Treasury, IRS officially withdraw political subdivision rules

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WASHINGTON – The Treasury Department and Internal Revenue Service on Friday officially withdrew their controversial notice of proposed rulemaking that would have imposed a new definition for political subdivisions in order for them to be able to issue tax-exempt bonds.

The announcement was in the Oct. 20 Federal Register.

Treasury Secretary Steve Mnuchin earlier this month recommended the withdrawal of the proposed rules in response to President Trump’s Executive Order 13789, which was issued on April 21, 2017. The order had asked the secretary to take action to alleviate burdens associated with Treasury and IRS rules issued or proposed as of Jan. 1, 2016 that would: impose undue financial burdens on U.S. taxpayers; add undue complexity to the federal tax laws; or exceed the statutory authority of the IRS.

Under the rules, which were proposed on Feb. 23, 2016, political subdivisions, in order to issue tax-exempt bonds, would have to be designated substantial amounts of at least one of three sovereign powers: taxation, policing and eminent domain, as historically been the case. The proposed rules added that they also would have to be governmentally controlled and serve a governmental purpose “with no more than an incidental private benefit.”

Muni market participants complained that the proposed rules were over-reaching, ignored congressional intent, ran counter to decades of practice, and would cast doubt on many legitimate entities that currently issue tax-exempt bonds. They said the long-standing sovereign powers requirement should be enough to define a political subdivision that can issue tax-exempt bonds.

Treasury and the IRS received more than 130 comment letters on the proposed rules, almost all of them opposed to the rules.

Despite the withdrawal of the proposed rules, agency officials remain concerned that some political subdivisions are controlled by developers.

In its announcement that it planned to withdraw the proposed rules, Treasury said that it “continues to believe that some enhanced standards for qualifying as a political subdivision may be appropriate.”

John Cross, Treasury’s associate tax legislative counsel, told bond lawyers meeting in Chicago earlier this month that any standards or rules proposed for political subdivisions in the future will be more targeted.

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