The Treasury Department's proposed changes to Circular 230 could jeopardize the bond market by driving up costs if the changes are not clarified, according to the Public Finance Network, a coalition of about 25 state and local government associations that specialize in public finance legislation and regulations.
Processing Content
In a letter released yesterday, the network said it is concerned that the proposed changes "would address a very small number of possible abuses that exist within the tax-exempt bond sector, while placing costly regulations on the entire sector -- approximately 15,000 transactions a year."
The PFN's letter came after Treasury and the Internal Revenue Service in December proposed changes to Circular 230 regulations -- which would for the first time would set standards for bond counsel writing tax-exempt bond opinions similar to those for tax shelters, and require lawyers to evaluate each significant federal tax issue in a transaction.
Since March 1, the deadline for submitting comments on the proposed changes, a number of bond market participants -- including The Bond Market Association and the National Association of Bond Lawyers -- have also submitted comments protesting the additional requirements and asking that some changes be better defined.
"The remedy proposed would put a serious burden on the public finance sector and place an unnecessary burden [on] our counsels who routinely provide sound advice and quality assistance in our development finance needs," the Council of Development Finance Agencies, one of 13 groups which also signed the PFN letter, said in a statement. "This regulation is targeted at such [a] small number of abuse cases that it appears too harsh for the given circumstances and will ultimately drive up costs for issues and state and local communities. Perhaps very significantly."
"If significant documentation is required for all transactions the costs to local and state governmental entities could be immense," PFN agreed, and encouraged both agencies to adopt broader guidance to provide bond counsel with more uniform standards for their written opinions.
"If new documentation standards are to be required," the letter said, "Treasury and the IRS should provide general, flexible guidelines and then have the public finance community, working with the IRS and Treasury, develop more detailed guidelines for compliance with Circular 230."
The network wants that guidance to: address new documentation requirements for bond opinions; provide recommended best practices issuers and bond counsel; and standardize documentation that will be used in bond transactions by providing templates or tax certificates.
Echoing the concerns of other bond market groups, PFN also said that Treasury and the IRS need to clearly define "significant tax issues" and provide examples of such tax issues. The network also expressed concern that the changes could cause "disclosure problems." Those problems "could exist under a system where only in transactions with significant tax issues is additional documentation required," PFN's letter said. "This could lead to market disruption, and again, higher costs to governmental entities in the form of increased interest rates."
PFN noted that state and local governments would bear any additional costs resulting from changes to Circular 230.
"At a time when local and state governments continue to struggle to provide balanced budgets in the face of decreasing federal funds and increasing demands for services from our citizens, the federal government should not impose another costly measure on these entities -- both in the form of increased legal costs for obtaining bond opinions and the potential for higher interest rates due to market disruption," the letter said.
Also this week, a handful of bond market organizations sent a letter to Senate Finance Committee chair Charles Grassley, R-Iowa, and ranking Democrat Sen. Max Baucus of Montana, protesting the Joint Tax Committee proposal to eliminate advance refundings and the so-called 15% proration rule, which would prevent property and casualty insurance firms from taking any deduction for the portion of their interest expense that is allocable to interest received on tax-exempt bonds.
The Built by Bonds Coalition, an organization of market participants that includes TBMA, insurance groups, and issuers' groups, said in its letter that the proposed measures would restrict market flexibility and drive up costs.
"By applying the pro rata rules in all cases to most corporations, including P&C companies, two of the JCT's proposals would combine to drive away corporate investment in short- and long-term municipal bonds -- high-quality investments that provide attractive returns -- and cause state and local borrowing costs to jump."
The Built by Bonds Coalition also challenged several JTC proposals that would eliminate the private-use test for stadium bonds, restrict the use of conduit bonds for Indian tribes, and require state and local bond issuers to report to the IRS all tax-exempt interest paid to bond holders.
