WASHINGTON — The National Association of Bond Lawyers has asked Treasury Department and Internal Revenue Service officials for a meeting to discuss the proposed rules on issue price.
NABL president Allen Robertson made the request in a March 7 letter sent to Vicky Tsilas, Treasury associate tax legislative counsel, and James Polfer, chief of Branch 5 in the IRS Chief Counsel's Financial Institutions and Products section.
NABL and other market groups have complained the issue price rules, proposed in September, are unworkable and would not adequately address policy concerns.
Issue price is important because it is used to help determine the bond yield and whether the issuer is complying with arbitrage rebate or yield restriction requirements, as well as the amount of federal subsidy payments issuers should receive for their direct-pay bonds, including Build America Bonds.
Under current tax rules, the issue price for each maturity of bonds publicly offered is the first price at which a substantial amount of the bonds is reasonably expected to be sold to the public, with substantial defined as 10%. As a result, the issue price is usually determined based on reasonable expectations when the bonds are priced and often before a transaction is closed,
But Treasury and IRS officials became concerned that underwriters were certifying issue prices that were lower than they should be, resulting in higher yields, arbitrage earnings, and subsidy payments. The tax regulators have become concerned that bonds are being flipped, that is priced low and traded up at higher prices to dealers or institutional investors almost simultaneously the same day of issuance.
The proposed rules would eliminate the reasonable expectations standard and instead base the determination of issue price on actual bond sales. The Treasury and IRS have proposed a safe harbor under which the issue price would be the price at which the first 25% of the bonds is actually sold.
But NABL and other market groups have complained the proposed rules would not make sense for competitive deals and would alter long-standing practices in the muni market, even if they could be made to work. They also would increase costs for issuers and other borrowers, the groups contend. NABL and other organizations have warned it would be difficult if not impossible to track actual sales.
In his letter, Robertson pointed out that NABL testified at a hearing held here by the tax regulators on Feb. 5 and also submitted two sets of written comments last year, one on the definition of issue price and the other on other aspects of the proposed rules.
"In light of the importance of the definition of issue price, I would like to offer to meet with you and other staff" at Treasury and the IRS, Robertson told Tsilas and Polfer. "I would bring with me a small group of NABL members who worked on our comments."
