IRS Municipal Bond Proposals Criticized By Industry Body

by Mike Godfrey, Tax-News.com, Washington

20 February 2004

The Bond Market Association has criticized IRS proposals intended to tighten up the tax laws surrounding municipal bond transactions, predicting that the new measures will likely cause confusion in the market place and discourage ownership of the bonds.

In an interview with the Wall Street Journal earlier in the month, Mark Scott, director of the IRS tax-exempt bond division, revealed that there are “four or five” so-called ‘Section 6700’ cases being dealt with by the Revenue at the present time.

Section 6700 refers to the section of the tax code that deals with penalties for promoters of illegal tax shelters. Using these regulations, the IRS now wants to crack down on the practice of ‘opinion shopping’, whereby lawyers certify that a muni transaction is legal and entitled to tax-exempt status, when in reality that particular transaction breaks tax shelter rules.

However, the Bond Market Association believes that the new regulations, as drafted, will create additional disclosure requirements that will “confuse and discourage” municipal bond investors, particularly in the retail sector of the market, which accounts for 66% of the whole.

In a comment letter filed with the IRS last Friday, John Vogt, head of the BMA’s Washington office, made three recommendations to modify the proposed regulations: clarify that a municipal bond that is the subject of an unqualified opinion is not a tax shelter; set forth specific tax shelter examples to bring some certainty to the marketplace; and finally, the Treasury Department should clarify that the phrase "reasonable basis for a successful challenge" is only relevant if an unqualified position on the bond cannot be delivered and it is reasonable to conclude the IRS would prevail in the Supreme Court.

“What is certain is that there will be a serious disruption of the municipal marketplace while these opinion positions are sorted out,” states the BMA’s letter. “And this disruption will be a continuing problem, as bond counsel struggle to determine which municipal bond transactions possibly are tax shelters and are forced to draft the lengthy opinions that are unique to each transaction.”

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