Often we would all like things to happen quickly in life.  At other times things happen in the blink of an eye and we wish we had more time to appreciate the moment.  One thing about the development of federal tax law, it rarely happens quickly.  Perhaps this deliberate process is for the best as the new tax law will have been given careful consideration and a thorough vetting.  Conversely, it may occasionally result in tax law that is a jumbled, chaotic mess because there were too many chefs stirring the pot.  In any case, this process instills patience and a long view in tax lawyers and may even help those tax lawyers develop ways to counsel patience to their clients.   Take the Issue Price Regulations, discussed several times over the last few months on this blog (here, here, and here), as an example.

HISTORY.  The original issue price rules trace all the way back to 1969 when the first arbitrage rules were introduced in Section 601 of the Tax Act of 1969 and were initially codified as Section 103(d) of the 1954 Code, which later became Section 103(c) of the 1954 Code and is now Sections 103(b)(2) and 148 of the Code.  That original 1969 statute introduced the concept of computing the yield on bonds and the yield on investments of bond proceeds and comparing them.  The Tax Act of 1969 provided no guidance as to how yield should be calculated and did not use the phrase “issue price,” but it did authorize the Secretary of the Treasury to promulgate regulations regarding the arbitrage rules.   Proposed regulations and temporary regulations were promulgated at various points throughout the 1970’s, beginning in 1972.  Finally, in 1979, final arbitrage regulations were promulgated.  Still, while there was guidance as to how yield should be calculated, there was no mention of the phrase issue price in those regulations.  But, in Treas. Reg. 1.103-13(d)(2), a precursor appeared.  In describing how to compute yield, that regulation used the phrase “purchase price” and defined purchase price for publicly offered debt as “. . . the original offering price to the public (excluding bond houses, brokers, and other intermediaries).”  And so it began.

As we moved into the modern era, the Tax Reform Act of 1986, which created the current Code, added a definition of yield to Section 148 of the Code and that definition said “. . . the yield on an issue shall be determined on the basis of the ‘issue price’ (within the meaning of sections 1273 and 1274).”  Section 1273(b) of the Code contains a definition of issue price for purposes of computing the amount of original issue discount on a security.  Not surprisingly, Section 1273(b)(1) states that the issue price of publicly offered debt is “. . . the initial offering price to the public (excluding bond houses and brokers) . . .”  That language looks awfully similar to the definition of purchase price in the 1979 regulations.  Because that definition is statutory, any arbitrage regulations governing the computation of yield must adhere to this cross-reference.

Everything was working just fine for decades after the 1986 Code was implemented.  Then, two things happened.  First, modern technological developments provided more publicly available information about those public offering prices.  Second, Congress authorized the issuance of Build America Bonds (“BABs”) for a limited timeframe in 2009 and 2010. BABs are tax credit bonds that are now described under the broader umbrella of tax-advantaged bonds, which include tax-exempt bonds and tax credit bonds.  The price information that was publicly available on EMMA for tax-exempt bonds and BABs led the IRS to question whether the definition of issue price was still adequate for today’s world.  With regards to BABs, the IRS issued Notice 2010-35.  That Notice, which covered a variety of topics, elicited some comments from various groups including the Tax Section in 2010 who were hoping for uniform rules for tax-exempt bonds and other tax-advantaged bonds such as BABs.  The IRS then issued proposed regulations on September 16, 2013 that dealt with the issue price of any tax-advantaged bonds, held a hearing, and received voluminous written comments in 2013 and early 2014.   As a result of that feedback, they revised and reissued the proposed regulations in June of 2015 (“2015 Proposed Issue Price Regulations”), held another hearing, and have received additional written comments.

Practicing lawyers have primarily submitted comments to the 2015 Proposed Issue Price Regulations through two groups.  The National Association of Bond Lawyers submitted comments on September 22, 2015 and the most recent comments were submitted by the ABA Tax Section (“Tax Section”) on January 4, 2016. Those ABA Tax Section comments attach as an exhibit comments first submitted by the Tax Section in 2010.  Thus, the wheels of improving and modernizing tax law turn slowly as the process is now in its sixth year and not yet complete.

ABA TAX SECTION COMMENTS.  The ABA Tax Section comments were prepared by the Tax Exempt Financing Committee of the Tax Section.  (By way of full journalistic disclosure, this blogger is the First Vice-Chair of the Tax Exempt Financing Committee.)  Some of the noteworthy Tax Section comments are:

First, the Tax Section would like clarification in the 2015 Proposed Issue Price Regulations that the definition of issue price would apply not only for purposes of Section 148 of the Code but also would apply uniformly throughout Sections 103, 141-150, 54A-54AA and 6431.

Second, the Tax Section would like to see a couple of slight revisions to the definition of “underwriter” to make it more precise.  As currently drafted, the 2015 Proposed Issue Price Regulations state that: “The term underwriter includes (A) Any person . . . that contractually agrees to participate in the initial sale of the bonds to the public . . .  and (B) Any person that, on or before the sale date, directly or indirectly enters into a contract or other arrangement . . . to sell the bonds . . .” (Emphasis added.) Use of the word “includes” is too imprecise and open-ended.  Similarly, the Tax Section found the use of the phrase “other arrangement” when describing the relationship between an issuer and an underwriter too imprecise.

Third, the Tax Section would like the 2015 Proposed Regulations to specify that there is no underwriter when a transaction is a private placement or a direct placement where the bonds are purchased for investment.

Fourth, the Tax Section would like further clarification as to the level of due diligence required for issuers in relying on information provided by underwriters and on underwriters relying on information provided by other underwriters.

Fifth, the Tax Section would like clarification that issue price is to be determined on a bond by bond basis.

Sixth, the Tax Section would like the 2015 Proposed Issue Price Regulations to better reflect how bonds are actually sold in describing the price of a bond on a sale date.  The existing concept of a “sale date,” defined as the date on which a binding written contract is executed, does not reflect the reality that bonds are often sold in a period of just a few hours and the bond purchase agreement is often not executed until the next day.   The Tax Section recommends looking at the end of the “pricing time” which is the actual marketing period.

Last, the Tax Section suggests clarifications and amplifications of the “Alternative Method” in the 2015 Proposed Issue Price Regulations.

CONCLUSION.  Admittedly, the process is slow.  But this particular process seems to be an instance where the deliberate nature of the undertaking will result in a good product when it is ultimately finalized and will not result in a chaotic mess.