The Internal Revenue Service has granted temporary coronavirus-related relief allowing telephonic public hearings for the issuance of certain private activity bonds.
Accompanying the IRS announcement Monday was new temporary guidance providing relief for the calendar year 2020 regarding the reacquisition of qualified tender bonds and commercial paper.
Officials at the National Association of Bond Lawyers, which had requested both actions early last month, said the relatively quick action by the IRS was particularly needed for certain PAB deals to be completed.
“It’s pretty important,” said Carol Lew, a shareholder of Stradling Yocca Carson & Rauth in Newport Beach, Calif. who is a former president of NABL.
A public notice and hearing are required for the issuance of most types of PABs under 1982 Tax Equity and Fiscal Responsibility Act (TEFRA).
“In the era of COVID, when public agencies find it extremely difficult to conduct face-to-face hearings the question was raised, how do we do the TEFRA notice hearing and approval requirement for private activity bonds,” Lew said.
Lew said she’s heard about housing transactions and 501c3 deals where people needed certainty from the IRS in order to get the deals completed.
A long-awaited update to the public notice requirement published by Treasury and the IRS Dec. 31 did not – as some in the muni industry requested – drop the requirement for a public hearing if there are no advance requests to speak at the hearing nor did it allow hearings to be held by teleconference or webcast.
However, the IRS guidance released Monday does allow teleconferences for calendar year 2020 as long as the public notice requirement is satisfied and the phone number is toll-free.
The other guidance released by the IRS Monday involves qualified tender bonds and commercial paper.
Issuers of these short-term variable rate instruments were facing tremendous market volatility in early March and some found the prices to be exorbitant, but repurchasing them would extinguish the bonds under IRS tax rules.
The new IRS guidance, which is similar to what was done in the wake of the 2008 financial crisis, allows issuers to repurchase and resell the qualified tender bonds and commercial paper through the end of this calendar year.
“They are trying to tailor this,” said Lew. “They don’t want to have this forever. But they want issuers to handle it during this very bumpy period.”
The muni market’s need for this second guidance “remains to be seen,” said NABL President Richard Moore, a tax partner at Orrick in San Francisco.
“We had a big liquidity issue in late March,” Moore said. “The market seems to have corrected itself since then except for in pockets. If it stays this way this might not be used. But we’re only a bad news cycle away from things returning to the way they were. We don’t know how badly this will be needed, but frankly if it’s needed, it will be more pressing than the TEFRA guidance.
NABL sent several letters in March and early April to congressional leaders and the Trump administration suggesting more than a dozen legislative and regulatory actions to assist state and local governments in weathering the financial crisis associated with the coronavirus pandemic.
Legislatively, NABL’s suggestions include reinstatement of advance refunding and direct-pay Build America Bonds which were part of the 2009 American Recovery and Reinvestment Act. NABL also has recommended lifting the volume cap for single-family and multifamily housing bonds for 2020 through 2022 because the current emergency is expected to exacerbate the housing shortage.
On the regulatory front, Moore said in an interview that the biggest priority remains revising the regulations for working capital bonds to enable government issuers to finance their way out of the huge deficits they are experiencing.
Moore said the revised regulations should not be overly complicated and should allow repayment over at least a generation.
NABL specifically has suggested the Treasury should use the extraordinary working capital exception under Regulation Section 1.148-6(d)(3)(ii)(B) to provide no retesting for deficit financings for at least 10.5 years after issuance to handle unanticipated and difficult to predict cash flows.
