FAQ Sparks Doubts on BAB Make-Whole Call

The Internal Revenue Service’s attempt to provide answers to frequently asked questions about Build America Bonds led to even more questions last week, as bond attorneys worried that one of the answers appeared to ban any premium on BABs sold with “make-whole calls.”

These calls, which are commonplace in the taxable market where BABs are sold, make the bonds redeemable at any time.

But a chief attorney with the IRS downplayed the concerns, saying at a meeting with bond lawyers late last week that the FAQs should not be viewed as published legal guidance from the Treasury Department.

The two sets of IRS FAQs — one on BABs and similar recovery zone economic development bonds, and another on the filing requirements for those programs — were published on the agency’s Web site Friday. The documents, each of which were seven pages, attempt to answer a number of basic questions surrounding the programs and their requirements, such as the purposes for which BABs can be issued, who can issue them, and when certain forms need to be filed.

However, bond attorneys began to scratch their heads after reading an answer intended to explain a special rule stating that BABs cannot be sold with more than a de minimis amount of premium.

The IRS stated that BABs may be issued at par plus a de minimis amount of premium. It added that, according to the tax code, de minimis constitutes “an amount that is not greater than 1/4 of 1% of the stated redemption price at maturity for the bond, multiplied by the number of complete years to the earlier of the maturity date for the bonds or the first optional redemption date for the bond, if applicable.”

Several bond attorneys gathered in California last week for the National Association of Bond Lawyers’ Tax and Securities Law Institute read the final phrase of that sentence as an effective prohibition on premium for BABs including a make-whole call.

The IRS document said de minimis is determined by multiplying a fraction of the redemption price at maturity by the number of years to the maturity date or first optional redemption date, whichever comes first. But because make-whole calls make bonds redeemable immediately, the document appears to state that de minimis premium for BABs with make-whole calls would have to be zero.

In response to questions about the phrasing, James Polfer, chief of the IRS’ tax-exempt bond branch in the associate chief counsel’s office, said the document should not be read as having any legal authority.

“They’re not precedent, they’re not guidance,” he said during a panel discussion of the FAQs. “I would be hesitant to read too much into the legal authority about these.”

He went on to say the documents were intended for a much broader audience than the tax law specialists gathered in the room.

“Obviously the people in this room represent the most sophisticated in this area, and this was meant to address a much broader audience, and to a certain extent stem the avalanche of calls we’ve received about these provisions,” he said. “It’s not really designed to undergo the level of scrutiny that individuals such as yourselves place upon them.”

The Treasury Department hopes to release additional interpretive guidance on BABs before the end of June, according to its priority guidance plan.

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