Yield Burning Scheme Is Just Another Mandate, NLC Says

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"These proposed tax procedures constitute an unfunded federal mandate on state and local taxpayers, a duplicative form of federal regulation, and a threat to local taxpayers," NLC said in urging the Treasury and Internal Revenue Service to withdraw their proposed "yield burning" revenue procedure in comments filed on behalf of the nation's cities last week. NLC submitted the comments to the Treasury and IRS in opposition to proposed, retroactive mandates that could force cities and towns to remit up to $1 billion to the IRS for what the IRS believes are overcharges by underwriters involved in upwards of 5,000 bond refinancings by cities and towns that occurred between the years 1991 and 1994.

"Overall we are concerned that the Treasury has issued a proposed rule which causes a significant fiscal impact on municipalities, regardless of whether there has been any violation or not, and whether intentional or not. The proposal provides no information about the potential compliance costs on state and local taxpayers as provided for under the Unfunded Federal Mandates Reform Act of 1995. The proposed regulation is targeted at states and municipalities, despite indications from the Service that it is underwriters, not states and local governments, which might have violated provisions of the 1986 Tax Reform Act."

Originally, the IRS proposed that cities would have until July 17, 1997, to reach an agreement with the IRS to recover what "the excess overcharges" from municipal underwriters. Failure to both reach such a voluntary agreement and make the repayment would have subjected cities to interest penalties and, potentially, additional tax penalties.

In response, NLC President Greg Lashutka wrote to U.S. Treasury Secretary Robert Greg Lashutka wrote to U.S. Treasury Secretary Robert Rubin to request a meeting and to insist upon removing what he termed the "gun at our head approach" proposed by the Clinton Administration. In September, after a meeting with NLC, the IRS agreed to drop the July 17th deadline, but scheduled comments and public hearings on moving ahead with the new mandate.

It its comments, NLC urged that the procedure be dropped, but that short of withdrawing the proposal, any final rules be written in plain English and developed jointly with cities: "Despite targeting the proposed rules to municipal issuers, the rules themselves do not translate into English as normally read and understood by municipal policy makers. We would suggest that if there is a genuine interest in arresting efforts by non-governmental interest to deprive governments of revenue, any proposal emanating from the Treasury should be a product of efforts on behalf of all taxpayers and, if directed towards municipal officials, should be readily understandable. Engaging in the writing of procedures which defy clear understanding and response do little to serve the public interest."

NLC noted that the proposed procedure is retroactive, in effect creating a new set of rules by for actions already taken by municipal issuers in good faith reliance on existing federal laws and regulations. Expressing concern about changing the rules well after the fact, NLC noted that the proposed rules would impose significant new costs, but uncertain benefits: "While the proposal has yielded significant quantities of smoke, there is, as yet, no evidence of fire. Similarly, the very nature nanced issues has created a veritable bazaar of business opportunities for firms to engage in transparent transactions with municipalities to determine, at a price, whether or not a violation might exist, and, if so, what rates they will charge to find there is a potential problem, and, upon such a finding, how they will charge to provide professional assistance in representations before the IRS.

We are concerned about any effort by the Treasury which creates such uncertainty and such potential for abuse - abuse harming not just federal taxpayers, but also state and local taxpayers. …