IRS Reportedly to Begin Random Audit of Advance Refundings for SLGS Rollover
A recent article in The Bond Buyer reported that the IRS will begin an audit program sweep this summer to examine whether the failure by trustees to roll escrow funds held under refunding escrows for tax-exempt issues into zero-interest rate State and Local Government Series (SLGS) securities may have resulted in issuer arbitrage violations.
The Bond Buyer report indicates that the IRS will initially sample, on a random basis, 100 issues from the 3,900 advance refundings in 1993 it has identified as having potential problems but says that more issues and later years may be opened for audit in the future. As reported, the concern of the IRS is that the refunding escrows held by trustees have been invested in higher-yielding open-market securities and have failed to be "blended down" by proper reinvestment in zero-interest rate SLGS, possibly creating arbitrage violations and threatening the tax-exempt status of those issues.
The IRS is encouraging issuers to report violations and reach settlement through its voluntary compliance program. Through this program, twelve trustees representing more than 100 issuers reached settlements since late 2002, according to the report. Generally, the IRS will permit issuers who voluntarily contact the IRS regarding a tax law problem to settle the issue at a substantially lower cost than in the case of tax law violations that it discovers on audit. The IRS permits these voluntary closing agreements to be negotiated on an anonymous basis.
Nixon Peabody's tax lawyers have negotiated numerous closing agreements with the IRS involving tax-exempt bonds.
The Corporate Trust Team at Nixon Peabody will continue to monitor developments on this issue. If you have any questions or require further information regarding these or other matters, please call your regular Nixon Peabody LLP contact or feel free to contact one of the following members of the firm's Corporate Trust Team:
- In our Boston Office, Robert J. Coughlin rcoughlin@nixonpeabody.com (617) 345-1039;
- In our San Francisco Office, Laura Wheeler lwheeler@nixonpeabody.com (415) 984-8417
For a complete list of the Corporate Trust Team members, please refer to the final page of this Corporate Trust Alert, or visit our Web site at www.nixonpeabody.com.
The foregoing summary is provided by Nixon Peabody LLP for education and informational purposes only. It is not a full analysis of the matter summarized and is not intended and should not be construed as legal advice. This publication may be considered advertising under applicable laws.