WASHINGTON -- In the wake of a recent Supreme Court decision, the Internal Revenue Service appears to be abandoning a widely used revenue ruling that allows issuers to extend the maturity of their bonds without causing the bonds to be reissued under stricter tax laws, a bond lawyer said this week.

Brian G. Belislee, a lawyer with Briggs & Morgan in Minneapolis, found the IRS to be "predisposed to saying Revenue Ruling 73-160 is no longer good law" in telling him that it would probably issue an unfavorable letter ruling for a client that needed an extension of bond maturity to avoid financial hardship.

The client, a developer who was lent the proceeds of a $2.9 million industrial development bond issue to finance construction of an office building, needed the extension of maturity to postpone a balloon payment of principal that was coming due at the end of this year.

The developer could not make the payment. But if the bonds were treated as reissued, they would be subject to current tax laws and would no longer be tax-exempt, Mr. Belisle said.

IRS officials told Mr. Belisle they did not feel they could rule favorably in light of the Supreme Court's April 17 ruling, Cottage Savings Association v. Commissioner of Internal Revenue.

The Cottage Savings ruling dealt with thrifts and mortgage loans, not municipal bonds. But IRS and industry officials have been concerned that the ruling affects municipal bond reissuance because it interprets the tax laws that form the basis for determining whether a bond reissuance has occurred.

Several bond lawyers said Mr. Belisle's experience bodes ill for the bond industry, particularly now, as the recession has created financial hardship and a possible need to extend the maturities of bonds for certain local governments and borrowers.

"The IRS, in previous rulings, has given a lot of flexibility" to issuers and borrowers who want to change the terms of their bonds to avoid financial problems, said William Loafman, a partner with Washington, Perito & Dubuc.

Mr. Belisle's experience, he said, seems to "signify a change in IRS's point of view." He added that it would be "disappointing" and "would cause a lot of problems" if the IRS were to come out against Revenue Ruling 73-160.

Some lawyers wondered if Mr. Belisle's case had an unusual set of facts that would force the IRS to rule adversely. But Mr. Belisle rejected this idea.

"I think if my facts had been ideal they would have taken the same position," he said. "The IRS was not concerned so much with my facts as with the fundamental legal issue of whether the Cottage Savings case caused them to reconsider [Revenue Ruling 73-160] that forms the basis for a lot of private letter ruling saying that a mere extension of time for payment of principal, or maturity, would not cause bonds to be reissued."

The court, in ruling that thrifts could exchange mortgage loans and claim losses for tax deductions -- but not for capital requirements -- held that a "materially different" standard is met if the properties being exchanged "embody legally distinct entitlements."

Most IRS rulings on bond reissuance have relied on Section 1001 of the tax code, which says, in effect, that there must be a material difference in a bond issue for it to be considered reissued and subject to current tax laws. And industry and IRS officials worry the Cottage Savings ruling can be interpreted to mean that any change in a bond issue is a legal right that triggers reissuance, thereby creating a "hair trigger" for reissuance.

Mr. Belisle said he asked the IRS for a letter ruling on his client's bond issue one day after the Cottage Savings decision was handed down, but that he was unaware of the concern about the Cottage Savings case at that time.

The $2.9 million industrial development bond issue that was the subject of the letter ruling request was sold in 1981 by a city. The bonds are due to mature at the end of 1991. But the deal was structured so that, while interest is paid every six months, the full $2.9 million of principal is to be paid at the end of 1991.

The office building was constructed. But the developer was going to have trouble making the payment of principal so parties to the deal proposed extending the maturity of the issue five years, to 1996. Because the letter of credit that backs the bonds expired in 1991, it too, would have to be extended. Mr. Belisle said he sought a letter ruling because the security, as well as the maturity, of bonds would have to be extended, and Revenue Ruling 73-160 says a reissuance would not be triggered by an extension of maturity only.

The IRS, he said, did not seem to care about the extension of security and asked him to consider the Cottage Savings decision and its effects on the letter-ruling request.

"I basically tried to tell them that the Supreme Court decision should not change 73-160," he said.

But IRS officials were not convinced. They told him their inclination was to issue an adverse ruling, but that this was not final.

The IRS asked Mr. Belisle to meet with them. Mr. Belisle said he has not yet been authorized by his client to do so.

"My personal view is that the IRS wants input" on the Cottage Savings ruling from the industry, he said. But he said he is not sure his client has the time or money to wait for the IRS to determine the impact of Cottage Savings.

Mr Belisle pointed out that if the 1981 bonds had been issued as 30-year revenue bonds with a 10-year call, they could be refunded, and his client's problems would be solved. But no one knew back then that Congress was going to eliminate refundings with extensions of maturities for small-issue industrial development bonds, he said.

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