PHOENIX — A major component of the compliance questionnaire the Internal Revenue Service plans to send to issuers of Build America Bonds will examine how issuers are complying with the rule that all BAB project proceeds go towards capital expenditures, an IRS official said here Friday.
Carl Scott, a group manager with the IRS' tax-exempt bond branch, told bond attorneys here that one goal of the survey is to inform BAB issuers that they need to be prepared to prove that their bonds are still compliant after the issue date. He made his comments while speaking on a panel at the National Association of Bond Lawyer's annual Bond Attorneys' Workshop here.
The American Recovery and Reinvestment Act, which authorized the BAB program, requires that 100% of the proceeds on direct-pay BABs, minus issuance costs totaling less than 2% of the bond issue, go towards capital expenditures, as opposed to working capital such as refinancing old debt.
Treasury officials have said Congress included the provision to ensure the program stimulates new developments. Tax-credit BABs, which provide investors with a tax credit instead of subsidy payments to issuers, can be issued for working capital purposes.
While issuers have sold more than $47 billion of direct-pay BABs so far, it is not clear if any tax-credit BABs have been sold.
"This 100%-use requirement is something that issuers need to take seriously," Scott said. "This survey is going to try and help educate issuers and to see that they have systems in place to monitor these things after the fact … so that we don't wind up sending that ugly little letter that says, 'Oh, by the way, you're not getting any more credits and we want what you got back because these aren't qualified bonds.' "
IRS bond office director Clifford Gannett said Wednesday that his office plans to send brief surveys to every issuer that sells BABs in the next year.
On the same panel, Frederic J. Ballard of Ballard Spahr LP suggested that issuers needed some protection in cases where they legitimately tried to adhere to that requirement.
"Sooner or later, somebody's going to get a phone call saying, 'Well, I think your costs of issuance are a little bit over' … and all of a sudden we've got a problem," Ballard said. "We need some sort of good-faith test, some sort of expectation test, something where we weren't trying to do something wrong … and someone just disagreed with the consequence of it." He also suggested the IRS allow for some margin of error on the rule.
Scott also said the IRS will be releasing two new forms in January — a redesigned 8038-CP issuers file to request BAB subsidy payments and a new 8038-B, which issuers will use to report both types of BABs as well as the similar recovery zone economic development bonds.
Meanwhile, Gannett said on a separate panel that while the bond office had not decided whether to initiate audits on governmental entities that responded to an IRS survey on post-issuance compliance by saying they had no procedures in place, the 13% of those that did not respond to the survey at all can expect to hear from the service in the coming year.
The bond office sent surveys to 200 governments in January, a follow-up to a similar survey of 207 nonprofit issuers done last year. Gannett said that not only did the charities respond at a greater rate than governments — 98% versus 87% — but the nonprofits also appear to have better-written procedures in place to ensure post-issuance compliance.
"One of the things that we're seeing is that potentially there are less general comprehensive written procedures with respect to the governmentals that received that questionnaire," he said.
