IRS Up­dates TEFRA Rules for PABs

The Bond Buyer - - Front Page - By Brian tu­multy

WASH­ING­TON -- The In­ter­nal Rev­enue Ser­vice and Trea­sury De­part­ment pub­lished new pro­posed rules on Thurs­day that are de­signed to up­date and mod­ern­ize pub­lic no­tice and ap­proval re­quire­ments for pri­vate ac­tiv­ity bonds.

At the same time, the IRS an­nounced that it is with­draw­ing the ex­ist­ing tem­po­rary rules that it put into place in 1983 and rules it pro­posed in Septem­ber 2008 that were never fi­nal­ized.

Is­suers can opt to im­me­di­ately com­ply with the pro­posed rules be­tween Sept. 28, when they were pub­lished, and their ef­fec­tive date, which still must be de­ter­mined. Oth­er­wise the rules are prospec­tively ef­fec­tive. The agen­cies said they will be ac­cept­ing pub­lic com­ments on the pro­posed rules for 90 days and plan to hold a pub­lic hear­ing on them as well.

The pro­posed rules take into ac­count tax law changes that have ex­panded the kinds of PABs that can be is­sued and tech­no­log­i­cal changes that have oc­curred since 1983 such as the In­ter­net and elec­tronic com­mu­ni­ca­tions.

John Cross, Trea­sury’s as­so­ciate tax leg­isla­tive coun­sel, ex­plained

why the new rules have been pro­posed to im­ple­ment the Tax Eq­uity and Fis­cal Re­spon­si­bil­ity Act of 1982 (TEFRA), which first im­posed the pub­lic no­tice and ap­proval re­quire­ments for PABs. At that time the only PABs were in­dus­trial de­vel­op­ment bonds. The Tax Re­form Act of 1986 greatly ex­panded the types of projects and fi­nanc­ings for which PABs could be used.

“The pro­posed rules are aimed to up­date and stream­line the pub­lic ap­proval process to in­crease flex­i­bil­ity and re­duce ad­min­is­tra­tive bur­dens, in­clud­ing rec­og­niz­ing ad­vances in tech­nol­ogy and elec­tronic com­mu­ni­ca­tion,’’ Cross said.

The agen­cies ad­dress some of the com­ments that were made in re­sponse to the rules the agen­cies pro­posed in 2008. For ex­am­ple, orig­i­nally the agen­cies wanted to leave the tem­po­rary and fi­nal rules in place, but com­menters said it would be too con­fus­ing so these pro­posed rules have all the re­quire­ments in one place.

Todd Cooper of Locke Lord in Cincin­nati, chair of the Amer­i­can Bar As­so­ci­a­tion tax ex­empt fi­nanc­ing com­mit­tee of the ABA tax sec­tion, said the IRS “did a re­ally com­mend­able job.’’

“The made a real ef­fort to mod­ern­ize some rules that were pretty out of date,” Cooper said. “The world has ob­vi­ously changed a great deal since those rules came out back in the early ‘80s.’’

Cooper said the ABA com­mit­tee is al­ready putting to­gether an ad hoc group to gather com­ments that will be sent to the IRS.

Matthias Edrich, a part­ner at Ku­tak Rock in Den­ver and former chair of the Na­tional As­so­ci­a­tion of Bond Lawyers’ tax law com­mit­tee, de­scribed the over­all pro­posed reg­u­la­tions as “a help­ful step for­ward to re­duc­ing the bur­dens that are in­her­ent in the pub­lic ap­proval re­quire­ment.”

“I be­lieve some of the most help­ful re­vi­sions ad­dress the con­tent of re­quired no­tices and the method for pro­vid­ing no­tice,” Edrich said. He nonethe­less said that it would “take some time’’ to un­der­stand the new pro­vi­sions.

The pro­posed rules main­tain the core statu­tory stan­dard which re­quires rea­son­able pub­lic no­tice and an op­por­tu­nity for a pub­lic hear­ing for a gov­ern­men­tal unit’s pub­lic ap­proval of a an is­sue of tax-ex­empt pri­vate ac­tiv­ity bonds.

But they re­duce the bur­den of hav­ing to de­scribe the projects to be fi­nanced with PABs in de­tail and also take into ac­count the fact that mort­gage rev­enue bonds and stu­dent loan bonds are not project-based and are in­stead port­fo­lio loan fi­nanc­ings or non-project based.

The pro­posed rules con­tinue to re­quire that the pub­lic ap­proval in­for­ma­tion in­clude the lo­ca­tion of the project by street ad­dress, but they al­low is­suers to use prox­i­mate lo­ca­tions such as a col­lege cam­pus. Also, in­stead of hav­ing to pro­vide no­tice of a pub­lic hear­ing in a gen­eral cir­cu­la­tion news­pa­per or in ra­dio or tele­vi­sion an­nounce­ments, which can be ex­pen­sive, the pro­posed rules al­low no­tices to be made in in­ter­net post­ings on ap­proved gov­ern­ment web­sites.

“Post­ing no­tices on­line in a man­ner that ap­plies to a gov­ern­men­tal unit’s other types of no­tices pro­motes con­sis­tency and may even help ex­pand the avail­abil­ity of TEFRA no­tices to those mem­bers of the pub­lic who do not sub­scribe to news­pa­pers,” Edrich said. “Of course, pub­lish­ing on­line also re­duces the gov­ern­men­tal cost of com­ply­ing with reg­u­la­tions.”

Edrich said an­other help­ful change is that “no host ap­proval is nec­es­sary un­der the pro­posed reg­u­la­tions for the por­tion of 501(c)(3) bonds to be used to fi­nance work­ing cap­i­tal ex­pen­di­tures.”

The IRS said us­ing pro­ceeds to pay work­ing cap­i­tal ex­pen­di­tures is an in­sub­stan­tial de­vi­a­tion from a project de­scrip­tion as long as they are di­rectly as­so­ci­ated with the project. Edrich said, adding it is un­clear what the IRS means by di­rectly re­lated.

Edrich said the rules fall short in re­tain­ing the tem­po­rary rules’ pub­lic no­tice pe­riod of 14 days, rather than go­ing with the seven days as pro­posed by the 2008 rules. Some groups com­plained in com­ments that the seven-day pe­riod was too short. These rules ad­dress those con­cerns. ◽

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