Shake-Ups and Changes at the Tax-Exempt Bond Branch
The IRS has announced that it will combine the Tax-Exempt Bonds Branch and the Indian Tribal Government Branch of the IRS Office of Tax Exempt and Government Entities (TE/GE). The new combined entity will be headed by Christie Jacobs, who has long been the Director of the Indian Tribal Government Branch. (Though Ms. Jacobs apparently does not have any experience with tax-exempt bonds, Sunita Lough, the Commissioner of TE/GE, assures us that Ms. Jacobs is a “very smart person” and “very capable.”) The Tax-Exempt Bonds Branch has been without a permanent Director since Rebecca Caldwell-Harrigal left the post in December 2016 (Imraan Khakoo served as acting Director in the meantime).
Formerly, the IRS Tax-Exempt Bonds Branch was divided into a Field Operations division (focusing on examinations) and a Compliance and Program Management (CPM) division (which, among other things, oversaw the administration of the VCAP program). As part of the reorganization, CPM will cease to exist, and its operations will be spread between a Compliance, Planning and Classification group that will span the full breadth of TE/GE (which includes some areas other than TEB and the Indian Tribal Government Branch), and a smaller, core “technical support” group that will continue to exist within TEB after it is combined with the Indian Tribal Government group. It is unclear whether this reallocation of resources will allow TEB to focus more attention and energy on examinations.
As previously noted, we are waiting to see how the new administration will change the pace of IRS guidance and enforcement. This reorganization adds to the uncertainty, and it is unclear how the reorganization and the change in administrations will affect the pace and focus of audits of tax-advantaged bonds and guidance regarding tax-advantaged bonds.
The regulatory freeze apparently will not impact the roll-out of the new examination process outlined in two internal guidance memoranda that the IRS released in November (both available at TEGE-04-116-0028), which are intended to increase the “efficiency” of tax-exempt bond audits. The new guidance attempts to achieve “efficiency” largely through a series of somewhat one-sided measures, which generally impose strict time limitations on issuers and borrowers, and far softer restrictions on the IRS exam team. The new approach also opens the possibility of the IRS contacting issuers early in an audit directly before the issuers can engage counsel, which has generally not been the approach of the IRS in the past. It remains to be seen how successful the IRS will be in implementing the new guidelines particularly while it undergoes a change in organizational structure at the same time.
In addition, the regulatory freeze apparently will not impact the effective date of the new issue price regulations, which take effect for bonds sold on or after June 7, 2017. As we have discussed before, the new rules mean that issuers can no longer rely on their reasonable expectations regarding the sale price of publicly offered bonds to set the issue price of those bonds. In negotiated deals, they’ll have to rely on the first price at which 10% of each bond with the same credit and payment terms sells. Issuers can use the initial offering price as the issue price if the underwriters agree to “hold the offering price” for five days after the sale date, or if the transaction meets the requirements of a “competitive sale,” laid out in the new regulations. This “hold the offering price” rule sounds easy enough, but it imposes some very real logistical challenges, and threatens to make the sale date of an issue of bonds on or after June 7, 2017 a real chaotic mess. Behind the scenes, various industry groups representing issuers, municipal advisors, and the underwriter community, are hashing out revisions to the various standard forms. We will provide further updates and links as those efforts progress.