WASHINGTON -- The Internal Revenue Service must write rules clarifying whether states should base private-activity bond volume cap allocations on the issue price or the face amount of bonds that are not sold at par, an Ohio official said recently.

The rules are urgently needed to give states guidance about how much of their private-activity bond authority under the annual caps should be allocated to discount or premium bonds, said Thomas C. Washbush, an official with the Ohio department of development, in identical letters to IRS and Treasury Department officials.

Washbush, the chief legal counsel and deputy director of operations for the Ohio authority, asked for the issuance of new regulations after the IRS concluded in a letter ruling that the California Pollution Control Financing Authority could allocate some of its private-activity bond authority based on the issue price, rather than the face amount, of two bond issues that were sold at a discount.

Under the tax law, states are permitted to annually issue an "aggregate amount" of private-activity bonds equal to $50 per capital or $150 million, whichever is greater.

Ohio and a number of other states have interpreted that to mean that they should allocate bond authority under the caps based on the face amount of their bond issues, even if the bonds are sold at a discount.

But in the letter ruling, the IRS said that the California authority could base its bond volume allocations on the issue price rather than the face amount of two bond issues that were sold at a discount in 1992 and 1993.

The issue price of the bonds was about $630.3 million, $6.4 million lower than the face amount of $636.7 million. As a result of the IRS ruling, the bond authority was able to free up and carry forward $6.4 million in bond authority that can be used for other financings.

In his letters to the IRS and the Treasury, Washbush said the IRS' decision to allow the California authority to use issue price for private activity bond allocations of discount bonds is "sensible" and "laudable."

At the same time he noted that it is the IRS' long-standing policy that letter rulings are intended to apply only to the market participants that seek them and are not to be regarded as precedent-setting.

The IRS, Washbush said, should clarify its policy for private-activity bond allocations for both discount and premium bonds in rules that can be relied on by all market participants.

In the case of bonds sold at a premium, the issue price would be higher than the face amount of the bonds.

Richard Chirls, a lawyer with Orrick, Herrington & Sutcliffe in New York City who helped the California authority obtain its favorable-ruling, told The Bond Buyer last month that he thought most issuers already use the issue price to determine privateactivity bond allocations for premium bonds.

Several other bond lawyers agreed with Chirls in interviews this week.

Chirls had predicted that bond lawyers for other issuers would rely on the letter ruling obtained by the California authority and would use the issue price for private-activity bond allocations for discount bonds.

He said he would expect the bond lawyers to continue to use the issue price for allocations of premium bonds.

But Washbush told the IRS and the Treasury that Ohio officials "have some difficulty" with the idea that issuers have relied on the issue price for allocations of premium bonds. Washbush could not be reached for comment.

But Joe Kelly, a bond specialist with the Ohio department of development, said Ohio has been using the face amount for bond allocations for all of its private-activity bonds, whether or not they were issued at par, premium, or discount.

"We've always used the face amount up until now. We thought that was what we were supposed to do," Kelly said.

In his letters to the IRS and the Treasury, Washbush said that if the IRS issues rules clarifying that states should use the issue price for privateactivity bond allocations of premium bonds, the rules should be only prospectively effective. He suggested any such rules be applied only to bond issues for which the premium is more than 5% of the par amount of the bonds.

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