WASHINGTON — The Internal Revenue Service’s tax-exempt bond office plans to send a letter to several hundred bond issuers that have suffered covenant or payment defaults in recent years, alerting them that certain actions they take could inadvertently trigger a reissuance of the bonds.
The two-page educational letter, which will be sent out in the next few weeks, provides information to issuers of conduit bonds about what they can do to ensure the reissued bonds are tax-exempt, said Bob Griffo, group manager of compliance and program management for the TEB office. The letter is part of an “ongoing efforts to promote voluntary compliance” with federal tax requirements, Griffo said. “We want to make sure people know about the rules so they can comply.”
Reissuance occurs when significant modifications are made to the terms of a bond so that it ceases to be the same bond for federal tax purposes. In a reissuance, the modified bond is effectively exchanged for the original bond.
An example would be if an issuer with financial problems convinces a bank that bought its bonds through a private placement to renegotiate the interest rate so that it’s more manageable for the issuer. That could trigger a reissuance.
Reissuances can create tax compliance problems,, according to Griffo. “A debt modification can become a trap for the unwary,” he said. “If people are not aware of what could trigger a reissuance, they could accidentally do something that could cause them to fall out of compliance.”
The IRS has identified several hundred or so covenant and payment defaults that have occurred since the beginning of 2007 based on external sources, including financial media reports, the Municipal Securities Rulemaking Board’s EMMA system and Bloomberg.
There may be situations where issuers’ bonds have defaulted but they cured the situation. It doesn’t mean all of the identified issuers who will receive the letter are currently in default,, Griffo said. The IRS plans to send out around 50 letters a month over the next few months, he said.
The letter is part of an IRS outreach effort to issuers who may not read its educational resources or who infrequently enter the municipal market to issue debt and aren’t aware of the most up-to-date tax compliance resources, Griffo said.
It directs issuers to
However, the IRS cautions that the materials on the website are not to be relied on as legal authority and that issuers and conduit borrowers should consult bond counsel before restructuring their bonds.
“We are asking you to consider whether any actions you, or any conduit borrower, have taken with respect to tax-advantaged bonds caused a reissuance for federal tax purposes,” the IRS wrote. “It is neither an audit nor an investigation under the Internal Revenue Code.”
The letter, which does not require the recipient to take specific action, outlines five different areas of reissuance: what it is, how it affects bonds, what federal tax consequences might result from it, what types of modifications cause it, and what issuers and conduit borrowers need to do if they have one.
The consequences of a reissuance include: a change in yield that would affect compliance with arbitrage investment restrictions, a need for additional volume cap, the need to accelerate rebate payments, and the need to file a new information return.
A reissuance can present problems for certain types of bonds that must be issued by a statutory deadline, according to the IRS.
