WASHINGTON -- The IRS should allow nonprofit student loan bond issuers to help lenders originate student loans without losing their ability to issue tax-exempt bonds, the Education Finance Council told the agency last week.

"We believe that providing preacquisition loan origination services ... is appropriately part of a secondary market operation," said the council, which represents student loan bond issuers, in written comments that were sent to the Internal Revenue Service.

The council submitted the comments to protest a private letter ruling that the IRS recently issued to the Mississippi Higher Education Assistance Corp., a "qualified scholarship funding corporation" that was created under Section 150(d) of the federal tax code "exclusively" to acquire student loans.

The IRS concluded in the ruling that the corporation could not help a lender originate loans, even though it planned to buy the loans. without violating the tax law requirement that it be "established and operated exclusively for the purpose of acquiring student loans."

The Education Finance Council, however, told the IRS that the ruling is too "restrictive" and is "a departure" from the IRS' previous stance and industry practice.

"What we want is for the IRS to reconsider its position," said David Caprera, a lawyer with Kutak Rock in Denver who chaired a committee that drafted the comments.

When nonprofit student loan bond issuers provide lenders with loan origination services, they encourage lenders to make student loans by reducing their administrative burdens, the council told the IRS.

The ruling, the council said, "fails to recognize the legitimacy and importance of assisting lenders by providing loan origination services."

The legislative history of the tax law provisions that authorize the creation of nonprofit student loan bond issuers, from 1976 to the present, makes clear that Congress intended for such issuers to engage in the same kind of activities as the student loan bond issuers that are created by the states, the council said.

Those activities include loan origination services, it said.

"Rather than discourage these types of activities for corporations that benefit from tax-exempt financing, Congress required the corporations to pursue them," the council said in its comments.

The ruling is also inconsistent with amendments to the Higher Education Act that require lenders who are eligible for special allowance payments from the federal government, including.secondary market corporations, to develop the market for student loans, the council said.

"The ruling's restrictions on loan origination activities clearly inhibit such corporations' abilities to meet their requirements of the plan for doing business and are certainly inconsistent with those requirements," the council said.

"To generate and stimulate new lender participation, these issuers must, by definition, engage in activities before the student loans are originated," it said.

The council also complained about the IRS' interpretation of the term "exclusively" in the ruling for the Mississippi corporation.

Congress uses the same term for organizations that receive tax-exempt status and are able to issue tax-exempt bonds under Section 501(c)(3) of the code, the council said. But for these organizations, the IRS has interpreted "exclusively" to mean "primarily" rather than "without any exception," the council said.

"Qualified scholarship funding corporations should be able to engage in some level of activities in addition to simply acquiring student loan notes," the council said.

The letter ruling sent to the Mississippi corporation, the council said, runs counter to at least five other letter rulings that were issued by the IRS between 1978 and 1991. All of those letter rulings recognize that nonprofit student loan bond issuers help lenders originate loans, it said.

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