WASHINGTON — A former senior official at the Internal Revenue Service says the IRS violated its own procedures in issuing a private letter ruling in May 2014 that has been used by Bank of America and other major banks to claim hundreds of millions of dollars of tax-free profits.
The profits are being claimed under transactions that involve long-term bonds and short-term total return swaps, also known as TRS.
The bank wears “two hats, as the swap provider and owners of the bonds, pricing (or in this case mispricing) two separate but integral transactions with a tax indifferent party, a tax exempt organization,” W. Mark Scott wrote in a
“Major banking organizations have now used this abusive tax shelter scheme to illegally shelter well over $1 billion in taxable income,” the letter said. “Many of these were put in place by Bank of America, who continues to reap substantial, illegal tax benefits from these shelter transactions.”
Scott, a former director of the Tax Exempt Bonds office and a former attorney in the Office of Chief Counsel at the IRS, asked the service to retroactively withdraw the private letter ruling, or PLR.
His letter repeats a public request Scott made in September 2015 letter to the IRS, which he says was submitted when the identity of Bank of America wasn’t publicly known.
The request is being renewed because Scott said he’s unearthed additional records through “sleuthing” that prove that
“When I found out Bank of America requested the ruling it just blew me away,” Scott said. “They weren’t technically under audit because the bonds were under audit. But they owned all the bonds under audit.”
The IRS, for its part, had no comment.
“Federal law prohibits the IRS from discussing specific taxpayers,” IRS spokesman Dean Patterson said in an email.
Scott is representing a whistleblower who did not work for the IRS.
In fiscal 2018, the IRS Whistleblower Office awarded $312.2 million to 217 claimants on overall collections of $1.44 billion. If the PLR were to be withdrawn retroactively, Scott said his whistleblower case could involve billions of dollars although he acknowledged he has no way to estimate how many banks have used TRS to reduce their tax liability.
The 2014 PLR was requested by Alabama-based attorney John Hobson “Hobby” Presley who was quoted in a September 2015
Presley confirmed in a phone interview that he requested the PLR on behalf of Bank of America and said his role in the case is widely known among bond attorneys.
Likewise, Presley and Scott have known each other for at least two decades dating back to when Presley served as president of the National Association of Bond Lawyers in 2000-2001 and Scott simultaneously led IRS tax enforcement in the area of tax-exempt bonds.
Scott left the IRS for private practice in 2005.
“The PLR has been out there for several years now and speaks for itself,” Presley said. “And the process for obtaining a private ruling is proscribed by regulation and well understood by the tax law. I can’t comment on a particular client’s views of the PLR process.”
Presley declined to comment on allegations made in the letter by Scott which said the Bank of America request for the PLR contained “numerous factual falsehoods made under penalties of perjury, including material factual misstatements by Bank of America about the values of the swaps and bonds, and the true ownership of the bonds.”
A Bank of America spokesman also declined to comment.
Scott’s Feb. 8 letter, addressed to IRS Deputy Counsel William M. Paul, who also is acting chief counsel, said “attorneys in your office rubber-stamped the arguments presented by Mr. Presley.”
“In doing so, your attorneys not only assumed the correctness of Bank of America’s false assertions that it independently priced the swaps and bonds, but worse, gave credence to Bank of America’s concocted method of hiding its mispricing within ‘price protection,’ ” Scott wrote. “Your attorneys would have known that this would effectively undercut the IRS field agents.”
The May 2014 PLR was not publicly released until January 2015. But Scott said Bank of America relied on the same factual basis in another transaction nine days after it was issued in mid-2014.
The TRS in question involved a hospital system.
Under the structure of the deals, a hospital or other borrower through a conduit issuer privately places long-term bonds with a bank, which then enters into a much shorter-term TRS with the borrower. The bank becomes the holder of the bonds as well as the swap counterparty.
The borrower typically swaps fixed for variable rates to lower its cost of borrowing. It also takes risk and provides price protection for the bank/bondholder/swap counterparty. When the TRS terminates, or is terminated, the bonds are valued.
If the bonds' value is below par, the hospital pays the bank. If the value is above par, the bank pays the hospital. However, many TRS' are rolled over or replaced with new negotiated terms for the life of the bonds. The borrower could be forced to pay if interest rates rise.
The bank/bondholder/swap counter party can make money from the higher tax-exempt bond rate and also from a deduction of its loss from the swap payments. In the case underlying the PLR, the bond proceeds had all been used to current refund some previous bonds, as well as to pay issuance costs.
News organizations have written about these transactions as far back as 2003 as being used by health care systems in a low interest environment.
Particularly in the health care sector, issuers are increasingly examining a type of financing feature known as payment or purchase-in-lieu-of-redemption as an alternative to traditional refinancing, a
The story said many issuers executing deals under the payment-in-lieu-of-redemption structure were financial advisory clients of Cain Brothers & Co. The story included a quote from the firm’s principal, James Cain, confirming that the firm had been active in those transactions.
The July 2003 story also said the chief financial officer of a group health cooperative said the transaction costs were lower because no new bond documents or new bond insurance was needed.
