WASHINGTON — Four municipal market groups are urging the Treasury Department and the Internal Revenue Service to publish guidance on the determination of issue price for tax-exempt, tax-credit and direct-subsidy bonds.
In an Aug. 16 letter addressed to Treasury Assistant Secretary for Tax Policy Mark Mazur and IRS Chief Counsel William Wilkins, the groups stressed "clear guidance is needed to help all market participants avoid unnecessary tax audits, and to be able to address issue price matters in IRS questionnaires and other inquiries without the confusion that exists under the current regulations."
The groups — Bond Dealers of America, the Government Finance Officers Association, the National Association of Bond Lawyers and the Securities Industry and Financial Markets Association — said they have been "eagerly anticipating the release of the regulations" over the past few years.
"While there may be additional regulations related to municipal securities that are also important to the market and awaiting Treasury's action, the need for guidance on issue price is most pressing to all market participants and their counsel and should not be delayed any longer," the groups wrote in the one-page letter.
The letter was sent just two weeks after the Securities and Exchange Commission announced it had picked John J. Cross 3rd, the Treasury official most involved in writing the guidance, to become director of its Office of Municipal Securities in September. Cross has been associate tax legislative counsel in the Treasury's Office of Tax Policy since mid-2006.
The groups said it is critical they have guidance they can rely upon because the IRS is focusing on this issue in some audits and there have been "allegations that issuers and their counsel have not properly determined the issue price of bonds."
Issue price is key to determining the bond yield for tax purposes in the case of tax-exempt bonds, and subsidy amounts in the case of Build America Bonds and other direct-pay debt.
The determination of bond yield has a bearing on whether a tax-exempt bond issuer is meeting arbitrage requirements and whether a BAB issuer is receiving the correct amount of subsidy payment from the Treasury.
Under IRS rules, the 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. However, the rule only applies if all of the bonds of a specific maturity are offered to the public at that price. The public "does not include bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters or wholesalers," the rules state.
In their letter, the groups noted they wrote the Treasury in August 2010 about how to address their concerns in determining a bond's issue price.
In that letter, the groups said that for the past 25 years, issue price for tax-exempt bonds has been based on the initial offering price to the public and there should be "no reason to depart from this approach."
They also said that requiring verification of sales or an analysis of secondary market trading activity places an "unreasonable burden on issuers" and causes uncertainty after a legal commitment has been executed.