Compliance with federal tax requirements does not end upon issuance of tax-exempt bonds. Continuing compliance is required to ensure interest on bonds, or bonds themselves, retains their desired federal tax status. Post-issuance compliance generally falls into two categories: (1) qualified use of proceeds and financed property; and (2) arbitrage yield restriction and rebate. The requirements are summarized in more detail in a recent publication of the IRS, available here.
Written procedures are generally a good idea for monitoring proper compliance with post-issuance tax matters. More importantly from a practical standpoint, however, is the fact that the newest versions of the IRS Form 8038 and 8038-G, published in 2011, require the issuer to disclose whether the issuer has established written procedures:
- to ensure that all nonqualified bonds of the issue are remediated according to the requirements under the Code and Regulations; and
- to monitor the requirements of section 148.
The question now is, “what are sufficient written procedures,” and may the issuer check the relevant IRS Form 8038 and 8038-G check boxes even if the issuer is relying solely on procedures mandated by a particular bond issue’s tax documents?
In the past, most bond counsel have advised their clients that provisions and covenants integrated into the relevant tax certificates and agreements were sufficient to prove to the IRS that proper procedures were in place to address all applicable post-issuance compliance requirements. In its recent summary of post-issuance compliance procedures, however, the IRS has warned that tax certificates and similar bond closing documents may be insufficient and has recommended that issuers adopt separate, written procedures that are applicable to all of the issuer’s bond issues.
For certain federal tax purposes, a refunding bond issue is treated as replacing the original new money issue. To this end, the tax-exempt status of a refunding issue is dependent upon the tax-exempt status of the refunded bonds. Thus, certain material records relating to the original new money issue and all material records relating to the refunding issue should be maintained until 3 years after the final redemption of both bond issues.
According to the IRS, such written procedures should address the following matters:
- require due diligence review at regular intervals;
- identify the official or employee responsible for reviewing post-issuance compliance matters;
- provide for training of the responsible officer or employee;
- require retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds) (See Notice 2006-63 regarding solicitations concerning record retention policies; record retention should generally be in place until three years after the bonds are discharged, according to this TEB Web site FAQ publication);
- implement procedures reasonably expected to timely identify noncompliance; and
- implement procedures to ensure that the issuer will take steps to timely correct noncompliance.
Issuers might approach their bond or tax counsel to request preparation of an applicable, separate policy or resolution that might be adopted by the issuer’s governing body.
How does this general rule apply to refundings? For certain federal tax purposes, a refunding bond issue is treated as replacing the original new money issue. To this end, the tax-exempt status of a refunding issue is dependent upon the tax-exempt status of the refunded bonds. Thus, certain material records relating to the original new money issue and all material records relating to the refunding issue should be maintained until 3 years after the final redemption of both bond issues. From IRS Tax Exempt Bond FAQ referenced below.
See “Your Responsibilities as a Conduit Issuer of Tax-Exempt Bonds,” Publication 5005 of April 2012, for additional information regarding post issuance compliance matters.
5th ACT Report regarding record retention.
Also see the IRS Tax Exempt Bond FAQ Regarding Record Retention Requirements publication.