WASHINGTON — The Internal Revenue Service has published a tax law compliance guide for issuers in conduit bond transactions.
The 12-page publication, "Your Responsibilities as a Conduit Issuer of Tax-Exempt Bonds," describes conduit deals, which can involve governmental bonds, private-activity bonds or 501(c)(3) bonds benefiting nonprofit organizations.
In conduit deals, an issuer sells the bonds and loans the proceeds to a borrower, such as a hospital or a developer.
The IRS guide details the forms that must be filed for such transactions as well as the procedures for filing the forms late.
It also describes the requirements for private-activity bonds, including volume cap restrictions and carry-forward requirements, public approval requirements, limits on fees charged by the issuer and issuer certifications about the expectations for the use and investment of bond proceeds.
The IRS outlines the modifications that can be made to conduit bonds that can cause them to be reissued as new bonds subject to the most recent tax requirements.
It also describes remedial actions the issuer can take to address potential tax law problems.
Treasury rules for PABs require that issuers make certain elections in writing before the bonds are issued, the IRS said in the guide. The document lists these, such as an election to pay a 1.5% penalty in lieu of rebating arbitrage profits.
The IRS guide details the arbitrage rebate and yield reduction payment requirements that may apply to conduit issuers, as well as the sanctions for failing to meet these requirements and the procedures for requesting the recovery of overpayments of arbitrage that was rebated.
The IRS notes that under its administrative procedures, the conduit issuer, rather than the borrower, is treated as the "taxpayer" when it audits bonds.
"This means that the conduit issuer will receive the letter initiating the examination and must be a party to any closing agreement resolving an IRS examination," the agency said in the guide. Closing agreements are settlements under which the issuer agrees to pay the IRS money to settle tax violations in return for the agency's maintaining the tax-exempt status of the bonds.
The guide describes the IRS' voluntary closing agreement program, under which issuers can voluntarily report, and take certain prescribed actions to remedy, specified tax violations.
The IRS also explains how an issuer can request a private-letter ruling when it is uncertain about compliance with tax requirements.