WASHINGTON -- Treasury rules on reimbursement, allocation and accounting, transferred proceeds, and the rebate relief law will not be retroactive when issued later this year or next, a Treasury lawyer said yesterday.
David A. Walton, the Treasury's attorney-adviser on tax-exempt bonds, told members of The Municipal Forum of New York at a luncheon that all but the reimbursement rules are expected to be issued in proposed form.
"We want to give the industry ample opportunity to read, understand, and comment on the proposed regulations," he said. "We have no intent for these regulations to change the world as you know it or stop transactions or anything like that."
The IRS has already said the reimbursement rules will be issued in final forum.
On another matter, Mr. Walton said Treasury and Securities and Exchange Commission officials plan to meet soon to explore ways to share information and coordinate their enforcement activities on municipal bonds.
Mr. Walton said while IRS enforcement efforts "have not been entirely consistent in the bond area" in the past, that section of the agency has been reorganized and should become "more standardized" in its activities.
He told The Bond Buyer after the luncheon that neither the IRS nor the SEC has formalized enforcement programs and that both agencies could benefit from cooperating with each other.
J.W. Rayder, an aide to House Ways and Means Committee member Rep. Beryl Anthony, D-Ark., who also spoke to the investment bankers and lawyers at the luncheon, said that next year may be a banner year to push for legislative changes that will encourage a broader market for municipal bonds.
He said the municipal market has become a "one-segment market," comprised mostly of individual investors, because tax law restrictions enacted in recent years have discouraged banks and other institutions from buying municipal bonds.
As a result, the market is more likely to be threatened by family savings account and super-Individual Retirement Account proposals that are likely to be included in tax legislation next year. Rep. Anthony has warned that these savings proposals would compete with and could reduce the market for municipal bonds.
"So we're going to be talking about rediversification of the market," he said at the luncheon. He said Rep. Anthony and some of the other members of the House Ways and Means Committee will continue to push for increasing the exemption from limits on bank deductibility, one of the proposals in a bill he introduced earlier this year.
Prior to 1986, banks could deduct up to 80% of the costs of purchasing and carrying tax-exempt bonds. But Congress eliminated that deduction in 1986, except for the bonds of small issuers who reasonably expect to sell no more than $10 million of tax-exempt governmental bonds per year. The lawmakers were concerned that banks were using tax-exempt bonds on a large scale to limit their tax liability.
Mr. Rayder said proponents of the measure to increase the exemption will have to show that bank deductibility does not have a significant impact on the tax liabilities of banks. Supporters of the measure will point out that municipal bonds are secure assets for banks, many of which are struggling financially in this recession.
Next year also may be a good time to push for an easing of state volume caps for private-activity bonds, Mr. Rayder said.
"This is really something that we're going to look at," he said, adding that some 20 to 30 states are already bumping up against their caps, which currently are equal to $150 million or $50 per capita, whichever is greater.
Proponents of easing the caps could push for an increase in them or for a change in the method for measuring them, he said. The Anthony Commission on Public Finance has set up a subgroup, chaired by California Treasurer Kathleen Brown, to explore the issue he noted.
Mr. Rayder said there is some support among House Ways and Means Committee members for creating new categories and expanding existing categories of tax-exempt bonds, particularly to finance infrastructure or environmental projects.
He said that four elements that are critical in passing legislation favorable to the municipal market are already in place or within reach: political support, credible proposals, a legislative vehicle, and revenue.
"I think it's going to be a big year," he said. "We've got nowhere to go but up."
The rules the Treasury is expected to issue later this year or next will cover bonds issue to reimburse issuers for expenditures previously paid with other funds; allocation and accounting for the expenditures and investment or bond proceeds for purposes of complying with rebate requirements; the transferred proceeds requirements for refundings; and the two-year rebate relief law, under which issuers of governmental and 501(c)(3) bonds financing construction projects are exempt from rebate if they spend certain percentages of their proceeds within a two-year period.
