CHICAGO — The Internal Revenue Service’s tax-exempt bond office plans to expand its market sector compliance survey efforts to student loan and governmental bonds in fiscal year 2008, according to office director Clifford Gannett. The TEB office has already sent 208 questionnaires to charitable organizations that have outstanding municipal debt, asking questions about record retention, private use of bond-financed facilities, and other post-issuance compliance issues. The IRS next will send surveys to governmental bond issuers in a similar effort to gauge compliance, officials have said. But Gannett went farther this week at the National Association of Bond Lawyers’ annual Bond Attorneys’ Workshop here, announcing that the TEB office will also delve into student loan bonds in 2008. TEB has created a team, headed by group manager Carl Scott, to develop a strategy for assessing compliance in the sector, he said. Field operations manager Robert Henn provided further details at a Thursday session. “We will be doing a small sample of student loan bond” examinations, primarily because TEB has not looked into them before, he said. “It probably will be less than 20 audits.” Gannett told NABL members at the workshop’s Wednesday general session that the IRS is moving more quickly to process tax-exempt audits this year than ever before. A procedural change in the audit settlement process — under which Gannett now sees the terms of a proposed closing agreement before the audited issuer signs it and pays a fine — has not slowed the cycle, he said. “I can categorically state, based on empirical evidence, that the closing agreement process has actually moved more quickly this year,” Gannett said. Examination case closures have risen from 495 last year to 510 thus far in 2007, and the size, scope, and seriousness of tax matters resolved in settlements “far exceeded” those of past years, he noted. The tax-exempt bond office has executed 66 settlements under the voluntary closing agreement program this year, compared to 60 total last year, he said. Gannett said he is particularly proud of TEB’s “examination timeliness number,” or cycle time — the time from which a case is opened to the time it is closed. TEB has not finalized this quarter’s numbers yet, but “the last number I saw was 189 days, as opposed to 280 last year,” Gannett said. “This is a phenomenal improvement.” Beyond expediting settlements, greater cooperation among TEB staff will enhance consistency in the treatment of audits around the country, and provide greater certainty and integrity to the process, he said. Gannett said he has been pleased with the “tremendous” support his office has received this year “from all levels of IRS management,” including the granting of authority to boost TEB’s staff. The office continues to work with the IRS’ criminal investigation division and the Justice Department on the criminal investigation of alleged anticompetitive practices in the muni market, and TEB has “dedicated some of [its] best employees from the field and [the compliance and program management office] to assist in these investigations,” Gannett said. PATENT DEBATE Also at the general session, John O. Swendseid of Swendseid & Stern in Reno, Nev., warned bond attorneys that even though only one tax-exempt bond-related patent has been granted, they should monitor developments in the area. Under new regulations proposed this week by the Treasury Department, taxpayers must disclose their participation in patented tax transactions on their tax returns. But if an issuer knowingly uses a tax-exempt bond-related tax strategy in a deal, and pays a royalty for it, it is not clear whether the bondholders should be notified so they can treat it as a “reportable” transaction, Swendseid pointed out. It may also become difficult for issuers and counsel to be certain they are not infringing on tax patents because patent applications are not required to be disclosed, he said. The issues have drawn attention from many kinds of tax practitioners, as well as federal lawmakers. Several bills that would ban the patenting of tax advice or methods have been introduced in this session of Congress, and the House earlier this month approved legislation with such a provision. The Senate has yet to act on the bill but is thought to be considering a stand-alone ban on tax patents. Future legislative action on the issue will likely involve “considerable and lively debate,” Swendseid said. “There is no presumption that [the House bill] will be adopted by Senate and signed by president in its present form,” he said. Treasury’s John J. Cross 3d, an attorney in the Office of Tax Policy’s tax legislative counsel office, said the department would prefer a statutory ban on tax patents, as is provided for under the House bill. “The basic concern is … that when people run around saying, 'We have a patent,’ it somehow implies that the tax approach taken has in some way been blessed by the government,” he said. Turning to recent regulatory developments, Cross told attorneys that the proposed arbitrage regulations released this week were a “grab-bag” of guidance that should help the muni market navigate swap transactions, in which issuers hedge interest rate risk on tax-exempt bonds. The proposed rules, which take effect Dec. 25, would make swaps based on taxable market indices such as the London Interbank Offering Rate, or Libor, eligible for simple integration — under which variable-rate bonds subject to an integrated floating-to-fixed-rate swap are treated as variable-yield bonds for purposes of certain tax code rules. In writing the regulations, Treasury attempted to “provide a clear path for hedging integration for Libor swaps,” Cross said. The department made other, smaller changes such as allowing issuers 15 days — instead of the current three — to “identify” hedges and clarifying that hedges must terminate at fair market value. The proposed regulations also would allow issuers to use electronic methods to bid out their guaranteed investment contracts. “There were various squirrelly questions” under the old rules, and federal regulators thought promoting transparency was a good idea, he said. Cross also reiterated previous skepticism about the tax-credit bond proposals that have proliferated on Capitol Hill this year for energy, education, and infrastructure needs. “I hate to keep getting on a soapbox about this topic, but tax-credit bonds have many structural issues,” such as a limited market for investors, he said. “They assume a can opener-economist pricing theory that a single price can clear all markets at all levels of demand at par price and a zero interest rate. That’s just Alice in Wonderland.” If tax-credit bonds “are a better mousetrap, we really need to figure out how to make them work,” Cross said. Meanwhile, Rebecca Harrigal, chief of the IRS chief counsel’s tax-exempt bond branch, said the “sequel” to the first set of arbitrage rules could potentially include “a lot of meaty topics,” such as issue price, the treatment of grants, present value versus fair market value for valuing yield-restricted investments, and the appropriate maturity for long-term working capital. Chief counsel staff also are finalizing the proposed allocation and accounting regulations that were released last year, as well as working on solid waste bond rules that were proposed in 2004.“The comments on those range from, 'You idiots, go back to drawing board’ to, 'Right answer; just need technical corrections,” Harrigal said. Chief counsel’s tax-exempt bond branch recently lost assistant branch chief Vicky Tsalis and is now short-staffed, with four attorneys and three reviewers, so resources are thinly spread, Harrigal noted.
