The NonProfit Times - February 1, 2008 - (Page 26) TAXING ISSUES Continued from page 24 IRS Compliance Checks And Audits Continue posed regs relax the current rules, which did not permit YRPs in LIBOR-based swaps. Despite the apparent ease of critical proactive (upfront) bond yield monitoring, organizations (and issuers) are advised to ensure that their actual bond yield (effective interest rate for tax purposes) is calculated when a LIBOR swap is involved, frequency being on the same five-year rebate cycle or earlier deemed IRS computation date. If you received a tax-exempt loan to reduce your borrowing cost, you often have to compute potential arbitrage rebate due to the IRS. In making this computation, you are entitled to claim an arbitrary annual credit of $1,000 where gross proceeds continue to exist, to reflect the time, expertise and cost involved with preparing these mathematical computations. A long overdue change will increase the credit to $1,400 in 2007. It’s adjusted in future years by the Consumer Price Index. The proposed regulations will also simplify the computations if you have issued callable serial premium bonds, as they only require the critical yield (interest rate) calculation to involve the lowest yield on a particular bond, as opposed to the lowest yield on the entire issue. The proposed regulations also specify that the Treasury will not pay interest on refund requests. The proposed regulations will take effect 90 days after the date the Final Regulations are published in the Federal Register. You are allowed to apply certain provisions earlier if they are beneficial; however, if swap provisions are involved, you must use an all or nothing approach. Early adoption is as of the date of publication (September 26, 2007) of the Proposed Regs in the Federal Register. NPT Harvey Berger is a retired tax partner with Grant Thornton and currently serves as a consultant on nonprofit tax issues. His email is harvey.berger@gt.com. Greg Goller is Grant Thornton’s National Partner-inCharge of Not-for-Profit Tax Services and is based in the Washington, D.C. area office. His email is greg.goller@gt.com. Gregg Ichel is a partner in Grant Thornton’s National Public Finance practice in Minneapolis, MINN.His email is gregory.ichel@gt.com T he Internal Revenue Service (IRS) is continuing its compliance checks of organizations with taxexempt bonds. It has been reported that qualified hedges were one of the spotlighted concerns. The benefit of “qualified” hedges (or an interest rate swap transaction) is that additional interest payments made by the borrower are included in the interest rate (bond yield) calculation. It thereby increases the bond yield and potentially sheltering positive arbitrage amounts that you would otherwise have to rebate to the Treasury. Specifically, the IRS has looked at qualified hedges within advance refunding transactions and found most troubling the failure to file IRS Form 8038-T along with the rebate, including underpayment interest. The IRS continues to question Section 501(c)(3) organizations that are a party to tax-exempt bonds for new capital projects.Their initiative likely involves the IRS’s inquiry into whether or not the conduit borrower transactions have adhered to the variety of post-issuance compliance requirements including record retention, arbitrage rebate and yield restriction and qualified use of bond proceeds to gauge compliance. Although a compliance check is not an audit, the IRS has the option of opening a formal examination if you fail to comply. More importantly you could risk the overall exempt status of your organization if you fail to timely and accurately respond to the IRS’s requests in this regard. In addition to these specific audit-type initiatives, the IRS is continuing the use of compliance check questionnaires in the context of more traditional governmental entities and for student-loan bond issuers. Given the rising interest rate environment during the past several years and outstanding bond issues with relatively low tax-exempt interest rates, you cannot overemphasize proactive arbitrage rebate (and yield restriction) compliance, including adequate mathematical substantiation of exceptions to the rules, to ensure preservation of the bonds’ underlying tax-exempt status. Voluntary compliance is strongly suggested, including payment of required rebate (and where also applicable, yield reduction) for past positive arbitrage earned along with IRS Form 8038-T to prevent steeper penalties should the IRS discover the same on random or targeted audits. Although the IRS attempts to avoid taxation of bondholders, it is possible they will be taxed in the future, although to date the IRS has imposed the majority of penalties on the Section 501(c)(3) (and other) conduit borrowers and direct issuers. WHAT SHOULD YOU DO? The arbitrage rules and related existing (and proposed) regulations under Section 148 are complex and challenging with a financial spin even for experienced practitioners.The changing environment has made this difficult area even more complex. You should make sure you are in full compliance with all of the rules, both old and new. Ignoring the IRS and legal requirements imposed upon issuers (and conduit borrowers) for the privilege of issuing or receiving tax-exempt debt is not something to take lightly. Steeper penalties, along with interest, will result should the IRS catch you before you voluntarily notify them of problems. A self-check on post-issuance compliance in this area is not only prudent, but likely a necessity, given the current regulatory environment in the United States, coupled with the continued national presence of the IRS’ tax-exempt bond group. A recent joint publication, issued by the National Association of Bond Lawyers and the Government Finance Officers Association, offers a suggested post-issuance compliance check list to adhere to minimum IRS and related bond covenant requirements at www.nabl.org. All of the post-issuance requirements should not cause you to avoid the substantial financial advantages of tax-exempt financing. However, you must obtain the appropriate advice to ensure that you comply with all of the post-closing requirements of Code Section 148. Failure to do so can cause substantial headaches, which you can avoid by prudent action. — HARVEY BERGER INTRODUCING Intelligent Mail Monitor C a l l u s t o l l f r e e a t 1.8 0 0.767.79 67 or visit us online at www.usmonitor.com. 26 FEBRUARY 1, 2008 THE NONPROFIT TIMES www.nptimes.com http://www.nabl.org http://www.usmonitor.com http://foundationcenter.org/pubhub http://foundationcenter.org/pubhub http://www.usmonitor.com http://www.nptimes.com
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