The Internal Revenue Service is moving forward with cleaning up some loose ends in the tax code, including how bond proceeds are handled in State and Local Government Series Securities.
"The IRS is trying to do something helpful," said Carol Lew, a partner at Stradling Law.
"Over the years, the IRS has attempted to respond when issues have been raised through a notice to correct a problem. These proposed regulations are making edits to the existing regulations, changing them, amending them, or clarifying something."
The proposed rule changes were unveiled on Thursday via a
The six-page notice includes several topics of interest to bond issuers and tax attorneys including clarifying refunding issues for student loan bonds, updating the IRS mailing address and dealing with questions about the relationship between arbitrage and SLGS.
Pronounced as "slugs," the demand deposit variety functions as a short-term money market fund that's designed to keep issuers and conduit buyers out of arbitrage trouble by providing a temporary safe haven for bond proceeds.
The IRS puts restrictions on tax-exempt bond proceeds invested into higher yield taxable instruments that turn a profit. The current interest rate environment puts arbitrage back on the table.
Making a profit isn't illegal as long as the issuer shares it with the federal government in the form of a rebate.
The new proposed rule change deals with proceeds that move from SLGS into interim 90-day certificates issued by the Treasury and whether that makes the funds subject to arbitrage rules.
"People had been worried that if you buy a demand deposit slug and you want it treated as if it were a tax-exempt bond," said Lew. "You're attempting to not have it be considered something that's subject to arbitrage rebate or yield restriction, and then it flips over into a different 90-day instrument, people were worried."
To clarify the rule, the IRS is proposing to include the 90-day certificates in the definition of a tax-exempt bond.
The IRS has been sending out notices over the years about the situation; the requested rule change would formally put it into the tax code.
"These are proposed, so after a comment period, the IRS will review any comments and then likely publish final regulations, which may reflect changes in response to any comments," said John Stanley, partner at Orrick's San Francisco office.
"I don't think anything here will have a broad impact, but it is possible that these changes could have some impacts on specific transactions."
