TO THE EDITOR
For many years, the Internal Revenue Code has provided tax-subsidized borrowing for the benefit of state and local governments. To administer these provisions, the IRS established a comprehensive compliance program that includes activities promoting education, outreach, voluntary compliance and enforcement.
With the enactment of the American Recovery and Reinvestment Act of 2009, state and local governments may now realize a direct tax subsidy in the form of a refundable credit payment from the U.S. Treasury upon the issuance of taxable direct-pay Build America Bonds. To support ARRA, the IRS has taken the same multifaceted approach.
Recently, there has been much discussion in the municipal finance market on the determination of a bond issue’s price for purposes of applying federal tax requirements to Build America Bonds. Specifically, concern has been expressed as to whether the IRS is applying a different interpretation to the definition of issue price for BABs than applies for tax-exempt bonds. This concern is unfounded. The definition of issue price set forth in section 1.148-1(b) of the Income Tax Regulations applies to both tax-exempt bond financings and Build America Bond financings, as provided in Notice 2010-35, 2010-19 I.R.B. 660 (May 10, 2010).
Under this regulation, the issue price of bonds that are publicly offered generally is established based on the first price at which a substantial amount of the bonds are sold to the public (excluding sales to bond houses, brokers, or similar persons acting in the capacity of underwriters or wholesalers), and the issue price does not change if part of the issue is later sold at a different price.
Thus, once the issue price is correctly established under applicable rules, it is not affected when bonds are sold in the secondary market at a different price, absent evidence of extraordinary circumstances. In the normal course of its compliance activities, the IRS will review the facts and circumstances involving offerings and pricing of Build America Bonds for purposes of determining compliance with the applicable definition of issue price of these bonds in a manner consistent with compliance reviews of tax-exempt bonds.
There also have been reports that the IRS intends to audit an extraordinarily high number of BAB issuances. This concern is unfounded. Note that the IRS has fewer than 10 such issuances under examination at this time. While that number may rise, the ultimate number will in no way reach the reported rates. The eventual number of audits will reflect what the IRS finds in this area and the audit selection process will be the same as it is for tax-exempt bonds.
Maintaining a fair and balanced compliance program is in the best interests of all participants in the municipal bond community.
Clifford J. Gannett
Director, Tax-Exempt Bonds
Internal Revenue Service