IRS Seeks GIC and Hedge Data for Private-Activity Bonds Form

The Internal Revenue Service has revised its Form 8038 for private-activity bonds, asking issuers now to provide more specific information about their guaranteed investment contracts and hedges.

The IRS is seeking the information as it and other federal agencies, including the Justice Department and Securities and Exchange Commission, are investigating and bringing criminal and civil enforcement actions against firms and individuals over alleged anticompetitive practices such as bid-rigging in connection with GICs and derivatives contracts.

The three-page form was revised in April and asks PAB issuers for the first time to disclose any GIC provider or hedge counterparty, among other details. The broader disclosure requirements for private-activity bonds may foreshadow to what extent the IRS will peer into transaction details for other deals, according to sources.

“So far, this is the most comprehensive” IRS form for issuers, said Kathleen Orlandi, a partner with Hawkins, Delafield & Wood LLP. “I would think this is a view of the future” as the agency updates other forms, she added.

Form 8038 asks issuers to provide the amount of gross proceeds invested in a guaranteed investment contract as well as the its final maturity and the GIC ­provider.

Issuers sometimes invest their bond ­proceeds in GICs until they are ready to be spent.

The form also asks for more details about hedges such as interest-rate swaps. The issuer is required to disclose the type of hedge, its expiration and the counterparty.

Some of the information IRS is asking for on the Form 8038 may already be found in an issuer’s tax or arbitrage certificate, which is put together by bond counsel.

Orlandi said the new form provides a better summary of the deal for the agency.

Other IRS forms do not yet include the same level of detail. Form 8038-G for governmental bonds asks for the amount of gross proceeds invested in a GIC and the final maturity of the contract.

For hedges, the form asks only if the issuer has a hedge associated with the deal.

Additionally, the revised Form 8038 allows another party, like bond counsel or a financial adviser, to answer IRS questions on behalf of the issuer.

The revised form also has two new “check the box” lines to show whether the issuer has established written procedures for best practices compliance.

Separately, the IRS last week published refresher information on its website about bond reissuance.

Often, an issuer facing financial trouble may need to modify the terms of its outstanding bonds.

To comply with federal tax law, the issuer may need to treat the modified bonds as a current refunding for tax purposes.

The information is the first item published by the IRS tax-exempt bond office’s distressed government entities team.

The nine-member team is trying to identify potential problems stemming from bond issuers’ fiscal woes and offer educational material that may be of assistance.

Reissuance “is a situation that is going to be more prevalent in times of financial distress,” according to Bob Griffo, a tax law specialist in the TEB office who is leading the distressed entities team.

One new wrinkle with reissuance involves Build America Bonds. By law, there is no provision for a current refunding of BABs.

An issuer that makes significant modifications to the terms for its BABs will lose the 35% federal subsidy.

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