Cliff Gannett, who helped establish the Internal Revenue Service’s tax-exempt bond office and is about to retire, warns muni market organizations should use more caution when endorsing transactions that turn out to be abusive.

“I do think they should be a little more circumspect about supporting these specific transactions before they understand all of the facts and circumstances,” Gannett said in an interview with The Bond Buyer. These kinds of rushes to judgment could harm the muni market over the long term, he added. 

Gannett, 58, has been with the IRS for 30 years and will officially retire at the end of June to spend more time with his family. He eventually hopes to explore possibilities in the private sector relating to tax-exempt matters but doesn’t have a set timetable for that.

Andrew Zuckerman will take over as acting director of government entities when Gannett leaves, but no one has been named director of TEB. Steve Chamberlin has been acting director of TEB since December and has served in a supporting role with Gannett.

While Gannett wouldn’t specify which market organizations endorsed transactions that the IRS views as abusive, the National Association of Bond Lawyers warned last fall that the IRS’ position on the Village Center Community Development District in Florida could seriously undermine the municipal bond market.

Earlier this month, the IRS chief counsel finalized its position and ruled after a five-and-a-half year long examination against the Florida CDD, saying it was not a political subdivision and cannot issue tax-exempt bonds because its board is and will always be controlled by the developer and its affiliates.

“The mere delegation of sovereign power is not sufficient to create a political subdivision,” the IRS said in the technical advice memorandum. “If it were sufficient, then a clearly private entity with powers of eminent domain, including some railroads and utilities, could issue bonds without any political oversight.”

Early Career

Gannett graduated in accounting at Mount Saint Mary’s University in 1977 and from law school in 1980 from the University of Maryland. He launched his career at the IRS in exempt organizations as a tax law specialist in 1983.

In the early 1990s, Gannett helped create a task force — a mixture of individuals from the chief counsel’s office and the commissioner’s office — that would become the foundation of TEB. By 2000, Gannett was manager of outreach, planning and review for TEB. In 2005, Gannett took the helm as director of TEB, a post he held until he started as acting director of government entities in 2011.

“I was real fortunate to be the director so I was able to focus on the areas where I really wanted to provide some leadership,” he said.

Serving as director for nearly half of the program’s existence, Gannett was instrumental not only in its creation but also with its first initiatives, such as post-issuance compliance, outreach and education. As a result, “there is a lot more sensitivity to the fact that there needs to be monitoring of the bonds over their life,” he said.

When the TEB program began, the emphasis was on looking for the outliers — such as abuses with financings for nursing homes in the early 1990s.

“I think that was a touch stone of the program,” Gannett said. “It has been and will continue to be trying to identify instances where the financing is being abused by developers or underwriters or brokers. It’s a really important aspect of the work because much of the industry issues dealing with tax-exempt bonds are pretty vanilla.”

Gannett said he believes it’s TEB’s responsibility to ensure that the muni tax-exempt benefit is used by those that Congress intended.

“I think we have seen significant strides in compliance over the last 20 years,” Gannett said. “There still are instances where you have abuses that occur and we continue to be concerned about captive entities being used by developers.”

Negotiations

Gannett described some of his best career accomplishments as ones that involved negotiating a handful of global yield burning settlements and resolving civil cases involving mispricing and guaranteed investment contract bid rigging in the 1990s.

Using his years of experience as negotiator, Gannett launched a project that began early last year to help identify red flags that an issuer could encounter along the lifetime of a bond. The resulting report, “Avoiding Troubled Tax-Advantaged Bonds” received unfavorable market reaction upon its publication earlier in June. Many market participants thought the report was derogatory in tone and that the IRS was overstepping its boundaries on guidance. Gannett clarified the IRS’ intention saying that the report was primarily to identify challenges such as price fixing that have occurred in the past few years.

“It seems strange to me that these finance officers are not recognizing the tax implications of not identifying these kinds of problems,” Gannett said. “What we tried to do, and this is why I’m a little surprised, is that we were trying to educate and point them to areas that they should be looking into ... so that they don’t end up with serious tax consequences.”

Gannett said he launched the project more than a year ago to develop a discussion with issuers about how they can work together to stop abusive transactions from occurring in the future. He also insisted that the IRS is not in the business of creating best practices, but rather positive, educational pamphlets and materials for issuers.

“I have just been so privileged to work with so many great professionals,” Gannett said. “They have worked so hard to raise the bar as far as competency and professionalism go, so I certainly don’t want it to sound like I am attacking the associations.”

With just a few weeks left before Gannett departs the IRS, he said he hopes to continue to provide insight with implementing sequestration, which went into effect in March. As part of those $85 billion in across-the-board federal budget cuts for this fiscal year ending Sept. 30, subsidy payments from the Treasury Department to issuers of Build America Bonds and other direct-pay bonds were reduced by about 8.7%.

“Hopefully there aren’t major issues that come up, just the variety where you can make a couple of adjustments and move on,” Gannett said. It’s been a challenge and will continue to be a challenge moving forward as the programs have to determine what to do if the sequester continues next year.”

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