Tax

WASHINGTON - Municipal market participants are warning that the federal government may have underestimated the revenue impacts of the Build America Bonds program so that it is far more costly than anticipated. They also are concerned that issuers may not receive federal payments under the direct-pay BAB program if they are used to "offset" taxes or other money owed to the government.

The Hazleton, Pa., Area School District has entered into a closing agreement with the Internal Revenue Service over $64.2 million of general obligation bonds it issued in 1997 after appealing the agency's 2006 decision that the debt was taxable because it involved yield burning.

WASHINGTON - The Treasury Department Friday released allocations for states, counties and large municipalities as well as interim guidance for $25 billion of recovery zone bonds, two new types of debt created by the stimulus law to foster economic development in distressed areas.

The American Bar Association's committee on tax-exempt financing has requested priority guidance on municipal bonds from the Internal Revenue Service, including a definition for issue price and responses to questions about Build America Bonds and qualified school construction bonds.

A federal official and market participants yesterday butted heads over whether direct-pay Build America Bond issuers should worry about Congress stopping or reducing the federal payments that are to be made to them, despite repeated statements by tax experts in Congress and the administration that such worries are baseless.

WASHINGTON - A federal judge yesterday ruled that two lawsuits related to South Carolina's use of federal stimulus funds must be heard in the state's Supreme Court, dealing a blow to Gov. Mark Sanford's hopes to have the cases heard in federal court.

Congress should be careful when considering whether to legislatively require nonprofit hospitals to meet national minimum standards to remain tax-exempt, because the legislation could impose unfair burdens and costs and potentially damage the hospitals' bond ratings, an attorney warned earlier this week.

WASHINGTON - The National Association of Bond Lawyers is urging the Internal Revenue Service to focus most of its attention over the next 12 months on drafting rules for the American Recovery and Reinvestment Act's two-year bond provisions.

The Northside Independent School District of San Antonio disclosed yesterday that the IRS has closed a random audit of $170 million of variable-rate bonds they sold in 2003 with no change to the tax-exempt status.

Congress should consider banning colleges from using tax-exempt bonds to finance sports facilities if it fears high-profile collegiate sports programs are becoming too commercial, a new report from the Congressional Budget Office released this week recommends.

As many as 43 states and the District of Columbia could lose up to $5.5 billion in tax revenue through 2011 if they do not take steps to "decouple" their tax laws from the federal tax code because of a little-noticed provision in the American Recovery and Reinvestment Act, a new report warns.

The Senate Finance Committee is considering mandating nonprofit hospitals to provide a minimum level of charitable patient care and meet other requirements to retain their tax-exempt status and issue 501(c)(3) bonds.

WASHINGTON - Total tax collections declined in nearly every state in the first quarter of 2009, which could lead to a boost in bond issuance, according to a new report released yesterday by the Nelson A. Rockefeller Institute of Government.

The Pennsylvania Higher Education Assistance Agency has disclosed that the Internal Revenue Service is requesting information for an audit of $150 million of student loan revenue bonds it issued in 1997.

WASHINGTON - The top Republican on the Senate's tax-writing committee yesterday suggested that nonprofit hospitals, which are currently tax-exempt and have the ability to issue tax-exempt bonds, should instead become taxable and receive tax deductions or credits for charitable activities.

President Obama's budget proposes to hike the marginal tax rates of the wealthy to 36% and 39.6% beginning in fiscal 2011, and to increase by 5% the capital gains and dividends tax rate for the wealthy - tax changes that market participants say could lead to higher demand for tax-exempt bonds.

WASHINGTON - A top House tax committee lawyer suggested that state and local issuers would be foolish to either avoid Build America Bonds or issue them with all sorts of special call or redemption features because they fear Congress will stop providing cash payments to them in the future.

The Internal Revenue Service has turned its attention to bond issues in three states, and although the examinations appear to be random, at least one stems from an ongoing IRS project on arbitrage rebate.

The Treasury Department and the Internal Revenue Service are seeking public comments on what municipal bond and other regulatory projects should be included on its 2009-2010 guidance priority list.

The Internal Revenue Service has closed an audit of $15 million of variable-rate demand solid-waste disposal revenue bonds issued in 2003 by Gilliam County, Ore., with no change to their tax-exempt status. Meanwhile, the IRS has initiated an apparently random audit of $76.4 million of utilities system revenue and refunding bonds issued in 2002 by Brownsville, Tex.