IRS PUBLICATION 5091 BOND COMPLIANCE PRIMER 2016

Transcription

1 IRS PUBLICATION 5091 BOND COMPLIANCE PRIMER 2016

2 Primer Objective: On behalf of ACS, thank you for your interest in obtaining additional information surrounding the post-issuance bond compliance requirements for issuers of tax-advantaged debt. The intent of this Primer is to assist debt issuers and advisors with the recognition of key points concerning the ongoing compliance requirements for tax-advantaged debt set forth by the IRS & US Treasury Regulations ( Tax Code ). While not a comprehensive review, after completing this guide you will be able to identify the key concepts and triggers as outlined below in order to ensure debt portfolios remain complaint with all applicable regulations: Use of Bond Proceeds Private Business Use Arbitrage Rebate & Yield Restriction of Funds Record Retention Elements The Importance of Post-Issuance Policies, Procedures and Due Diligence Reviews Understanding of the TEB Voluntary Closing Agreement Program (VCAP) The importance of recognizing and forming a basic understanding of these key concepts is paramount in order to ensure tax-advantaged debt portfolios remain compliant with federal tax regulations. In ACS 30 years of existence dating back to the inception of the regulations, and as a firm that regularly interacts with issuers after the debt has been issued, we have been able to construct a strong foundation of knowledge and expertise concerning the aforementioned concepts. If at any time you would like to discuss these key points in further detail whether by phone, through a pre-arranged in-person training, or by web, please feel free to contact me at your earliest convenience. On behalf of all my colleagues at ACS, thank you again for your time! Sincerely, Stephen Broden, Vice President Arbitrage Compliance Specialists, Inc Stephen@RebateByACS.com

3 IRS Compliance Key Concepts: The first step in complying with the Tax Code is following the key concepts listed below. Use of Proceeds Compliance - Private Business Use Arbitrage Rebate and Yield Restriction of Funds Record Retention Importance of Compliance Due Diligence Importance of Written Post-Issuance Procedures Understanding the TEB Voluntary Closing Agreement Program Do you know how to handle each of the points listed above? IRS Use of Proceeds Compliance: Many issuers are not aware of the growing issues surrounding use of proceeds compliance (private business use). Whether intentional or not the ramifications of violating these rules can trouble an issuer for many years so it is good to ask yourself the following questions. Is the facility used in a manner that will benefit a for-profit entity or individual (private business use test)? Is the facility owned or leased to a for-profit entity or individual (private security or payment tests)? Are proceeds used to make or finance loans (private financing test)? Can you answer yes to the questions listed above? OR Are you finding difficulty answering yes or no to the questions listed above? A yes answer to one question may not cause an issue though it suggests further review is necessary. Also, it is understandable if you are not sure whether the answer is yes or no because the questions require an understanding of the common triggers that prompt an answer. Some common triggers: Sale of a facility or facilities Leases Management Contracts Any issuers who have encountered triggers similar to those listed above should contact their consulting group (financial advisor, bond counsel and compliance analyst) to further discuss the matter. Issuers may also request specific training on this subject from ACS as part of a group/individual webinar, self-study or prearranged on-site training. 1 P a g e

4 IRS Arbitrage Rebate and Yield Restriction of Proceeds Compliance: Issuers often involve both internal and external parties with compliance associated related to arbitrage rebate. This is likely a result of the administrative burden caused by extensive rules that must be followed for the life of the debt. It is still essential to follow the rules and there are specific rule concepts that will help most with monitoring the internal compliance. Some common arbitrage rebate exception rule concepts include: Fund spending exceptions Small issuer exception examples: Issuer 1 has no taxing power, issues debt infrequently and generally for less than five million dollars in aggregate each calendar year. Why is the issuer not exempt from the arbitrage rebate rules? Issuer 2 has limited taxing power, issues debt infrequently and generally for less than five million dollars in aggregate each calendar year. Why is the issuer exempt from the arbitrage rebate rules? Were you able to determine why each issuer was exempt/not exempt? Some common yield restriction rule concepts include: Temporary periods Materially higher yields Any issuer that has encountered yield reduction payments will be an advocate for deeper understanding the yield restriction rules. These rules exist regardless of the small issuer exception to arbitrage rebate referenced above. Arbitrage rebate and yield restriction rules share specific similarities but are otherwise very different. For example, arbitrage rebate focuses on the whole debt issue while yield restriction is fund specific. Put simply, yield restriction relates to whether an issuer can earn arbitrage versus arbitrage rebate which relates to whether an issuer can keep arbitrage. Yield Restriction vs. Arbitrage Rebate (Earn it?) (Keep it?) Project Reserve Debt Service Project The most significant similarity between arbitrage rebate and yield restriction is that payments and reporting are due every five years and at the final redemption of the debt. Any issuers who require arbitrage rebate and/or yield restriction services should contact their consulting group to further discuss the requirements. Issuers may also request specific training on this subject from ACS as part of a group/individual webinar, self-study or prearranged on-site training. 2 P a g e

5 IRS Record Retention Compliance: Record retention has proven to be one of the most challenging, ongoing compliance tasks. The IRS does not have safe harbors in place to allow issuers reprieve from storing volumes of debt issue data for extensive periods of time. IRS Section 6001 provides the checklist for issuers seeking to comply with the federal tax record retention requirements. The two major time concepts are provided below: Records must be retained for the life of the debt plus three tax years. In the event of a refinancing, records must be retained for the refinanced debt issue through the maturity of the refinancing debt issue plus three tax years. Do you currently know which records must be retained? Any issuers who require review of the record retention rules should contact their consulting group to further discuss the requirements. Issuers can visit the following link - Requirements. Lastly, issuers may also request specific training on this subject from ACS as part of a group/individual webinar, self-study or prearranged on-site training. Importance of Compliance Due Diligence: The key points of compliance due diligence for the previously referenced concepts is to help issuers identify issues, prevent issues, and correct any violations. Issuers that fail to exercise due diligence relating to compliance may have difficulty maintaining the tax-advantaged status of their debt. Importance of Written Post-Issuance Procedures: Issuers are under increasing pressure to adopt appropriate written post-issuance procedures. Whether triggered by a desire to check the applicable line items on the IRS filing form, externally influenced by parties of the consulting group, or by internal pressure, these procedures are components that support the ongoing due diligence process. Key IRS characteristics include the following: Due diligence review at regular intervals; Identification of the official or employee responsible for review; Training of responsible officials/employees; Retention of adequate records to substantiate compliance (e.g., records relating to expenditure/investment of proceeds, use of debt financed property and related contracts); Procedures reasonably expected to timely identify noncompliance; and Procedures ensuring that the issuer will take steps to timely correct identified noncompliance. 3 P a g e

6 Have you implemented written post-issuance procedures? Any issuers who require written post-issuance procedures should contact their consulting group to further discuss the requirements. Issuers may also request sample procedures and training on this subject from ACS as part of a group/individual webinar, self-study or prearranged on-site training. Understanding the TEB Voluntary Closing Agreement Program: Most issuers will never enter the TEB Voluntary Closing Agreement Program ( VCAP ) and that is due to the fact that the program is designed for correction of violations that cannot be corrected through other available programs. Key Points: The closing agreements may be used to permanently and conclusively resolve violations based upon the facts & circumstances of each case. The closing agreement committee ensures the fairness and consistency of proposals. The appeals process is available to issuers under examination when an agreement cannot be reached at the exam level. Any issuer who is contemplating VCAP should contact their consulting group to further discuss the potential violation. Issuers may also request further training on this subject from ACS as part of a group/individual webinar, self-study or prearranged on-site training. Summary: IRS compliance for debt issues is often an administrative burden in both time and money for issuers. By implementing internal policies to address each IRS compliance key concept, issuers can better maintain the tax-advantaged status of each debt issue. This primer is intended for all issuers and is based upon the IRS Publication 5091 which is also attached as a reference. Many important IRS Publications are available publicly with the most applicable ones listed within Publication ACS supports the ongoing education of issuers and can send the other publications as needed. Issuers may also request further training on specific subjects (not described as part of this primer) from ACS as part of a group/individual webinar, self-study or prearranged onsite training. 4 P a g e

7 Our Firm: ARBITRAGE COMPLIANCE SPECIALISTS, INC. ACS ACS is a specialized accounting firm headquartered in Centennial, Colorado. Originally founded by current President and CEO Janet Sacks, the firm began in 1986 as part of Pricewaterhouse Coopers, subsequently transferring to Public Financial Management (PFM), and eventually incorporating as Arbitrage Compliance Specialists, Inc. in Since its inception, ACS has grown into one of the industry s most experienced and independent arbitrage reporting practices. Currently, ACS provides its services to over 1,600 active debt issuers across the United States and routinely completes thousands of arbitrage calculations annually, with over 50,000 completed since inception of the tax code in ACS commitment to our clients is rooted in our philosophy to provide dedicated individuals from our accounting and project management teams that bring stability, knowledge, and years of expertise to ensure that our clients debt portfolios remain compliant with the tax code. Our expert project managers provide a direct and immediate response to our clients needs whether during an IRS audit, payment or overpayment recovery situation, or just any questions relating to the complexities of the tax code. Whether an issuer of tax-advantaged securities, financial advisor, underwriter or counsel to issuers of tax-advantaged debt, please do not hesitate to reach out to ACS for any questions you may have. We certainly look forward to speaking with you soon. Sincerely,

8 Voluntary Compliance for Tax-Exempt and Tax-Credit Bonds Part one of this publication is a summary of highlighted considerations to help issuers of tax-advantaged bonds comply with related federal tax law requirements. Part two is a summary of Tax-Exempt Bonds Voluntary Closing Agreement Program (TEB VCAP) provisions. Tax-Advantaged Bonds Compliance The IRS Mission Provide America s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. The office of Tax Exempt Bonds ( TEB ), of the Internal Revenue Service ( IRS ), Tax Exempt and Government Entities division, offers specialized information and services to the municipal finance community. Municipal bonds provide tax-exempt financing for the furtherance of governmental and qualified purposes. Detailed educational resources on post-issuance compliance and voluntary compliance (including TEB VCAP requirements) are available on TEB s website: Useful IRS Publications 1 Your Rights as a Taxpayer 4077 Tax-Exempt Bonds for 501(c)(3) Charitable Organizations 4078 Tax-Exempt Private Activity Bonds 4079 Tax-Exempt Governmental Bonds 5005 Your Responsibilities as a Conduit Issuer of Tax-Exempt Bonds PART ONE: Introduction to Tax-Advantaged Bond Compliance Tax-advantaged bonds (tax-exempt, tax credit and direct pay) are obligations that receive preferential tax treatment under the Internal Revenue Code (the Code ). These bonds, issued by or on behalf of state and local governments, are subject to applicable federal tax requirements both at the time of issuance and as long as the bonds remain outstanding. An issuer, conduit borrower, or other party s failure to comply with any applicable federal tax requirements with respect to taxadvantaged bonds jeopardizes the preferential tax status of those bonds. Compliance at Time of Issuance Compliance with certain applicable federal tax requirements at the time the bonds are issued include filing a Form 8038 series information return (e.g., 8038, 8038-G, 8038-GC, or 8038-TC) and reasonable expectations by the issuer that there will be ongoing post-issuance compliance. Additional issuance requirements might include a proper volume cap allocation and public approval of the bond issue. Compliance Following Issuance Post-issuance federal tax requirements generally fall into two categories: (1) qualified use, including use of the bond proceeds and the property financed by bond proceeds; and (2) arbitrage, including appropriate restrictions of investment yields and rebate of arbitrage from the investment of bond proceeds. Qualified use requirements require monitoring of the various direct and indirect uses of bondfinanced property over the life of the bonds, determination of the sources of debt service payments and security for the debt, and calculations of the percentage of nonqualified uses within the project to be financed with the bond proceeds. Arbitrage requirements involve calculating and monitoring the yields on investments, determining appropriate restrictions on the investment yields, determining the amount of arbitrage on the investments, and calculating the amount and timing of arbitrage rebate payments that must be paid to the US Treasury. There may be other post-issuance due diligence requirements. For example, some level of post-issuance monitoring may be required to determine compliance with issuance cost limitations applicable to qualified private activity bonds. Importance of Post-Issuance Compliance The ongoing nature of post-issuance federal tax requirements applicable to tax-advantaged bonds requires issuers to actively monitor compliance throughout the entire life of their bonds. This due diligence will significantly improve the issuer s ability to ensure the continued tax-advantaged status of its bonds by: (1) identifying noncompliance; (2) preventing violations from occurring; and (3) timely correcting identified violations (when prevention is not possible). Role of Written Procedures in Post- Issuance Compliance Issuers should adopt appropriate written procedures for their tax-advantaged bond issues that go beyond reliance on tax certificates provided at closing and bond documents. Sole reliance on tax certificates and bond documents may result in insufficiently detailed procedures or procedures not adequately incorporated into an issuer s operations. Appropriate written procedures may contain certain key characteristics including: (1) Due diligence review at regular intervals; (2) Identifying the official or employee responsible for review; (3) Training of responsible officials/employees; (4) Retention of adequate records to substantiate compliance (e.g., records relating to expenditure/investment of proceeds, use of debt financed property and related contracts); (5) Procedures reasonably expected to timely identify noncompliance; and (6) Procedures ensuring that the issuer will take steps to timely correct identified noncompliance. Establishing and following written monitoring procedures helps issuers to preserve the preferential tax status of their tax-advantaged bonds. Generally, an issuer that has established and followed comprehensive written monitoring procedures to promote postissuance compliance will be significantly less likely to violate the federal tax requirements related to its bonds than an issuer without such procedures. Remedial Actions An action that causes an issue to meet the private business tests or the private loan financing test is not treated as a deliberate action if the issuer takes a remedial action under the Treasury regulations. Application of an appropriate remedial action prevents the bonds from losing their tax-advantaged status. Some of the more common deliberate actions for which remedial action may be available include: (1) A management contract that causes private business use; (2) The sale of bond-financed property; (3) The lease of bond-financed property to a nongovernmental person; and (4) The failure to use 95% of net proceeds to provide an exempt facility. An issuer that discovers it has taken a deliberate action that may result in a violation of any of the federal tax requirements applicable to its bonds should immediately ascertain if there are available remedial actions under the Income Tax Regulations (the Treasury regulations ) or other published guidance. Record Retention Requirements Various sections of the Code and Treasury regulations, including, but not limited to, sections 103, , and 6001 require

9 the retention of the records necessary to substantiate compliance with federal tax requirements applicable to tax-advantaged bonds. Generally, any person subject to income tax, or any person required to file a return of information with respect to income, must keep such books and records as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by that person in any return. This includes Form 8038 series and other returns filed by the issuer with respect to a tax-advantaged bond issue. PART TWO: TEB Voluntary Closing Agreement Program Introduction The Tax Exempt Bonds Voluntary Closing Agreement Program (TEB VCAP) is described in Notice , I.R.B. 592, which provides information about TEB VCAP for tax-advantaged bonds. This program provides remedies for issuers who voluntarily come forward to resolve a violation which cannot be rectified under self-correction programs described in the Treasury regulations or other published guidance. Closing agreement terms and amounts may vary according to the degree of violation as well as the facts and circumstances surrounding the violation. TEB VCAP operating procedures are in section of the Internal Revenue Manual ( IRM ). Objective of TEB VCAP TEB VCAP encourages issuers and other parties involved in tax-advantaged bond transactions to exercise due diligence in complying with the applicable federal tax requirements, and to provide a vehicle to correct violations as expeditiously as possible before they are discovered during an examination. An issuer submitting a TEB VCAP request can expect to settle the case on terms that are no less favorable, and generally on terms that are more favorable than the settlement terms that would be expected had the violation been discovered as a result of an examination. Availability of TEB VCAP TEB VCAP is available to issuers of taxadvantaged bonds who have discovered a violation of the federal tax requirements applicable to their bonds. TEB VCAP is not available for bonds under examination, or if the tax-advantaged status is at issue in a federal court or before the IRS Office of Appeals. TEB VCAP is generally not available, absent extraordinary circumstances, if the violation can be resolved under existing remedial action provisions or closing agreement programs contained in the Treasury regulations or other published guidance. Submitting a TEB VCAP Request A TEB VCAP request must include Form Tax-Exempt Bonds Voluntary Closing Agreement Program Request, available on TEB s website at Bonds. Form must be signed under penalty of perjury and included at the beginning of the request. This form assists issuers in organizing their TEB VCAP requests and ensuring that their submissions are complete in accordance with the requirements under Notice and IRM section requests with this required information to: TEBVCAP@irs.gov. Requests may also be mailed to: Internal Revenue Service, Attn. TEB VCAP, 1122 Town & Country Commons, Chesterfield, MO TEB VCAP Resolution Standards In order to standardize closing agreement terms (including settlement amounts) and to provide transparency to issuers and other parties to tax-advantaged bond transactions, TEB has described in IRM section resolution standards that may be used to conclusively resolve certain violations. Methodologies relating to calculation of settlement amounts under these resolution standards are fully described in IRM section If a violation does not fall within a specific resolution standard, TEB VCAP general resolution standards may be applied on such terms as are determined appropriate under the facts and circumstances. TEB frequently expands the resolution standards available under its IRM procedures in order to address additional violations. Resolution Standards for Tax-Exempt Bonds IRM section describes resolution standards for specific violations of federal tax laws applicable to tax-exempt bonds. Examples of violations that these standards address include: (1) A final allocation of tax-exempt bond proceeds to nonqualified purposes that exceeds the defined percentage limits; (2) Property financed with proceeds of a qualified 501(c)(3) bond issue is owned by a person other than a 501(c)(3) organization or governmental unit; (3) A failure to successfully remediate nonqualified bonds through establishment of a defeasance escrow because some or all of the bonds are not callable within 10.5 years of the issue date; (4) On an allocation of proceeds to property, the average maturity of the bonds exceeds 120% of the average reasonably expected economic life of such property; and (5) A party to the escrow agreement fails to meet their obligations to timely reinvest proceeds of a refunding issue, upon maturity of the investments, as directed by the escrow instructions. Resolution Standards for Direct-Pay Bonds IRM section describes resolution standards for specific violations of federal tax laws applicable to certain direct pay bonds. Examples of violations that these standards address include: (1) A deliberate action that causes build America bonds to be private activity bonds; (2) A final allocation of proceeds to an impermissible use; and (3) The acquisition by an issuer of its own debt instrument resulting in extinguishment. Anonymous Request A TEB VCAP request may be submitted on an anonymous basis to find the appropriate resolution method for a violation. This option is intended to assist issuers in evaluating appropriate resolution methods in instances where the violations are novel or in instances where there is significant uncertainty regarding the appropriate settlement terms. The anonymous request may only pertain to a general matter, question, or factual scenario. It may not be used to inquire as to appropriate resolution methods for violations involving detailed facts and circumstances. Resolution Benefit for Issuers with Post- Issuance Compliance Procedures The TEB VCAP program provides an incentive for issuers and conduit borrowers to implement written post-issuance compliance monitoring procedures. Under this program, issuers that adopt written procedures to ensure their tax-advantaged bonds remain in compliance with all post-issuance related federal tax requirements that are conditions to the tax-advantaged status of the bonds may be eligible to resolve violations on terms that are more favorable than issuers that have not adopted such post-issuance compliance monitoring procedures. Please see section of the IRM for additional information. Publication 5091 (6-2013) Catalog Number 63020Y Department of the Treasury Internal Revenue Service

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