CHICAGO - Treasury Department officials are looking into whether a glitch in the American Recovery and Reinvestment Act could prevent Build America Bond issuers from challenging the Internal Revenue Service in a U.S. District Court in an effort to reclaim federal subsidy payments halted as a result of an audit.
Speaking on a panel at a meeting of the American Bar Association's committee on tax-exempt financing here, W. Mark Scott, a tax lawyer and former director of the IRS' tax-exempt bond office, told Clifford Gannett, the current TEB director, that he believes a portion of the law was improperly written, and needs to be fixed to ensure issuers can access all their legal options.
"I believe that there is a technical problem with the way the statute has been written in that the refundable credit is not treated as an overpayment," Scott said.
Meanwhile, John J. Cross 3d, the Treasury's associate tax legislative counsel, backtracked from a Treasury press release from earlier this month that announced the $2 billion of tribal economic development bonds authorized by the stimulus could be issued as direct-pay BABs, saying there are still some technical issues to be addressed on that front.
Scott's comments come as the IRS bond branch is trying to figure out how exactly it should handle and enforce BABs. The program creates a unique enforcement arrangement for the agency, given that the TEB office is charged with sending the subsidy payments to issuers and also conducting enforcement on the deals.
At the same time, the BAB program is supposed to allow issuers to take the service to court to contest TEB findings of tax law violations, an option normally not available for traditional tax-exempt issues.
The issue surrounding possible BAB litigation is whether or not a particular set of provisions in the tax code were properly modified to include BAB issuers. Those provisions permit taxpayers with a negative tax liability due to a tax credit like the earned income tax credit to take the IRS to court if it withholds the credit by treating it as a tax overpayment.
But Gannett says it appears a technical amendment to ARRA to refer BABs to that section may have neglected to address refundable credits, which include BAB subsidies.
Issuers could turn to the U.S. Claims Court in an effort to reclaim BAB payments the IRS has blocked, but would rather go to a district court, bond lawyers said.
The overriding concern in this situation is what options BAB issuers have if the statutory error keeps them out of district court and whether the IRS plans to block payments if the error remains unfixed, Scott said.
"The big issue here is ... what are you going to do in the meantime?" he said. "If there's no ability for the issuer to go to district court and sue for their money if you withhold it, are you going to withhold it in the meantime? If there is the requirement for a technical correction, what's going to happen in the next year or so while waiting for that technical correction?"
Gannett said IRS attorneys are looking into the matter.
"I think it's deserving of consideration, I think it's highly technical, and I think it's one [the IRS office of] chief counsel probably has to take a look at," he said.
The TEB office also is seeking guidance on whether or not it should assess penalties to parties found to be negligent as a result of a BAB audit. Gannett noted that penalties typically are imposed in those types of situations.
But he emphasized that his team's top priority for BABs is getting the subsidy payments out on time to issuers. His staff will be examining requests for payments, and could pursue expedited exams if questions emerge.
"All of our reviews have been tailored to make that payment timely .... That's why we have this expedited referral and work done immediately," Gannett said.
He added that when it comes to checking the paperwork, the IRS would only block payments in "extraordinary situations ... where potentially we saw a very serious problem, a fraud problem."
On the regulatory front, it appears that the Treasury's press office may have been premature in announcing two weeks ago that tribal economic development bonds could be issued as either tax-exempt debt or BABs. Cross said that while the "non-tax guidance press release" announcing what tribes were receiving from the first $1 billion tranche of the program said BABs could be issued under the program, "a number of technical questions" remain on that issue.
One question is whether the sections of the tax code on tribal governments give them access to the BAB program, he said. The existing tax guidance on the program, which detailed how the bond authority would be allocated, did not delve into whether BABs were an option.
"We're sympathetic to the hardship and economic circumstances of tribes and are considering whether or how to clarify that topic," Cross said.
The Treasury also is working on more detailed guidance for the bond programs created by the stimulus, particularly BABs and qualified school construction bonds. The Treasury also is working on guidance on how tax credits can be "stripped" from tax-credit bonds and sold separately.
But the Treasury also hopes it can return in the upcoming months to bond-related guidance projects that have fallen by the wayside due to the financial crisis and ARRA.
"We fervently hope to get back to some of the guidance plan priorities that were on the list and on the top of the list before the financial crisis," Cross said.
Those include guidance on arbitrage, which would address "some discrete issues on swaps and hedge terminations" as well as final allocation and accounting regulations for mixed-use facilities, which have governmental use as well as private use in excess of 10%, Cross said. The allocation and accounting rules were proposed in 2006.
Treasury officials also hope to put recently proposed rules on bond-financed solid waste disposal facilities on the "fast track" for finalization.
"We recognize the value of finalizing these quickly," said James Polfer, chief of the IRS' tax-exempt bond branch in the associate chief counsel's office. A public hearing on the proposed rules is to be held Jan. 5.
Meanwhile, Treasury officials at the meeting said Timothy Jones of the IRS' associate chief counsel's office has received the Attorney Excellence Award, which is given out annually by the service to chief counsel attorneys. Polfer said it is "about the highest award we can give to an individual attorney for his contributions to the excellence in the program."