The Internal Revenue Service has issued an updated version of a revenue procedure used by municipal bond issuers who want to challenge agency determinations that bonds are taxable.
The update, which was released Wednesday, modernizes a previous revenue procedure to reflect changes in the IRS’ organizational structure and codify procedures currently in use but developed since the original version was published in 1999.
Agency officials said yesterday that Revenue Procedure 2006-40 is meant to remove confusion about how tax-exempt bond issuers can pursue an administrative appeal of a proposed adverse determination. The agency issues such determinations after finding a problem with bonds’ compliance with federal tax code rules.
Under the revenue procedure, an issuer must file a written protest requesting appeals proceedings within 30 days of receiving a proposed adverse determination. A proposed letter typically follows a preliminary notice of taxability, both of which are issued by the tax-exempt bond office.
From there, cases are to be expeditiously handed over to the Office of Appeals and processed by an official in its TE/GE section. The appeals official negotiates a settlement with the issuer or issues a final determination of taxability if no agreement is reached. At that point, the IRS can take steps to tax bondholders.
Officials indicated yesterday that the updated document reflected the agency’s desire to be transparent and consistent in its procedures.
“There is nothing new in here that deviates from what our current practices are, but there are a couple of items in here that are being clarified,” said Steven Chamberlin, director of the IRS’ office of compliance and program management, formerly the office of outreach, planning, and review.
“Early on, when we started talking about this, we wanted to make sure everybody understood the process; that there wouldn’t be any surprises,” he added.
“Occasionally when you’re having a discussion about what’s within appeals’ jurisdiction, we were clear, between TEB and appeals, but some of the practitioners weren’t,” said Charles Fisher, appeals team manager for the TE/GE division.
Some have expressed frustration with the pace of case movement, which is complicated by the large, varied caseload handled by the Office of Appeals. TE/GE appeals officials have cases docketed in courts of law and tend to work on those with specific deadlines first, and “that’s why bond cases take so long,” said one source that wished to remain unidentified yesterday.
Fisher said yesterday that when cases are received, they are reviewed and immediately assigned to an appeals officer.
“If they’ve got cases in progress obviously they’re not going to drop everything they’re doing,” he said. “But that will be a priority assignment so that we can get with bond counsel and try to resolve the matter as expeditiously as we possibly can. That’s a quid pro quo, because it goes both ways. Sometimes bond counsel is not ready.”
Fisher also pointed out that TEB has agreed to send cases over as quickly as possible if there are no complications in issuers’ written protests. TEB reviews those protests and can choose to reexamine cases under the revenue procedure.
“That’s reacting, I think, to a service-wide concern that practitioners and taxpayers have expressed that they’d like the Appeals process to flow a little quicker,” Fisher said.
The new document, which replaces Revenue Procedure 99-35, also formalizes several TEB processes that have evolved in recent years. It stipulates that when a case does not get resolved in appeals it cannot revert back to TEB for new settlement negotiations. It also codifies the relatively new practice of not offering so-called “Section 6700 passes,” which brought transaction parties into settlements. Section 6700 allows the IRS to individually penalize participants in abusive deals.
“When a case is transferred to appeals, they’re looking at the taxability of a bond issue,” Chamberlin said. “They’re not looking at other tax matters … it’s off the table.”
Jeremy Spector of Blank Rome LLP in Philadelphia said the new revenue procedure reflects that the IRS’ enforcement efforts are beginning to show fruit.
“I think this transparency is very healthy,” he said. “There are signs all over the place that issuers, underwriters, and other parties to a transaction are taking very seriously their tax compliance responsibilities.”
Mary Gassmann Reichert of Bryan Cave LLP in St. Louis noted that the revenue procedure could be more specific when it comes to requirements for issuers’ written protests.
“From 10,000 feet, what concerns me most is the … ‘ticket’ to appeals as a matter of right,” she said. “It seems to me there’s a real problem in having ambiguous criteria, given the statutory right accorded municipal issuers.”
Additionally, the revenue procedure does not require “some level of finality when [the IRS issues] that last letter,” giving it another bite at the apple if an issuer’s protest contains new information, she said. “I think that given the limited financial resources of issuers, this is a very difficult procedure to live with.”
Chamberlin said that situation arises in a significant number of audits. “In many cases we will see information or analysis that is new to us, and if we feel it would possibly change our position or the outcome of the case, for expeditious treatment purposes it’s prudent for us to explore that,” he said.
