THIS IS AN ADVERTISEMENT.
The Internal Revenue Service has been sending "compliance questionnaires" to issuers of "direct pay" Build America Bonds since February (see http://www.peckshaffer.com, Peck Shaffer & Williams e-Bulletins dated 02/18/2010 and 03/23/2010). Based on the responses to this original Questionnaire, the IRS has revised the questions and posted a proposed second version of the Questionnaire on its website (http://www.irs.gov: Revised Form 14127, Direct Pay Bonds Compliance Check Questionnaire), together with a draft explanatory letter (Letter 4575, Direct Pay Bonds Post-Issuance and Record Retention Practices), with a request for comments (suggestions may be sent to teb.cpm@irs.gov TEB-CPM Questions. "Questionnaire Suggestion" should be inserted in the subject line of any e-mail). The revised Questionnaire is expected to be used by the IRS before the end of June.
The first question of the proposed Questionnaire asks whether the bonds were issued pursuant to a negotiated sale and if so, whether the underwriter provided a written certification that each maturity of the bonds "was offered to the public in a bona fide public offering . . . at the initial offering price for such maturity." The proposed Questionnaire (like the original version) also asks whether the issuer has written procedures for determining whether there is more than a de minimis amount of premium on the Build America Bonds and whether records of the trading activity of the bonds are available on EMMA (the MSRB's Electronic Municipal Market Access System). Note that the original Questionnaire gave the issuer a choice of stating that it did not know whether the issue price could be tracked, whereas the proposed Questionnaire eliminates this answer, implying that the issuer should know the answer. For negotiated sales, the proposed Questionnaire also asks if the issuer has checked the trading activity of the bonds after the sale date but before delivery on the issue date and whether any purchases were made at a price in excess of the initial offering price. Note that the Treasury Regulations that govern the determination of issue price have not been changed and still provide: "The issue price of bonds for which a bona fide public offering is made is determined as of the sale date based on reasonable expectations regarding the initial public offering price" (Treas. Reg. § 1.148-1(b)). Notwithstanding the regulation, the wording of the proposed Questionnaire suggests that relying on the certification of the underwriter or financial advisor will not suffice to establish the issue price of Build America Bonds and; that instead, issuers of interest-subsidy Build America Bonds must track the actual selling prices of their bonds.
The remaining questions on the proposed Questionnaire mirror those of the original Questionnaire. The issuer is asked whether it has written procedures to ensure compliance with the other requirements of Build America Bonds (e.g., .expenditure rules, arbitrage restrictions) and to correct missteps that might occur after the bonds are issued.
Finally, the IRS Tax Exempt Bond compliance group has announced that up to 50% of all issues of Build America Bonds will be audited, in addition to requiring that all issuers of Build America Bonds complete the Compliance Questionnaire.
If you have questions about this Peck Shaffer alert, or if you have questions about other matters concerning Build America Bonds, the Compliance Questionnaire or the audit program, please contact the Peck Shaffer Tax and Financial Analysis group.