WASHINGTON — The National Association of Bond Lawyers is urging the Treasury Department and the Internal Revenue Service to develop guidance on the definition of issue price for tax-exempt bonds and private business use tests for accountable care organizations.
NABL asked that the guidance be among the agencies’ top list of priorities for the July 1, 2013 through June 30, 2014 period. The group made the request in a
The letter was in response to the Treasury’s request for public comment on what should be included in its priorities list for the coming year, which is typically released in November.
“These items are suggested as priority items,” wrote Lilienthal. “These items are not listed in any specific order of priority. Nor by suggesting them do we mean to withdraw any other items we suggested for any prior list.”
Only one of NABL’s five suggested items is new from their list last year — guidance concerning the application of the private business use tests to accountable care organizations and other arrangements entered into under the 2010 Patient Protection and Affordable Care Act.
“The addition of the list to last year is basically a function of the implementation of Obamacare and perhaps some of the unintended consequences of this implementation on tax exempt bonds,” said Mike Larsen, chair of the NABL tax law committee and partner with Parker Poe.
NABL’s concern is that Obamacare imposes a number of requirements on health care providers and hospitals and encourages partnerships between exempt organizations and entities that would otherwise be treated as private business users of tax exempt bond finance facilities. To the extent that the partnerships are treated as a private user, it could give rise to private business use limits. If these entities are subject to private business use limits, the tax exempt status for any outstanding bonds hospitals may have could be jeopardized, Larsen said.
The number one item on NABL’s list was issue price, which has been requested for several years.
“We continue to await guidance related to the definition of issue price, which we hope will be forthcoming soon,” Larsen said.
Issue price is key to determining the bond yield for tax purposes. The determination of bond yield has a bearing on whether an issuer of tax-exempt bonds is meeting arbitrage requirements or whether an issuer of Build America Bonds is receiving the correct level of subsidy payments from the federal government.
Issue price for each maturity of bonds is the first price at which a substantial amount of them are sold to the public, with 10% considered to be a substantial amount. The rule only applies if all of the bonds of a specific maturity are offered to the public at that price.
NABL wants guidance on the perceived gap in reissuance guidance that does not cover tax-exempt bonds that issuers privately place with banks. Under a provision in the American Recovery and Reinvestment Act of 2009 it was easier for banks to purchase more tax-exempt bonds during 2009 and 2010. Banks could deduct 80% of the cost of buying and carrying tax-exempt bonds sold by small issuers whose annual issuance was $30 million or less. Before 2009 and since the ARRA expired at the end of 2010, issuers’ annual debt issuance is $10 million or less.
IRS reissuance rules issued in 1988 for qualified tender bonds and guidance issued in 2008 for auction-rate securities does not cover bonds that issuers privately place with banks, according to NABL.
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.
NABL is also seeking guidance on updated rules for management and service safe-harbor contracts, which are important in determining that certain governmental and 501(c)(3) bonds remain tax-exempt and are not found to be private-activity bonds because of the contracts. Guidance on management contracts were issued more than 30 years ago and NABL has argued that the rules haven’t kept up with current business practices.
NABL also requested final regulations on arbitrage rules related to qualified hedges and yield reduction payments as well as final public approval rules for private-activity bonds that the Treasury Department proposed in 2008.
