WASHINGTON -- Nearly a dozen proposals for easing tax-exempt bond curbs were included in long-awaited simplification legislation that top tax leaders introduced late Wednesday -- including one unexpected provision that would increase the small-issuer exemption from the arbitrage rebate requirement.

In another unexpected twist, the bond provisions were divided between two bills. Several minor ones are in legislation offered jointly by House Ways and Means Committee Chairman Dan Rostenkowski, D-Ill., and Senate Finance Committee Chairman Lloyd Bentsen, D-Tex., but the major provisions ended up in a separate measure sponsored only by Mr. Rostenkowski.

Thus, only Mr. Rostentkowski's bill purposes increasing the $5 million small-issuer exemption from the arbitrage rebate requirement to $10 million -- a proposal that has been discussed since 1988, but which was not expected to be included in the Ways and Means chairman's bill. His measure also would ease overlapping yield restriction and arbitrage rebate rules and repeal the so-called 5% unrelated and disproportionate-use test. Those and all the other provisions would be effective for bonds issued after the date of enactment of the bills.

But congressional aides said the split was not because of any opposition from Sen. Bentsen to those provisions; staff members from the two committees simply ran out of time in trying to put together a joint bill. The legislation had to be rushed to get it introduced late Wednesday night before Congress adjourned for its Independence Day recess, a day earlier than had been expected.

Prospects for the bills remain uncertain because it is still not clear whether Congress will draft a tax measure this year. Congressional aides said they expect the House Ways and Means select revenue measures subcommittee to hold hearings on the bond provisions in late July, but beyond that did not know how tax lawmakers would proceed. They said any action on a tax bill would begin in September at the earliest.

The effort to simplify the tax code began last year when Mr. Rostenkowski called on his own staff and the general public to suggest ways to make the tax code more workable. Most of his bond proposals are gleaned from suggestions by Ways and Means and Joint Tax Committee staff members.

Increasing the $5 million small-issuer exemption, in fact, was already endorsed once by the Ways and Means panel, in a 1988 bill that was later scrapped because the lawmakers decided to eliminate all revenue-losing items from that year's tax package. Rep. Beryl Anthony, D-Ark., and Sen. Max Baucus, D-Mont., have made similar proposals in simplification bills they introduced earlier this year.

Mr. Rostenkowski proposes ending the confusion issuers have faced in trying to comply with arbitrage and yield-restriction rules at the same time by stopping the rebate requirement at the end of the so-called "temporary period." The term refers to the first few years after a bond is issued when an issuer is exempted from the requirement that the yield on investments be restricted to 0.125 percentage points over the yield.

Under current law, an issuer must continue to rebate arbitrage on proceeds that remain unspent after the temporary period ends, even though the issuer is also yield-restricting. Mr. Rostenkowski's proposal would allow an issuer to elect to stop rebating, though the issuer would have to then yield-restrict at the bond yield. The issuer could make this choice up to 60 days after the end of the temporary period.

Another proposal in Mr. Rostenkowski's bill, repeal of the "5% test" had been roundly endorsed within the municipal bond community. That rule requires an issuer to spend no more than 5% of the issue on uses "disproportionate and unrelated" to the purpose of the bond issue. A description of the bill notes that enough safeguards are already built into the law -- the 10% private-use test, the private loan restriction, and the private-activity volume cap -- that the 5% test is unnecessary to forestall abuse.

Rep. Anthony and Sen. Baucus have also proposed easing overlapping arbitrage and yield rules and repealing the 5% test. But neither Mr. Rostenkowski's bill nor the joint bill contain several other proposals made by Rep. Anthony and Sen. Baucus, including: increasing the exemption from limits on bank deductibility to $25 million from the current limit of $10 million; allowing issuers to retain a small amount of arbitrage profits; and making the 1989 arbitrage rebate relief law retroactive to Sept. 1, 1986, the date of enactment of the Tax Reform Act of 1986.

The joint bill offered Wednesday night by the two lawmakers contains a group of small bond changes, most of which have not appeared in other bills, like that of Mr. Anthony. Many of them do, however, solve problems brought to light over the last several years by bond lawyers and issues. They include:

* Expanding the six-month exemption from the rebate requirement to an issuer who has spent 95% of proceeds within that period. To be eligible for this exemption, the issuer must spend the other 5% within the next six months. Under current law, an issuer could only qualify for the six-month exemption if the lesser of 5% or $100,000 was left over after six months.

* Easing requirements for bona fide debt service funds under the 1989 arbitrage rebate relief law. Under that law, an issuer of governmental or 501(c)(3) bonds is exempt from rebate if proceeds are spent withint two years according to a specific schedule. The exemption does not apply to proceeds left in a bona fide debt service fund after that period is over. The provision would exempt those funds from rebate if the issuer met all the requirements of the spending schedule.

* Automatically extending the temporary period for construction bonds for an additional year as long as the issuer has spent 85% of the proceeds of the issue and reasonably expects to spend the other 15% in the next year.

* Ending the requirement that two bond issues paid from substantially the same source of funds be treated as the same issue if they are issued within 31 days of each other. Current law has forced issuers to, for example, separate by 31 days a tax and revenue anticipation note from a capital financing because it would be impossible to treat them as one issue for rebate purposes.

* Giving the Treasury Department authority to waive, in certain cases, the requirement that taxpayers report all tax-exempt bond interest on their tax returns.

In their joint bill, the two legislators also say they expect Congress will continue to consider coming up with alternative penalties to the one weapon the Internal Revenue Service may now use to punish those who violate bond restrictions: retroactive taxability of the bond issues.

The two also said they want Congress to keep studying the idea of developing a safe harbor from arbitrage rebate calculations for issuers who commingle their funds.

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