WASHINGTON — The National Association of Bond Lawyers and the American Bar Association tax-exempt financing committee are urging the Treasury Department and the Internal Revenue Service to develop guidance on the definition of issue price for tax-exempt bonds, Build America Bonds and other direct-pay tax credit bonds.
NABL asked that the guidance be among the agencies’ top list of priorities for the period of July 1, 2012, through June 30, 2013. NABL made its request in a two-page, May 1 letter signed by president Kristen Franceschi.
The ABA committee made its suggestions in a 11-page letter May 16 signed by William Paul, chairman of the taxation section.
The letters were sent in response to the Treasury’s request for public comments on what its priorities should be for the coming year. The Treasury’s Office of Tax Policy and the IRS use the list to identify and prioritize the tax rules, revenue rulings, notices and other published guidance.
Both groups also asked for guidance on reissuance, updated rules for management and service safe-harbor contracts, and final public approval rules for private-activity bonds that the Treasury Department proposed on Sept. 8, 2008.
The PAB rules are designed to address several practical problems and take into account technology advances in determining how issuers must provide information and hold public hearings before issuing PABs under the Tax Equity and Fiscal Responsibility Act of 1982, or TEFRA.
The groups also want guidance on refundings of several bonds created under the American Recovery and Reinvestment Act of 2009, allocation and accounting of proceeds and projects, and whether premiums for bond insurance could disqualify BABs and jeopardize the federal subsidy payments made to the issuers.
They also requested final regulations on arbitrage rules related to qualified hedges and yield-reduction payments. “These are the most pressing subjects we are dealing with, or they involve projects with proposed guidance outstanding and we’d like to see them buttoned up,” said Mike Larsen, chairman of the NABL tax law committee and partner at Parker Poe.
Some of the groups’ requests were similar to last year, such as seeking guidance on issue price.
The absence of a clear definition of issue price has become a hot topic for many muni market participants and industry groups. They have been requesting guidance on issue price for several years.
Issue price is key to determining the bond yield for tax purposes. The determination of bond yield has a bearing on whether an issuer of tax-exempt bonds is meeting arbitrage requirements or whether an issuer of Build America Bonds is receiving the correct level of subsidy payments from the federal government.
Under IRS rules, the issue price for each maturity of bonds is the first price at which a substantial amount of them are sold to the public, with 10% considered to be a substantial amount. However, the rule only applies if all of the bonds of a specific maturity are offered to the public at that price. The public “does not include bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters or wholesalers,” the rules say.
The IRS has become concerned, particularly with BABs, that the bonds are trading up as they are issued, indicating the issue price was set too low, the interest rates are too high and Treasury’s subsidy payments are too big. BAB issuers receive payments equal to 35% of interest costs.
NABL is seeking clarification for the refundings of several ARRA bonds, including BABs, recovery zone economic development bonds, and recovery zone facility bonds. All of these bonds received benefits under the ARRA. NABL wants to make sure the bonds’ benefits would carry over to bonds issued to refund them.
“We are hoping at some point in the near future we could get some authority that the refunding of these bonds, in situations where you aren’t extending the maturity of the prior bonds, or increasing the amount of bonds outstanding, will be permitted,” Larsen said. “We see it as win-win for the issuer and for the federal government.”
Earlier this month both NABL and the ABA sent comment letters to the Treasury Department and IRS urging them to update their rules and guidance on management-contract safe harbors, which are important in determining that certain governmental and 501(c)(3) bonds remain tax-exempt and are not found to be private-activity bonds because of the contracts.
Some of the guidance on management contracts were issued 30 years ago and both groups argued that they haven’t kept up with current business practices.
NABL and the ABA’s request to include updated guidance on management contracts as a priority was a new addition from last year’s requests.
Both groups also want clarification on working capital rules relating to bond insurance premiums. Last year, after a handful of BAB audits, the IRS raised concerns about whether the payment of a premium for bond insurance constitutes a capital expenditure.
That would be a huge problem for Build America Bond issuers because for bonds to qualify as BABs, all of the proceeds except those used to pay the cost of issuance and a reasonably required reserve fund must be used for capital expenditures. Many bond attorneys believe insurance premiums are capital expenditures.
