The National Association of Bond Lawyers is urging the Treasury Department and the Internal Revenue Service to include, as a priority, guidance on whether the benefits provided to bonds issued under the stimulus law would apply to refundings of those bonds.
The group, which made the request in a two-page, June 1 letter signed by NABL president John McNally, also asked for guidance on issue price, solid waste, allocation accounting rules, drawdown bonds and other tax issues.
NABL’s letter was sent in response to the Treasury’s request for public comments on projects it should focus on for the period from July 1, 2011, through June 30, 2012. The department’s Office of Tax Policy and the IRS use the list to identify and prioritize the tax rules, revenue rulings, revenue procedures, notices, and other published guidance.
Much of NABL’s letter is devoted to seeking clarification about whether benefits the American Recovery and Reinvestment Act provided for bonds issued in 2009 and 2010 would carry over to those bonds if they were refunded.
For example, the ARRA exempted private-activity bonds issued during those years from the alternative minimum tax. But the exemption expired on Dec. 31. NABL wants the Treasury and the IRS to clarify that, if those bonds are refunded, the refunding bonds are also exempt from the AMT.
The ARRA also extended the so-called 2% de minimis rule to banks during 2009 and 2010. Under that rule, banks could buy tax-exempt bonds and receive tax-exempt interest without losing the ability to deduct the interest they pay depositors and others if no more than 2% of their total assets were tax-exempt bonds. The provision expired at the end of the year. NABL is seeking clarification that debt issued to refund those bonds would receive the same benefit.
NABL is seeking the same clarification for refundings of Build America Bonds, recovery zone economic development bonds, recovery zone facility bonds, and Gulf Opportunity Zone bonds. All of these except GO Zone bonds received benefits under ARRA. The group wants to make sure those bonds’ benefits would carry over to bonds issued to refund them.
The attorneys also are seeking guidance on the definition of issue price, which is important in determining the extent to which issuers earn arbitrage that may have to be rebated to the federal government or that is in violation of tax laws.
The definition of issue price is also particularly important for BABs. The ARRA requires BABs not be issued with more than a de minimis amount of premium, which is defined as 1/4 of 1% of the stated redemption price at maturity for the bond, multiplied by the number of complete years to the maturity date or the first optional redemption date, whichever comes first.
The provision was included to ensure that issuers do not inflate the rates of their BABs to collect higher subsidy payments from the Treasury. IRS officials also want to ensure the federal government’s subsidy payments to BAB issuers are as low as possible.
Tax rules state: “The issue price of bonds that are publicly offered is the first price at which a substantial amount of the bonds is sold to the public” and that “10% is a substantial amount.”
The rules also state the issue price “does not change if part of the issue is later sold at a different price” and that, if there is a bona fide public offering of the bonds, the issue price can be determined “as of the sale based on reasonable expectations regarding the initial public offering price.”
In August of last year, NABL, two dealer groups, and the Government Finance Officers Association urged the Treasury to issue guidance confirming that the existing regulatory framework for the issuance of tax-exempt bonds would apply to BABs and that if issuers followed certain long-standing practices they could be confident they are compliant with the tax rules.
The NABL letter also seeks guidance on how allocations work for conduit issues of private-activity bonds subject to state volume caps where some of the PABs are draw-down bonds.
“That’s something that needs to be addressed,” said Michela Daliana, a partner at Hawkins, Delafield and Wood LLP and chair of NABL’s tax law committee. “It’s a pitfall for the unwary.”
Drawdown bonds are a popular way for small issuers to finance construction projects with bonds without having to make initial interest payments on the entire issue. Typically, an issuer agrees to sell a certain amount of the bonds to a bank in a private-placement transaction. The bank, in turn, agrees to loan the bond proceeds to the issuer in small periodic amounts. The issuer is only obligated to pay interest on the amounts tapped.
NABL wants the IRS to clear up confusion that stems from a notice on draw-down bonds it issued in November and PAB rules.
The November notice made clear that issuers could not retain benefits provided for certain bonds, such as BABs, issued under the ARRA that expired at the end of the year by issuing them as drawdown bonds. The IRS said bonds would be considered issued when the money was borrowed such that each draw would have a different issue date. But private-activity bonds allocated under the state volume caps can be carried forward for three years, and the oldest allocation must be carried forward first. The two sets of guidance seem conflicting.
NABL wants the IRS to finalize regulations on solid-waste disposal facilities and provide a definition for those facilities. The solid-waste rules would be a final version of rules proposed in September 2009. Those proposed rules would have defined what constitutes solid waste and would have identified specific waste categories that would not fall within that definition.
The proposed rules also would have eliminated the “no-value test” proposed in 2004, which stated that solid waste would have to be property that had no market or other value at the place it was located. That test generally was considered by bond lawyers to be unadministerable.
The group asked for allocation and accounting rules that will clarify how tax-exempt bond proceeds can be allocated to various costs when the issuer is using other sources of financing as well as bonds. It also asked for yield computation rules in connection with certain qualified hedges.
In addition, NABL asked for assurance that bond opinions for taxable munis, such as BABs and tax-credit bonds, are excluded from the formal requirements under Circular 230, which sets standards for lawyers practicing before the IRS.