CHICAGO - The Treasury Department and the Internal Revenue Service hope to release guidance projects on political subdivisions and allocation and accounting rules this fall, Treasury associate tax legislative counsel John Cross told bond lawyers meeting here.
Cross talked about these projects on the Treasury and IRS 2015-2016 priority guidance plan at a Wednesday panel about tax hot topics at the National Association of Bond Lawyers' 40th annual Bond Attorneys' Workshop.
Cross assured the lawyers at the session that the guidance on the definition of a political subdivision for tax-exempt, tax-credit and direct-pay bond purposes will be "fully prospective, with a full opportunity for public notice and comment." The tax-exempt financing committee of the American Bar Association's taxation section and the House Appropriations Committee have asked for guidance on political subdivisions to be prospectively rather than retroactively effective.
Market participants and lawmakers have been seeking guidance on the definition of a political subdivision ever since the IRS issued a technical advice memorandum in 2013 that concluded the Village Center Community Development District in Florida was not a political subdivision when it issued bonds from 1993 to 2004 because its board was and will always be controlled by the developer rather than publicly elected officials. In June, the IRS said it will not apply the TAM retroactively.
Lawyers have said that the notion that control by elected officials is necessary for an entity to be a political subdivision is a new requirement, and that historically, the determination of whether an entity is a political subdivision has been based on whether it has the right to exercise substantial sovereign powers.
Treasury and the IRS are considering having the guidance include "a possible objective governmental control standard" and other principles beyond the sovereign powers analysis, Cross said.
In the allocation and accounting rules project, Treasury and the IRS hope to make good on a years-old promise to consider more flexible rules for public-private partnerships, Cross said. The agencies are considering and expanding a simplified version of the "undivided portion" concept that was in allocation and accounting rules proposed in 2006. Under this concept, if an issuer finances a mixed public and private use project partially with tax-exempt bonds and partially with equity, the equity would be allocated to the private use, he said.
Another project on the guidance plan is to finalize various arbitrage rules proposed in 2007 and 2013. Treasury and the IRS have not yet decided whether these rules will be finalized on a stand-alone basis or if they will be finalized along with the issue price rules that were proposed in June, Cross said.
Treasury and the IRS are also going to consider updating the safe harbors provided in guidance published in 1997 for when management contracts do not give rise to private business use. The agencies hope to build on guidance on management contracts provided in the notice on accountable care organizations issued last year. Treasury and the IRS will consider focusing less on the many specific safe harbors for different types of compensation for management contracts and instead focus more on "outer boundaries," Cross said.
The guidance plan also includes finalizing rules proposed in 2008 on public approval requirements for private-activity bonds. The proposed rules were "user friendly" and modernized the public approval process, Cross said. While Treasury and the IRS officials had some internal "technical challenges" fitting the 2008 proposal with rules from the 1980s, they hope to move forward with this project, he said.
There are two new projects on the 2015-2016 guidance plan.
One is about remedial actions in the event there's a change in the use of a project financed with tax-exempt bonds or other kinds of tax-advantaged bonds. With this project, "we're trying to look at some current issues," Cross said.
Treasury and the IRS aim to consider what issuers can do when a bond-financed project is leased to a private party. Also, they will consider special remedial action rules for direct-pay bonds. It may be simpler to just stop subsidy payments to the issuer than to require the issuer to defease bonds as a remedy for a change of use situation that would create a tax law problem, he said.
The other new project is regulations on bond reissuance. Cross said that Treasury and the IRS hope to build on guidance published in 2008. He said he's seen issues in the reissuance area particularly since the financial crisis, with a lot of short-term bank debt maturing and being restructured. Bonds are considered to be reissued, and therefore subject to the latest tax law and other requirements when their security or other major terms are changed.
