Why NABL wants written IRS guidance on advance refundings

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WASHINGTON — The National Association of Bond Lawyers wants the Internal Revenue Service to provide written guidance clarifying that tax-exempt bonds can be issued to refund taxable bond issues.

The guidance could take the form of an "audit technique guideline" written by the senior manager of field operations for the Office of Indian Tribal Governments/Tax-Exempt Bonds, NABL wrote in a three-page letter sent to Christy Jacobs, director of that office. The letter was signed by President Alexandra "Sandy" M. MacLennan.

The request for clarification stems from the new tax law's termination of advance refundings of bonds after Dec. 31, 2017. The new law does not explicitly say that only "tax exempt" refundings are terminated.

Although NABL's letter says it is “settled law” that the tax law changes don’t apply to taxable bonds, the organization nonetheless is asking IRS to clarify the issue.

NABL wrote that “a sizable portion of our membership, as well as representatives of issuers and other participants in the tax-exempt bond community, have expressed concerns” about possible audits.

IRS spokeswoman Robyn Walker said Monday, "The letter was received and is being reviewed."

The letter noted that “public statements” already have been given by John J. Cross, an associate tax legislative counsel at the U.S. Treasury and Vicky Tsilas, chief of Branch 5 at the IRS, citing a story published by The Bond Buyer.

Cross and Tsilas said taxable bonds could be advance refunded with tax-exempts under certain conditions in response to questions from some bond attorneys attending NABL's Tax and Securities Law Institute in Phoenix in February.

Cross said that existing tax rules make clear that municipal issuers can issue tax-exempt bonds to advance refund taxable bonds because the refunding would not result in two sets of tax-exempt bonds outstanding — the basic problem with a tax-exempt advance refunding of tax-exempt bonds.

“You don’t need any more guidance,” Cross said at a NABL session on hot tax topics.

Lawyers also wanted to know if they could issue tax-exempt bonds to advance refund tax-advantaged bonds such as Build America Bonds. BABs are taxable but they are called tax-advantaged because the issuers of these and other direct-pay bonds receive federal subsidy payments from the Treasury equal to a percentage of their interest costs.

Cross said, “If you turn off the subsidy, I think you are fine. If the subsidy stays, then I think you’ve got problems.” Cross predicted Treasury would issue a guidance in this area “reasonably soon.”

Issuers can also "turn off" the subsidy payments for their BABs without doing a refunding, Cross said. They can inform Treasury that they no longer want to receive the payments.

However, the public statements made by Cross and Tsilas didn’t constitute formal guidance, said Tom Vander Molen, a partner in the public finance and tax groups at Dorsey & Whitney in Minneapolis who was involved in drafting the NABL letter as chair of NABL’s tax law committee.

“They are two very important people at the IRS and Treasury, as the case may be,” Vander Molen said in an interview. “But the field is in a different chain of command and they can take their own position unless there’s written formal guidance. For some of us, the things both Vicky and John have said both there and in other contexts are enough. But there are a lot of people who correctly point out that’s not binding on the field.”

Vander Molen said NABL officials decided that asking the IRS to issue an audit guideline would yield a faster response than requesting an IRS notice.

How fast might that happen? “I don’t want to presume to tell the IRS how quickly they should do this,” Vander Molen said.

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Refunding bonds Tax-exempt bonds Muni tax exemption Tax regulations Finance, investment and tax-related legislation IRS Treasury Department Washington DC