WASHINGTON -- The National Association of Bond Lawyers is among the wide array of legal and governmental groups asking the Internal Revenue Service withdraw its controversial proposal for a new definition a political subdivision that can issue tax-exempt bonds.

The group made the request in a nine-page comment letter sent to the Internal Revenue Service that said the proposed rules are not administrable and that, unless withdrawn, "will continue to cause significant uncertainty and disruption in the financial markets and legal community."

The Treasury Department asked for comment letters after the proposed political subdivision rules were among eight regulations it said last month that it was considering rescinding or modifying under an Executive Order issued by President Trump targeting tax regulations that create undue financial burdens, too much complexity, or exceed the authority of the IRS.

Treasury Secretary Steve Mnuchin has until Sept. 18 to recommend "specific actions to mitigate the burden imposed by the regulations" identified under the Executive Order.

In the meantime, comments on the regulations are being accepted by the IRS and Treasury through Aug. 7.

“I am hopeful personally that the fact they put this on the list indicates that they know it’s problematic,’’ Tom Vander Molen, a lawyer with Dorsey & Whitney in Minneapolis who chairs the NABL tax law committee said Tuesday. “And I hope they say there’s no need to change what had been for many years, established standards.’’

Tom Vander Molen, a lawyer with Dorsey & Whitney in Minneapolis, chairs the tax law committee chair of the National Association of Bond Lawyers.
Tom Vander Molen, a lawyer with Dorsey & Whitney in Minneapolis, chairs the tax law committee chair of the National Association of Bond Lawyers.
Dorsey & Whitney

The outcry against the proposal has been overwhelming.

Last year the National League of Cities, National Association of Counties, U.S. Conference of Mayors and National Conference of State Legislatures were among nine organizations that signed a joint letter in opposition.

The Government Finance Officers Association is preparing a letter that also will ask for withdrawal of the proposed regulation, Emily Swenson Brock, director of the association’s Federal Liaison Center, said in an email Tuesday.

Brock said the new request will be “extremely similar’’ to the critique the GFOA filed last year when it said it was “deeply concerned’’ about its impact on the 38,578 special districts around the country.

GFOA suggested last year that the proposed regulation be “rewritten in order to directly address the specific types of abuses the IRS believes to exist.’’

But NABL doesn’t favor a do-over.

Vander Molen said his organization supports the current case law that dates back to a court decision in the 1940s, Commissioner of Internal Revenue v. Shamberg's Estate, a case on whether interest received on bonds issued by the Port of New York Authority was subject to income taxes.

The current controversy began in 2013 when the IRS Office of Chief Council issued a technical advice memorandum in connection with an examination of bonds issued in Florida. The bonds were issued by two community development districts that are part of The Villages development.

The IRS memorandum concluded that the CDD was not a political subdivision because its board was, and would always be, controlled by a developer rather than by residents or other publicly elected officials.

The IRS was widely criticized for its memorandum, but responded by proposing a new regulation in February 2016 to redefine what constitutes a political subdivision that can issue tax-exempt bonds.

Under longstanding federal law and rules, an entity is considered a political subdivision that’s eligible to issue tax-exempt bonds if it has the ability a substantial amount of at least one of three sovereign powers – taxation, eminent domain or policing.

The proposal would, as the American Bar Association described it, “replace the one-part sovereign power test that applies to a division of the state with a three-part test.’’ The proposal added that a political subdivision must also be governmentally controlled and serve a governmental purpose “with no more than an incidental private benefit.’’

The American Bar Association’s Section on Taxation said in a May 2017 letter the IRS should consider “a narrower scope’’ that would include addressing the use-related concerns through its regulations on private activity bonds. Other ABA suggestions included “a more tailored approach’’ to concerns about development districts.

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