In a technical advice memorandum issued by the Office of Chief Counsel in January but not publicly released until Friday, the Internal Revenue Service ruled that an unidentified issuer’s single-family housing bond deal was properly exempt from certain tax code rules governing the use of unspent bond proceeds.
Among the issues in the deal — which was probably done around 1980 but not specified in the memo — was whether the issuer’s unused funds were excess proceeds subject to a special allocation rule and whether they qualified as transferred proceeds of a subsequent refunding. The IRS essentially upheld the issuer’s position by ruling that the funds were not excess proceeds but were transferred proceeds, and that the issuer appropriately calculated the average maturity of the refunding bonds by using a weighted average maturity computation as well.
Technical advice memos typically are the IRS Office of Chief Counsel’s response to a revenue agent’s request for technical advice on a case’s legal issues. TAMs do not set a legal precedent and do not identify the relevant bonds, issuer and other transaction parties.
In this particular case, an IRS agent requested guidance on a case involving three series of housing bonds sold by the issuer over a period in which the tax code was amended several times.
The initial series of tax-exempt bonds were issued to purchase, from lending institutions, mortgage loans made to low- and middle-income homeowners, according to the TAM. Taxable bonds were issued at a later date and were to be payable from the mortgages after final payments were made on the tax-exempt bonds.
A series of refunding bonds was later issued, and the issuer invested most of the unspent proceeds in Treasuries to be used to retire the taxable bonds. There is no dispute about the bonds’ tax-exempt status, the IRS said.
The TAM seems to suggest that the first bonds were sold around 1980, when certain tax code provisions related to municipal bonds were amended. The third set of bonds, sold to refund the original debt, appears to have qualified for transitional relief from 1986 tax reform and other code changes.
In the technical advice request, the IRS revenue agent asked chief counsel whether the issuer’s unspent bond proceeds were excess proceeds subject to a 1989 special allocation rule for refunding bonds, under which certain mandatory allocations are required.
“Here, the unspent proceeds of the bonds do not meet the definition of excess proceeds because those proceeds were not used to pay interest on the bonds” or to discharge principal or interest, the IRS ruled.
The agency also said that proceeds of the refunding bonds were used to redeem the original tax-exempt bonds, and at that time, unspent proceeds of the bonds became “transferred proceeds,” or part of the refunding issue.
The IRS agent also inquired about the issuer’s use of weighted averages to compute the average maturity of the refunding bonds, a practice used across the board by municipal issuers. Maturities, based on 120% of the life of the underlying housing stock, have to be measured to determine whether the bonds fall under certain transitional tax code rules.
The IRS’ national office agreed with the issuer’s approach, stating that it did not err by using a weighted average in its average maturity computations.
“Today when we refund single-family mortgages there is a limit of 32 years from the date of the original issue,” explained Frederic L. Ballard Jr., a partner with Ballard Spahr Andrews & Ingersoll LLP here.
That rule apparently did not apply in this case because the bonds were not qualified mortgage bonds. “They were issued under the general authority of [Section] 103 so the 32-year-rule” was not relevant, he said.
“It is a specialized situation,” Ballard added. “It will not be of great practical importance to issuers. Many of the opportunities to do transactions of this general type have come and long gone.”
