Issuers Seeking Arbitrage Overpayment Refunds May Get Procedures Before Year Ends, IRS Says

WASHINGTON -- Internal Revenue Service procedures for issuers seeking refunds for arbitrage overpayments may be published by the end of the year, agency officials said yesterday.

The procedures are needed because a few issuers are already seeking refunds and because the guidelines' absence became an issue in a lawsuit the Riverside County Housing Authority brought against the Treasury and IRS over the Whitewater Garden bond issue earlier this year.

The refund procedures also were called for in arbitrage rebate rules the IRS published in May 1989.

The Government Finance Officers Association on Wednesday asked Rep. J.J. Pickle, chairman of the House Ways and Means Committee's subcommittee on oversight, to "alert" the agency to the need for the speediest possible publication of the procedures as many issuers make their first rebate payments to the government.

IRS officials said yesterday that arbitrage refund procedures are a "high-priority item" that is receiving the same attention as projects involving rules on allocation and accounting, transferred proceeds, and the two-year rebate relief law.

"We're working on a procedure for filing a claim for a refund of a rebate overpayment," said one official. "We would like to get it out with other projects. And our hope is to get them out before the end of the year."

But there are still some "quirky issues" to be resolved, he said. These include definitional issuers -- such as determining when an alleged overpayment of arbitrage is really an overpayment -- and such timing issues as how long an issuer would have to obtain such a refund.

According to IRS officials, only a handful of issuers are currently seeking such refunds. The need for procedures at this point, they said, is driven as much by the Whitewater Garden lawsuit as by these issuers' actions.

"I don't think that it's a very big problem right now in terms of the number of people seeking refunds," said another IRS official. "But it's become a bigger deal with the Riverside lawsuit."

The Riverside County Housing Authority filed a lawsuit against the Treasury and IRS earlier this year to prevent the agencies from collecting $2.5 million of arbitrage profits from the Whitewater Garden bond issue or revoking the tax-exempt status of the bonds. The IRS had threatened to tax the bondholders if the arbitrage were not rebated after determining that the Whitewater Garden bond issue, which was closed in 1985, was not validly sold until 1986, and was therefore subject to rebate requirements.

U.S. attorneys, who are representing the Treasury and the IRS, had argued that the case should not have been brought before the U.S. District Court for the Central District of California because other remedies were available to the authority.

They said the authority could rebate the arbitrage to the government and then seek a refund of that amount from the U.S. tax or claims courts. But the authority pointed out that there are no rules or procedures for such refunds. The court agreed to hear the case, which is still pending.

Meanwhile, the Government Finance Officers Association is worried that the refund issue could become a bigger problem for issuers beginning this year as rebate payments become due on more bond issues. They asked that the IRS be urged to publish refund procedures as soon as possible in letters sent on Wednesday to Rep. Pickle, IRS Commissioner Fred T. Goldberg, and Kenneth W. Gideon, the Treasury's assistant secretary for tax policy.

"The five-year anniversary date of the Tax Reform Act of 1986 is approaching. Because arbitrage rebate payments are, in general, made every five years, instances of overpayment due to conceptual or mathematical errors are bound to be more frequent in the months ahead than they have been to date," said Ruth Wallick, a consultant to the GFOA's federal liaison center.

"As the representative of thousands of tax-exempt securities issuers in the U.S., GFOA believes that state and local government issuers, while not technically taxpayers but nevertheless subject to rebate payments to the U.S. Treasury, are entitled to the same basic right that all taxpayers have, namely the right to follow a clear procedures for securing the return of overpayments resulting from mistakes," she said.

The GFOA fired off the letters after Rep. Pickle's subcommittee held a hearing to consider the rights of taxpayers in dealing with the IRS. Although the hearing did not touch on arbitrage refunds or other municipal bond issues, the GFOA felt the arbitrage refund issue was related. "It's something that needs to get done," Ms. Wallick said yesterday. "The situation is going to get worse with the fifth year anniversary" of the rebate requirements.

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