WASHINGTON -- The Internal Revenue Service and Treasury Department published
At the same time, the IRS is proposing to withdraw the existing temporary rules that it put into place in 1983 when it finalizes the rules proposed Thursday.
Issuers can opt to immediately use the proposed rules between Sept. 28, when they were published, and their effective date, which still must be determined. Otherwise the rules are prospectively effective upon being made final. The agencies said they will be accepting public comments on the proposed rules for 90 days and plan to hold a public hearing on them as well.
The proposed rules take into account tax law changes that have expanded the kinds of PABs that can be issued and technological changes that have occurred since 1983 such as the Internet and electronic communications.
John Cross, Treasury's associate tax legislative counsel, explained: “The proposed rules are aimed to update and streamline the public approval process to increase flexibility and reduce administrative burdens, including recognizing advances in technology and electronic communication.’’
He said the new rules have been proposed to implement the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which first imposed the public notice and approval requirements for PABs. At that time the only PABs were industrial development bonds. The Tax Reform Act of 1986 greatly expanded the types of projects and financings for which PABs could be used.
“The proposed rules are aimed to update and streamline the public approval process to increase flexibility and reduce administrative burdens, including recognizing advances in technology and electronic communication,’’ Cross said.
The agencies address some of the comments that were made in response to the rules the agencies proposed in 2008. For example, originally the agencies wanted to leave the temporary and final rules in place, but commenters said it would be too confusing so these proposed rules have all the requirements in one place.
Todd Cooper of Locke Lord in Cincinnati, chair of the American Bar Association tax exempt financing committee of the ABA tax section, said the IRS “did a really commendable job.’’
“The made a real effort to modernize some rules that were pretty out of date,” Cooper said. “The world has obviously changed a great deal since those rules came out back in the early ‘80s.’’
Cooper said the ABA committee is already putting together an ad hoc group to gather comments that will be sent to the IRS.
Matthias Edrich, a partner at Kutak Rock in Denver and former chair of the National Association of Bond Lawyers’ tax law committee, described the overall proposed regulations as “a helpful step forward to reducing the burdens that are inherent in the public approval requirement.”
“I believe some of the most helpful revisions address the content of required notices and the method for providing notice,” Edrich said. He nonetheless said that it would “take some time’’ to understand the new provisions.
The proposed rules maintain the core statutory standard which requires reasonable public notice and an opportunity for a public hearing for a governmental unit’s public approval of a an issue of tax-exempt private activity bonds.
But they reduce the burden of having to describe the projects to be financed with PABs in detail and also take into account the fact that mortgage revenue bonds and student loan bonds are not project-based and are instead portfolio loan financings or non-project based.
The proposed rules generally continue existing 1983 temporary rules regarding which governmental entities must approve bonds under the “issuer approval” (issuer of the bonds) and “host approval” (location of the project) provisions, but they include refinements to reflect statutory changes. For example, no host approval is necessary for portfolio loans for single-family housing mortgages, which would be or student loans, where there is no project.
Under the proposed rules, mortgage revenue bonds “would require the public approval information to state that the bonds will finance residential mortgages, provide the maximum stated principal amount of the bonds, and generally describe the issuer’s geographic jurisdiction in which the residences to be financed with the mortgage loans are expected to be located.”
Qualified student loan bonds “would require the public approval information to state that the bonds will finance student loans and provide the maximum stated principal amount of the bonds,” the agencies said.
“For these two types of bonds, the proposed regulations would not require the names of borrowers to be included in the public approval information,” the agencies said.
The proposed rules continue to require that the public approval information include the location of the project by street address, but they allow issuers to use proximate locations such as a college campus.
Also, instead of having to provide notice of a public hearing in a general circulation newspaper or in radio or television announcements, which can be expensive, the proposed rules allow notices to be made in internet postings on approved government websites.
“Posting notices online in a manner that applies to a governmental unit's other types of notices promotes consistency and may even help expand the availability of TEFRA notices to those members of the public who do not subscribe to newspapers,” Edrich said. “Of course, publishing online also reduces the governmental cost of complying with regulations.”
Edrich said another helpful change is that “no host approval is necessary under the proposed regulations for the portion of 501(c)(3) bonds to be used to finance working capital expenditures.”
The IRS said using proceeds to pay working capital expenditures is an insubstantial deviation from a project description as long as they are directly associated with the project. Edrich said, adding it is unclear what the IRS means by directly related.
Edrich said the proposed rules fall short in retaining the temporary rules' public notice period of 14 days, rather than going with the seven days as proposed by the 2008 proposed rules. Some groups complained in comments on the 2008 proposed rules that the seven-day period was too short. These rules address those concerns.
“The proposed regulations also allow for the use of supplemental public approvals to cure substantial deviations,” Edrich said. “In my experience, these supplemental public approvals should be very helpful to borrowers that experience unexpected changes that require a reallocation of bond proceeds after the bonds are issued.”
