2008-41 generally permitting an issuer to purchase its own taxexempt auction rate bonds without resulting in a retirement of the bonds for federal income tax purposes if (i) the issuer did not hold the purchased bonds for more than 180 days, and (ii) the bonds were purchased before October 1, 2008. Under general federal income tax principles, when an issuer purchases its own bonds, those bonds ordinarily are treated as extinguished for federal income tax purposes. Extinguishment of the bonds may result in the issuer being unable to subsequently remarket or refund those bonds on a tax-exempt basis. Since the issuance of Notice 2008-41, disruptions in the credit markets have extended beyond the auction rate bond sector to other forms of short-term tax-exempt debt, such as variable rate demand bonds (VRDBs) and commercial paper.

Notice 2008-88.

The new IRS Notice 2008-88 (new Notice) generally expands the relief previously granted to issuers with respect to auction rate securities, allowing issuers to purchase their own tax-exempt VRDBs and commercial paper without causing a retirement of the obligations for purposes of the tax-exempt bond provisions of the Internal Revenue Code, provided that the issuer does not hold the obligations beyond December 31, 2009. At any point during this permitted holding period, the issuer may refund the purchased obligations with a refunding issue, tender the purchased obligations in it’s capacity as bondholder, or otherwise resell the purchased obligations. In addition, in the case of commercial paper, any refinancing of the commercial paper during the permitted holding period will be treated as a continuation of the same issue. After the end of the permitted holding period the issuer may not continue to hold the purchased obligations without causing a retirement of the obligations for federal income tax purposes.

The new Notice also extends certain time periods provided under Notice 2008-41. For example, under the new Notice issuers that purchased their own auction rate bonds under Notice 2008-41 may hold those bonds until December 31, 2009 without causing a retirement of the bonds (as opposed to the 180-day period originally provided under Notice 2008-41). Also, the time period for purchasing bonds pursuant to a qualified tender right for which the special 180-day holding period applies under Notice 2008-41 (as opposed to the regular 90-day holding period) is extended from October 1, 2008 to December 31, 2009.

Effective Date.

The new Notice is effective as of March 25, 2008, which is the same effective date for Notice 2008-41. As with Notice 2008-41, issuers may apply and rely on the new Notice for any action taken with respect to tax-exempt bonds on or after November 1, 2007, and before the effective date of any new treasury regulations implementing the guidance in the new Notice or of any other public guidance that withdraws or supersedes the new Notice.

Securities Law Considerations.

Issuers considering the purchase or other acquisition of their own obligations pursuant to the new Notice should consult with their counsel regarding any possible securities law considerations that should be taken into account.