WASHINGTON — The Treasury Department and Internal Revenue Service released their 2016-2017 priority guidance plan this week, which includes a revenue procedure on management contracts as well as regulations on issue price and political subdivisions.
The plan, released on Monday, includes six projects for tax-exempt bonds that the agencies plan to allocate resources toward through June 2017.
John Cross, Treasury's associate tax legislative counsel, said the agencies will place immediate emphasis on management contracts and issue price.
"The two highest priority near-term projects in the next several months are updated management contract safe harbors first, then the final regulations on issue price," Cross said.
IRS and Treasury said they plan to release a revenue procedure that will update Rev. Proc. 97-13 relating to the conditions under which a management contract does not result in private business use.
Rev. Proc. 97-13, issued in 2013, established safe harbors for long term management contracts, but many bond lawyers have said that guidance on these contracts is not flexible enough, especially when using tax-exempt bonds for infrastructure projects.
That guidance provided safe harbors under which a contract of up to 10 years would require at least 80% of the manager's annual compensation be based on a fixed fee, while one of 15 years would require at least 95% of the annual compensation be based on a fixed fee.
Both the National Association of Bond Lawyers and the America Bar Association's tax-exempt financing committee have made recommendations on how the guidance could be modernized so that contracts do not create a significant amount of private use and make tax-exempt bonds taxable.
Also included in the plan are final regulations on the definition of issue price for tax-exempt bonds, which were proposed first in 2013 and again in June 2015 after facing widespread criticism in their initial form.
"We've proposed this twice and we really want to follow through and finish that up hopefully this fall," Cross said. "The most recent proposal was fairly well received and we'll consider the comments on that."
Under the rules re-proposed in 2015, the issue price of a maturity would generally be the price at which the first 10% of the bonds are actually sold to the public. If 10% of a maturity hasn't been sold by the sale date, the issue price would be the initial offering price of the bonds sold to the public as long as the lead or sole underwriter certifies to the issuer that no underwriter filled an order from the public after the sale date and before the issue date at a higher price. An exception can be made for market movements justifying a higher price.
Dealers and issuers have called for a safe harbor for bonds sold in competitive deals.
Issue price helps determine the yield on bonds and whether an issuer is complying with arbitrage rebate or yield restriction requirements, as well as whether subsidy payments for direct-pay bonds are appropriate.
Emily Brock, director of the Government Finance Officers Association's federal liaison center, said Tuesday that the group is "definitely happy to see the guidance plan includes the final regulations on the definition of issue price for tax-exempt bonds, adding "it would be great to see them certainly before January if possible."
Still, she said that without a safe harbor, underwriters may no longer participate in competitive sales because they will have few orders prior to a bid. This could result in increased costs to issuers.
"The competitive bid process is the purest way of establishing the market price of the bonds, and the proposed regulations should not change the way that the issue price is determined for such issues," Brock said.
Cross said that the agencies are considering the comments calling for a rule more accommodating to competitive sales.
"We're taking a hard look at that," he said.
Another project being considered this year is the definition of a political subdivision for purposes of tax-exempt, tax credit and direct pay bond provisions. Historically, political subdivisions have had to have the right to exercise a substantial amount of one of at least three sovereign powers of eminent domain, taxation, or policing. But rules proposed in February would require political subdivisions to also serve a governmental purpose "with no more than an incidental private benefit" and to be a governmentally controlled.
Many bond lawyers, muni market groups and airports, utilities, and others have warned the proposed rules could jeopardize the tax-exempt status of outstanding bonds and have complained they are overly restrictive.
The agencies received more than 130 written comments, most of which opposed the proposed rules. Because of the widespread opposition, Cross said that the political subdivision project would be more of a long-term one, but did not estimate when the rules may be finalized.
"We received an extensive amount of comments and we're going to consider those comments very carefully and very deliberately before doing anything else on that project," Cross said.
The rules were introduced after IRS audits had shown that political subdivisions were vulnerable to being controlled by private entities, Cross said earlier this year.
Other tax-exempt bond projects included in the priority plan are guidance on remedial actions for tax-advantaged bonds, final regulations on public approval requirements for private activity bonds, and regulations on bond reissuance. The plan had included final regulations on arbitrage investment restrictions proposed in 2007 and 2013, but those were published in July.
The guidance plan says the agencies intend to work on the projects from July 2016 through June 2017, but does not include any deadlines for when they must be completed.
IRS and Treasury began soliciting public comments and recommendations for the plan from muni market participants in April.
The agencies said that in compiling their annual guidance plan they consider whether the recommended guidance promotes sound tax administration, resolves significant issues relevant to taxpayers or involves burdensome or ineffective regulations among other factors.
In a joint statement, IRS commissioner John Koskinen, IRS chief counsel William Wilkins and assistant secretary of tax policy for Treasury Mark Mazur said they will continue to solicit comments throughout the plan year.
"The published guidance process can be fully successful only if we have the benefit of the insight and experience of taxpayers and practitioners who must apply the rules," they said.
The officials also said some projects included in the 2015-2016 priority guidance plan were not included in the newly released plan but may be reintroduced in a future plan.
