SAN FRANCISCO — California Treasurer Bill Lockyer has waded into the issue of tax compliance by conduit tax-exempt bond issuers.
Lockyer said in a letter Friday to an Internal Revenue Service advisory committee that he supports recent recommendations to strengthen tax compliance for conduit issuers.
"I believe we need to ensure maximum transparency and the strongest possible oversight of conduit bond transactions," Lockyer said in the letter to the IRS' Advisory Committee on Tax Exempt and Government Entities, or ACT. "We would be happy to work with you in identifying compliance issues and developing workable solutions."
Conduit issuers issue tax-exempt bonds for private entities or local governments that generally support a public benefit, such as economic development or heath care. They are typically formed by government entities, although some have looser government ties than others.
Last month, the 21-member advisory committee in a report to IRS officials laid out recommendations on the responsibilities of conduit issuers and borrowers in tax compliance and oversight.
The report also raised issues related to "extraterritorial" conduit issuers, or issuers that sell tax-exempt debt for out-of-state borrowers, which have recently come under the spotlight.
"The advent of conduit issuers that have authority to issue bonds for conduit borrowers, with which they have little of no relationship, raises a number of policy issues for Congress, the service and the community of conduit issuers and conduit borrowers regarding the meaning of the oversight role of conduit issuers," the report released June 15 said.
The committee pointed to three examples of such issuers: the Colorado Health Facilities Authority, the Indiana Financing Authority and the Public Finance Authority.
ACT recommended in the report that the IRS should discuss specific policies and procedures with local and state governments to ensure out-of-state issuers have adequate tax compliance.
The PFA was set up in Wisconsin to serve out-of-state borrowers. Its formation stirred controversy in the industry, partly because it is run by a private contractor that also runs a California conduit issuer: the California Statewide Communities Development Authority.
Lockyer has been a long-time critic of privately run conduit issuers and has endorsed a recent call by a state lawmaker for an audit of the issuers because of concerns about transparency.
The treasurer's office also operates several industry-specific conduit issuers.
ACT's report focused on conduit issuers being treated as taxpayers in many instances rather than the conduit borrower, despite the fact that they generally are not subject to federal income tax and are generally not the obligor of the debt they issue.
The IRS report recommended that both the issuer and the borrower be appropriately treated as taxpayers for tax-exempt bond compliance. It said this would also be the best solution for "multi-jurisdictional" conduit issuances, such as for a health care provider located in different states.
The ACT report was based partly on a survey of 20 conduit issuers, of which 70% sold at least $500 million of bonds a year, on how they would respond to an IRS inquiry.
The survey found less than half of respondents had the required procedures for responding to an IRS examination. A third of respondents said they do not keep records at all.
