On April 11, 2018, the Internal Revenue Service published Revenue Procedure 2018-26 ("Rev. Proc. 2018-26") which sets forth new remedial measures that issuers may utilize to preserve the tax-exempt or tax-advantaged status of municipal bonds when a “nonqualified” use takes place. Effective immediately, Rev. Proc. 2018-26 will expand the remedial action options in connection with certain long-term post-issuance leases to private parties of facilities financed with tax-exempt bonds. Prior to Rev. Proc. 2018-26, tax-exempt bond issues that financed privately leased facilities would have to be redeemed or defeased to preserve the tax-exemption of the applicable bonds. The new provision allows the bonds to remain outstanding if the present value (using the yield of the bonds as the discount factor) of the lease payments are applied to other permissible capital projects within two years of the date the lease is entered into.

With regard to direct pay bonds (such as Build America Bonds), prior to Rev. Proc. 2018-26, there had been no remedial action providing for the adjustment of the refundable federal tax credit for nonqualified uses of the facility financed with the direct pay bonds. Rev. Proc. 2018-26 allows an issuer to cure such nonqualified uses by reducing the amount of the refundable federal tax credit to eliminate the amount allocable to the nonqualified bonds. Beginning with the first IRS Form 8038-CP filed for any interest payment date after the nonqualified use occurs, the issuer must reduce the amount of the interest payable by the portion allocable to the affected bonds.

Finally, with regard to certain types of tax credit bonds and direct payment bonds (including Build America Bonds), prior to Rev. Proc. 2018-26, there had been no general remedial action provisions available to issuers to cure a change of use. Rev. Proc. 2018-26 extends the availability of the existing remedial action provisions of redemption or defeasance of nonqualified bonds, allowing for the alternative use of disposition proceeds to these types of bonds.

By extending the scope of available remedial actions, Rev. Proc. 2018-26 offers municipalities greater flexibility and mitigates certain risks involved with tax-advantaged bond proceeds. The full text of Rev. Proc. 2018-26 is available here.