The Internal Revenue Service and the Treasury Department told issuers on Wednesday that they may release guidance as soon as possible on tax law issues triggered by the end of the year with regard to certain auction-rate securities and draws under draw-down loans or commercial paper programs.
In a one-page document published on the IRS website, the two agencies also encouraged issuers facing tax law problems with regard to these securities to try to work them out under the IRS' voluntary closing agreement program, or VCAP.
Auction-rate securities held after Dec. 31 by state and local governments that have been unable to remarket them will become extinguished for all federal tax purposes and will lose their tax-exempt status, under guidance previously issued by the IRS.
The loss of tax-exempt status for the ARS will not affect the state and local governments that hold them because they have no federal tax liability for the securities. However, it could make it impossible for the issuers to remarket them in the future.
The IRS said it expects to soon announce that these issuers will be able to come in to the IRS under VCAP to work out a way for the ARS to retain their tax-exempt status after Dec. 31. However, any issuer coming in under VCAP will have to have an expectation that it will be able to successfully remarket the ARS within a limited period of time, the IRS said.
Under guidance previously given in March and April 2008, as well as January 2010, the IRS permitted issuers after the collapse of the auction-rate securities market in 2008 to purchase their ARS until they could remarket them. Under the most recent guidance, issuers are permitted to hold them until the end of 2010, after which they would be extinguished for federal tax purposes.
"For reasons beyond their control, some issuers have been unable to remarket their bonds and have approached the IRS about the possibility of entering into a closing agreement to allow them to continue holding and remarketing their bonds for an additional period beyond that," the IRS said in the document on its website.
Other issuers who entered into draw-down loans or commercial paper programs and were allocated amounts under their state's private-activity bond volume caps have been concerned the allocations were too high because they were based on the entire amounts of the loans or programs rather than on the smaller amounts drawn during the year.
If the issuers do not use all the volume cap allocated and do not carry it forward, they lose the cap and then have none under which to make remaining draws, sources said.
"States and issuers have indicated that changing the different approaches to volume cap in this area presents administrative difficulties," the IRS said in the announcement. "A complicating issue with respect to such volume cap awards is that the awards in 2008, 2009, and 2010 may include volume cap from the temporary $11 billion increase in annual [PAB] volume cap established under the Housing Assistance Tax Act of 2008" for housing bonds.
The IRS and the Treasury said they are considering giving guidance on this matter and that, in any case, issuers can enter in under VCAP to try to address any problems with their volume cap allocations.
