INSTITUTE LETTER ON PROPOSED JUDICIAL REVIEW OF IRS DETERMINATIONS REGARDING TAX-EXEMPT STATUS OF MUNICIPAL BONDS (DELETED 6/17/1998)

1 See Institute Memorandum to Tax Committee No. 1-98, dated January 8, 1998. [10031] June 17, 1998 TO: TAX COMMITTEE No. 22-98 UNIT INVESTMENT TRUST COMMITTEE No. 19-98 RE: LEGISLATIVE PROPOSAL FOR JUDICIAL REVIEW OF IRS DETERMINATION THAT MUNICIPAL BOND IS TAXABLE _____________________________________________________________________________ As you may know, the Internal Revenue Service has been examining municipal bonds to ascertain whether, in the IRS’ view, they meet the requirements for tax-exempt status.1 In at least one situation in which IRS determined that municipal bonds were taxable, the IRS requested that a municipal bond fund provide its shareholders and the IRS with information regarding amounts received by the fund’s shareholders with respect to the bonds. This information was requested for all years for which collection of tax on income paid to the fund’s shareholders was not prevented by the three-year statute of limitations. Earlier this year, the Senate included in a bill to “restructure” the IRS a provision that would permit an issuer to seek judicial review of an adverse IRS determination regarding the tax-exempt status of its bonds. Specifically, the bill would (1) permit an issuer to file in the U.S. Tax Court a declaratory judgment action regarding the tax-exempt status of the bonds; (2) suspend (or “toll”) the statute of limitations with respect to the collection of any tax on this income during the period that the lawsuit is pending; and (3) permit bondholders to participate (or “intervene”) in the declaratory judgment action. As we discussed at the recent Tax Committee meeting, the Institute has advised the issuer community that we support issuers’ efforts to resolve their differences with IRS regarding the tax- exempt status of municipal bonds without impacting bondholders. Consistent with that position, the Institute supports the issuer community in its opposition to the portion of the declaratory judgment provision that would permit bondholders to intervene in the Tax Court proceeding. The attached letter to the National Association of Bond Lawyers, which has coordinated the issuer community’s effort, notes that our position is based upon an understanding that elimination of the right to intervene would not prevent (or “collaterally estop”) each bondholder from litigating separately his or her tax liability with respect to income on the bonds. Keith D. Lawson Senior Counsel Attachment