SAN FRANCISCO - Bond lawyers meeting here late last week raised disclosure concerns about the Internal Revenue Service's planned changes to its tax-exempt bond audit procedures.
During panel sessions at the National Association of Bond Lawyers' Tax and Securities Law Institute Thursday afternoon, several bond lawyers pressed IRS tax-exempt bond office director Cliff Gannett about how the proposed Form 5701-TEB, which would replace the preliminary adverse determination letter, would impact issuers from a disclosure standpoint.
Under the planned changes in procedures, instead of sending an issuer a letter stating the IRS has preliminarily decided its bonds are taxable, an IRS agent would send the issuer a Form 5701-TEB outlining tax issues that have arisen that need to be resolved with regard to the bonds.
Gannett said the office is adopting the form in order to raise potential problems with issuers sooner and to increase the communication between issuers and examiners. But the attorneys said the changed procedure will leave them in a conundrum about whether they should disclose the forms.
"This will probably make [disclosure requirements] a little more gray," said Bruce M. Serchuk, an attorney with Nixon Peabody LLP in Washington, D.C., who was on the panel. "Until, we actually see them, it'll be hard to know what the impact will be."
Serchuk added during an enforcement panel on Friday that the preliminary adverse determination letter now functions as a "trigger" for disclosure, and that, with the Form 5701, it would not be clear about the appropriate time to disclose information.
When asked about the disclosure issues, Gannett said the IRS had not consulted with the Securities and Exchange Commission about the disclosure implications of the new form. He said it is his agency's responsibility to ensure audits are handled as quickly as possible.
"From our perspective, we have a very different job," he said. "We need to take steps to move as quickly as we can." Gannett emphasized that he wants to ensure that any case opened by the TEB office will continue to progress and not fall stagnant.
Bradley S. Waterman, a tax controversy lawyer on the panel, asked Gannett if the amount disclosed has an impact on the amount reached in a closing settlement.
"That is not high on my list," Gannett responded.
"But it is on your list," Waterman said.
The tax controversy lawyer on Friday added that the disclosure of an examination typically drives holders of variable rate bonds to seek higher interest rates from issuers.
Despite the disclosure questions, NABL members seemed generally receptive to the proposed change, noting that Form 5701 is used in addressing concerns for most other types of IRS examinations. They said they appreciate changes that speed up examinations.
"As the agent raises issues, he or she can pick up the phone," said Waterman. "This change just conforms TEB procedures to how things have been done since the beginning of time" in other IRS divisions.
Daniel Rosenbaum, a partner at Caplin & Drysdale in Washington who chaired the panel, said the changes address "what's been missing all along, and it appears to be being fixed," referring to an increase in communication between issuers and IRS agents.
"[The changes] invite the issuer to come back and respond," he said.
The discussion then turned to the IRS' Office of Appeals. Charles Fisher, IRS appeals team manager for the tax-exempt and government entities division, said the office is considering adopting a rapid settlement program currently used elsewhere in the agency.
The fast-track settlement program, which was initiated in 2001, allows the IRS to reach agreements with large and mid-size businesses more quickly. It permits an appeals officer to function as a neutral party to help taxpayers and the agency's large and mid-size business division reach a mutually agreeable settlement faster than through the typical audit procedures. Fisher said the tax-exempt side of appeals is hoping to begin a similar program sometime next year.
"We are looking at it. We are looking at it strongly," he said.
The program would differ from the rarely-used mediation program currently in place for tax-exempt bonds, which was used to reach a settlement agreement disclosed last week. As opposed to mediation, where the appeals officer and an optional private-side mediator serve to facilitate discussion between the two parties, the settlement program would permit the appeals officer overseeing the case to actually suggest settlement offers to both sides, which can conclude the case if mutually agreed upon.
Meanwhile, discussion of the Treasury Department's recently released notice on reissuance slowed in the second day of the conference, as Perry Israel, who has his own law firm in Sacramento, said the notice had been "discussed to death."
But John J. Cross 3d, an attorney with the Treasury's office of tax policy, quipped that he has some "buyer's remorse" for including in the notice a stipulation that permits issuers to resell bonds converted to a fixed interest rate for the remaining duration of the bonds at a premium or discount. Cross has been deluged by questions about the provision. Under Notice 2008-27, all other interest rate mode conversions require the bonds to be resold at par.
The exemption drove much of the debate on the issue, as attorneys explored the specifics of the provision. They wondered, for example, if bonds were resold at a premium, would the extra money be included as part of the bond proceeds. Prior to the notice, all bonds had to be resold on par, and Cross said he preferred that simplicity.
