The NonProfit Times - February 1, 2008 - (Page 24) TAXING ISSUES HARVEY J. BERGER, D. GREG GOLLER AND GREGG ICHEL Tax-Exempt Bonds IRS proposes changes to rules I f your organization has issued, or is thinking of issuing, tax-exempt bonds, you need to be aware of some actions taken recently by the Internal Revenue Service (IRS). The IRS and the U.S. Department of the Treasury released proposed regulations under IRC Section 148 this past September that affect issuers and organizations holding tax-exempt bonds. Described by Treasury attorney John Cross in a September 28, 2007 Bond Buyer article titled “TEB to Expand Market Sector Compliance Survey Efforts,” the proposed regulations are a “grab-bag” of direction, which provide much needed clarity with respect to swap transactions as well as promote transparency in other areas. Specifically, the proposed regulations provide guidance in the area of interest rate swap transactions involving taxable indices based upon the London Interbank Offering Rate (LIBOR).In a typical swap transaction, a borrower desires a fixed interest rate.To accomplish this, the borrower executes a contract with a counter party who agrees to make the origi- nal, variable rate interest payments to the bondholders in exchange for the borrower’s fixed interest payments. The proposed regulations detail that LIBOR-based swaps will not allow for super-integration or fixed rate yield treatment. However, issuers and conduit borrowers now have clearer direction on what constitutes simple tion requirement for a qualified hedge transaction on the books and records of the local governmental or authority issuer to 15 calendar days from the current three-day rule. But the strict issuer identification rule will likely remain, which requires the actual issuer, as opposed to conduit institutional borrower, to properly identify the hedge on its books and records. Issuers and organizational borrowers can also breathe a sigh of relief.Future tax-exempt transactions to advance refund (pay off prior tax-exempt bonds via a segregated bank ac- The proposed regulations detail that LIBOR-based swaps will not allow for super-integration or fixed rate yield treatment. integration on underlying variable rate bond issues. It thereby allows underlying swap payments and related receipts,if any,to be included in the bond yield (interest rate) calculation. In addition, the proposed regulations clarify various additional elements, which will be required for simple integration and resulting qualified hedge treatment. Another more user-friendly provision will be extending the identificacount over a period of more than 90 days) utilizing a LIBOR-based swap will now qualify for yield reduction payments (YRPs) should it be needed. This will allow for the investment yield to be reduced by making YRPs back to the Treasury if the actual computed bond yield is less than the escrow investment yield. Existing regulations in this regard do not specifically allow for the use of either a rebate or YRP as a cure if the actual bond yield in LIBOR-based transactions is less than the escrow investment yield. Consequently, the proposed regulations will make such retroactive solutions possible. Under current regulations, issuers and borrowers are often contractually required to proactively monitor the actual bond yield subsequent to the closing date of their LIBOR-based swap transactions. Unlike the typical advance refunding transaction where the new bond issue has a fixed interest rate, LIBOR-based advance refunding transactions have an underlying variable rate yield. Hence, LIBOR-based advance refunding transactions are more at risk to run afoul of the Treasury’s rule requiring that the escrow investment yield not exceed the new bonds’interest rate or yield. If the actual bond yield is less than the investment yield within an escrow account, options typically used to cure violations have involved: (i) investing in zero-yielding state and local government series obligations or investments through a yield reductiontype fund; or (ii) restructuring the escrow fund. Perhaps recognizing the time sensitive nature and cost involved with yield monitoring, the proTaxing Issues, page 26 YOUR FUTURE IS HERE. MAKE SURE YOU TAKE YOUR CFRE INTO THE NEXT 25 YEARS. www.cfre.org 24 FEBRUARY 1, 2008 THE NONPROFIT TIMES www.nptimes.com http://www.cfre.org http://www.baypath.edu http://www.baypath.edu http://www.baypath.edu http://www.cfre.org http://www.nptimes.com
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