Members of the Government Finance Officers Association’s debt committee voiced strong concern Saturday that the Internal Revenue Service’s recent white paper on problematic bond transactions could be codified into requirements for the municipal bond market.
The 25-member debt committee met here before the group’s annual meeting and discussed reactions to the report and the possibility of developing comments for the IRS.
In March, the IRS’s tax-exempt bond office released the 38-page report, “Avoiding Troubled Tax-Advantaged Bonds: A Study of Issuer Compliance Considerations. The agency said the paper was intended to be a “starting point from which to develop tools to facilitate issuer adoption of practices and procedures that work for their individual needs to avoid abusive or questionable transactions.”
“My primary concern would be, from a big picture perspective, to [what] the extent they are suggesting these practices establish de facto market standards that issuers are required to comply with,” said Ben Watkins, chair of the debt committee and director of the Florida division of bond finance. “That is the real danger of having the IRS publishing this level of detail with respect to subject matter that is normally way beyond what I perceive to be their role in the municipal market.”
Watkins added that the IRS has moved away from what he views as its normal role within the tax-exempt bond market and into the position of “giving advice in the blocking and tackling of how we are supposed to do our jobs.”
Many committee members echoed Watkins’ comments that the IRS had overstepped its boundaries in writing a report that recommends best practices instead of tax law requirements. Watkins and others found that the structure of the paper, with its “if a certain set of circumstances exists, then the issuer needs to do this” statements, to be cumbersome.
The IRS said the report is the first of a series of public resource products designed to serve as best practices for issuers to avoid troubled transactions that can occur in three main phases of a bond transaction. It was developed by TEB’s new compliance practice research team.
One committee member was worried the paper could be a template for a future questionnaire on how issuers make decisions on negotiated deals versus a competitive sale. Another said the tone of the paper was “patronizing.”
“I find this just frankly unprofessional from the IRS and would hope that any kind of final product would have a revision primarily on the tone,” the committee member said.
The committee decided that it would have Dustin McDonald, director of GFOA’s federal liaison center, follow up with the IRS to determine if the group should develop further comments and feedback on the paper. At the very least, the committee agreed that if the IRS wants to appeal to issuers, it may not want to write a final version of the paper with the “if, then” approach.
