WASHINGTON -- Treasury Department and Internal Revenue Service staff members plan to press high-level agency officials soon for a decision whether the Supreme Court's recent Cottage Savings decision creates a new standard for municipal bond reissuance.

"There are a number of issues concerning reissuance pending that we would like to resolve in the near future," said David A. Walton, Treasury's attorney-adviser for tax-exempt bonds. "But before we can proceed, the effect of Cottage Savings must be addressed by upper level IRS and Treasury officials. We hope to discuss these issues with them soon," he said.

Those officials would include Kenneth W. Gideon, Treasury's assistant secretary for tax policy, IRS Commissioner Fred T. Goldberg and IRS Chief Counsel Abraham N.M. Shashy, Mr. Walton and IRS officials said.

Agency officials would not comment on the pending rulings.

But one, knowledgeable sources said, is a proposed revenue ruling that would curb call waiver transactions by concluding that bonds would be deemed to be reissued and subject to current stricter tax laws if an issuer waives its right to call them in return for a payment from the bondholders.

Also pending before the IRS are several requests for private letter rulings that would allow issuers with bond-financed projects facing financial difficulties to extend maturities or make other changes to bond issues for some temporary relief from debt service payments.

Historically, the Treasury and the IRS have relied on Section 1001 of the tax code and a series of related revenue and private letter rulings to settle reissuance questions.

Under Section 1001 of the code -- which generally deals with whether a taxpayer has realized losses or gains for tax purposes from an exchange or sale of property -- a bond issue is deemed to be reissued and subject to the current, more restrictive tax laws if changes made to it cause the terms of the bonds to be materially different.

The IRS has fleshed out the "materially different" standard in a series of revenue and private letter rulings. Under Revenue Ruling 73-170, for example, an extension of maturity would not cause bonds to be reissued.

But the Supreme Court's April 17 decision in Cottage Savings Association v. Comissioner of Internal Revenue, which focused on the meaning of "materially different," has caused some agency officials to question whether the wealth of rulings and guidance on municipal bond reissuance can still be relied upon.

The high court's decision -- that thrifts could deduct losses claimed from the exchange of substantially similar pools of mortgages -- found the loans exchanged by the thrifts were "materially different" because they embodied "legally distinct entitlements." The exchange pools of mortgage loans had different obligors and different sources of collateral.

The court's decision has led some IRS officials to suggest that Cottage Savings creates a new "hair trigger" standard for reissuance, under which any change in a bond issue would trigger a reissuance and make the bonds subject to current tax laws.

Harold Altscher, a tax lawyer with Miles & Stockbridge in Baltimore who is seeking a private letter ruling for a developer client, said IRS officials told him recently that they were inclined to rule that a five-year extension of maturity that was proposed for a small issue of private-activity bonds would trigger a reissuance under the Cottage Savings decision.

Mr. Altscher said he showed the IRS studies demonstrating that his client's real estate project would go into default with the extension of maturity but said "they seemed to take the view that a relatively insignificant change in maturity would cause a reissuance."

One IRS officials refused to discuss the ruling request, but said some agency officials have taken the view thta the Cottage Savings decision creates a hair trigger test for reissuance merely to play devil's advocate and to stimulate debate. He added, however, that some agency officials believe the Supreme Court has created a clearer test for the materially different standard that can not be ignored.

The National Association of Bond Lawyers is expected later this week to urge the Treasury and the IRS to take the view that the Cottage Savings decision has no impact on municipal bond reissuance.

"You can legitimately read Cottage Savings as breaking no new ground for any tax law issues," said one NABL member. "When you get past the legal entitlements language, the court applied the same 1001 standard" to the exchange of pools of mortgage loans, he said. The court was doing nothing more than rejecting the IRS's argument in the case that no exchange occured because the pools of mortgages were economically equivalent -- arguments that most bond and tax lawyers believe the IRS should never have made in the first place.

But as a back-up position, the lawyers are expected to say that if the Treasury and the IRS decide that the Cottage Savings decision does create a new materially different standard under section 1001 of the code, that section of the code should no longer be applied to bond reissuance.

Several lawyers said a hair trigger standard on bond reissuance, applied across the board for income gains and losses, would hurt the IRS from a revenue standpoint.

"Treasury has a huge incentive to read Cottage Savings narrowly," said one lawyer, "because if they don't, any portfolio manager with billions of dollars of investments who wants to create losses to offset his income will get together with the issuer of debt obligations he's holding that are worth less today than he paid for them and make minor changes to the terms of those obligations so they are considered reissued and he can recognize the loss."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.