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Cities may benefit from IRS simplification of arbitrage rules.

The Internal Revenue Service last week proposed a significant overhaul and simplification of its current arbitrage rules which could give cities an unexpected new exemption from rebate requirements on municipal tax exempt bonds.

The proposed rules are not only simpler and shorter than the existing rules, but could lead to millions in dollars worth of savings for cities and towns. The City of Bangor, Maine, for instance, last year reported it was holding over $220,000 in reserve to meet federal rebate mandates--funds which the city would far prefer to spend to meet other unfunded federal mandates or local needs and priorities. While the proposed simplifications would not mean savings for every city, they do promise relief for many.

The 178-page set of the proposed rules (21 CFR 1, FI-3692) is about one-third the size of the existing regulations. It was scheduled to be printed in the November 7 Federal Register, after the Weekly went to print. The final rules are to be issued in final form next year after public comment.

The proposed rules, would provide most cities and towns with a new 18-month spending exception from rebate requirements. Municipal issuers would be exempt from the rebate mandate if they spent 30 percent of their bond proceeds in six months, bond proceeds in six months, another 30 percent in one year, and the remainder in 18 months.

The new spending exception would be an alternative the current six-month spending exception, which most cities claim is too short, and to the two-year spending exception, which many cities say is too complex and unworkable because of the current tax laws and regulations.

The rules also would make it easier for cities to comply with rebate requirements when they could not qualify for an exemption from them. The rules would allow issuers of fixed-rate bonds, for example, to determine their bond yield for arbitrage purposes at the time of issuance, taking into account reasonably expected redemptions rather than recalculating their bond yields when bonds are called or redeemed early.

The rules would ease yield restriction requirements and help relate them with rebate requirements by allowing some cities to make payments to the IRS to reduce their bond yield instead of yield-restricting their investments.

The proposed rules would eliminate many of the detailed provisions of the existing rules that were aimed of halting specific abuses in the overall bond market. Instead the IRS proposes to replace these provisions with broad anti-abuse rules.

The IRS said that written comments, requests to speak at the hearing, and outlines of oral comments must be received by January 15, and should be sent to: Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Attn: CC:CORP:T:R (FI-36-92), Room 5228, Washington, D.C. 20044.
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Title Annotation:Internal Revenue Service
Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Nov 9, 1992
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