• Internal Revenue Service Publishes Guidance for Conduit Issuers of Tax-Exempt Bonds
  • June 8, 2012
  • Law Firm: McCarter English LLP - Newark Office
  • The Internal Revenue Service ("IRS") has recently released Publication 5005, Your Responsibility as a Conduit Issuer of Tax-Exempt Bonds.  Publication 5005 summarizes the IRS's assessment of the responsibility of an issuer of tax-exempt bonds (the "conduit issuer") in a financing (the "conduit financing") to accomplish a qualified purpose of an entity (the "conduit borrower") other than a conduit issuer (for example, the lending of bond proceeds to a developer to acquire and construct a qualified residential rental project, or the lending of bond proceeds to a 501(c)(3) organization to acquire and construct a hospital).  The IRS notes that the guidance in Publication 5005 would apply to tax-exempt financed facilities that are leased to other entities (for example, certain airport bonds).

    In the first part of Publication 5005, the IRS describes the following responsibilities of conduit issuers:

    • Timely filing of information returns with regard to the conduit issuer (which usually would be Form 8038).

    • Monitoring volume cap limitations and carryover of unused volume cap (the election to carry over unused volume cap is made on Form 8328).

    • Obtaining required public approval of the conduit issue (the so-called TEFRA approval process).

    • Ensuring that fees received by the conduit issuer are within applicable arbitrage limitations.

    • Certifying the expected use and investment of bond proceeds.

    • Compliance with the rules regarding declarations of official intent regarding use of bond proceeds to reimburse certain expenditures paid prior to bond issuance.

    • Timely identification of qualified hedges.

    • Avoiding actions that can cause bonds to lose their tax-exempt status.

    • Taking permitted remedial actions (such as bond redemptions) to cure actions that would otherwise cause loss of tax-exempt status, and notification of the IRS of such remedial actions.

    • Approval of any agreements between a bondholder and conduit issuer or conduit borrower to modify bond terms.  In this regard, the IRS notes that if bond terms are substantially altered without action by the state or local government issuer, the bonds will become taxable.

    • Making any required elections (such as, in the context of the two year spending exception to the rebate requirement, the election to apply certain provisions based on actual facts rather than reasonable expectations).

    • Payment of rebate and yield reduction payments, and filing of Form 8038-T to accompany such payments.

    • Compliance with IRS record retention requirements.

    • Responding to IRS audits of conduit financings.

    • Requesting voluntary closing agreements under the IRS's TEB Voluntary Closing Agreement Program ("VCAP") to preserve tax-exempt status when the conduit issuer discovers violations that can't be corrected under certain self-correction programs.

    • Requesting private letter rulings.  In the case of a conduit financing, the conduit issuer, rather than the conduit borrower, must submit the ruling request.

    In the second part of Publication 5005, the IRS discusses "procedures and other options conduit issuers may adopt with respect to its conduit bond program to assist them in their tax compliance responsibilities."

    In this regard, it is stated that:

    "A 'one size fits all' approach is not workable, due to the various organizational structures of conduit issuers as well as the unique features of different financings.
    As such, options set forth below are meant to help conduit issuers develop adequate written procedures to assist them in fulfilling their tax responsibilities with respect to their conduit financings."

    The IRS acknowledges in Publication 5005 that, other than the TEFRA public approval requirement, the Internal Revenue Code, Treasury Regulations and other guidance don't specifically provide that particular officials of a conduit issuer have specific tax compliance responsibilities.  However, the IRS suggests that conduit issuers consider whether to designate one or more officials to be responsible for assisting in actions in which the conduit issuer is involved, such as (i) responding to an IRS audit, (ii) submitting a voluntary closing agreement request to the IRS under the VCAP program, (iii) taking any necessary remedial action steps, and (iv) executing a hedge identification.

    In addition, the IRS suggests that the conduit issuer develop post-issuance monitoring procedures concerning compliance of its bond issues with applicable federal tax requirements, including:

    • Designation of officials to assist in post-issuance compliance.

    • Requiring the conduit borrower to identify officials responsible for assisting the conduit issuer with post-issuance compliance monitoring.

    • Providing training or technical support for conduit issuer and conduit borrower officials.

    • Requiring, as a condition of issuing the bonds, the conduit borrow to demonstrate that it has adopted written post-issuance compliance monitoring procedures.

    • Setting schedules for conduit issuer and conduit borrower compliance monitoring activities.

    • Timely resolving noncompliance issues (including taking remedial actions and making VCAP requests).

    • Requiring the conduit borrower to notify the conduit issuer of the completion of post-issuance compliance monitoring activities.

    The IRS notes that the amount that must be paid to resolve compliance issues is reduced when an issuer timely submits a VCAP request with respect to a violation identified in accordance with monitoring procedures.