Regulatory Activity Continues in Washington.

• Author: DOTSON, BESTY

Although Congress takes a year-end recess, the activities of the executive branch and independent regulatory agencies continue throughout the year. Indeed, many policy determinations only begin to take shape after Congress has passed legislation. The executive branch agencies and regulators are responsible for interpreting the laws that Congress passes, and they take their own actions on rulemaking and enforcement. The following represent some key regulatory areas of interest to state and local governments.

Tax-exempt Debt

Issuer Appeals. In 1998, the Congress approved the Internal Revenue Service Restructuring and Reform Act (Public Law 105-206), which for the first time treats state and local government bond issuers as taxpayers for purposes of appealing adverse determinations on the taxability of their bonds. Under Section 3105 of the law, if the Internal Revenue Service (IRS) proposes that the interest on an outstanding bond is taxable, the issuer will have an administrative right of appeal to a senior officer in the Office of Appeals.

On September 22, 1999, the IRS published the final version of the rule governing the appeals procedure (Rev. Proc. 9935, "Administrative Appeal of Proposed Adverse Determination of Tax-Exempt Status of Bond Issue," Internal Revenue Bulletin 1999-41, October 12, 1999). The process allows state and local governments to challenge proposed adverse determinations on a municipal bond's tax-exemption before the IRS moves to tax bondholders. In addition, IRS district offices will not be required to seek a Technical Advice Memorandum (TAM) from counsel before an appeal can proceed. TAMs outline the technical rationale behind a decision to tax the interest on a bond. Under the final rules, any issuer with an unresolved bond audit is eligible to submit an appeal.

The procedure requires the IRS key district to notify the issuer in writing, describe the reasons for the proposed adverse determination, and notify the issuer of the opportunity to appeal. The issuer must submit a request for appeal within 30 days of receiving notification, and the case will be assigned to a senior appeals officer. If the issuer and the Office of Appeals agree no action is necessary, the IRS district office will be notified and will close the case. If both parties reach an agreement, the IRS will implement its model closing agreement. If agreement is not reached, the Office of Appeals will return jurisdiction to the district office with a copy of its memorandum. In that case, the adverse determination would become final. There is no fee for submitting an appeal request. The final rule may be obtained at wwwirs.gov.

Disclosure in Industry Sectors. The National Federation of Municipal Analysts (NFMA) has released draft recommended guidelines that it would encourage issuers and other market...