NABL Reiterates Request to Lower User Fee for Bond Letter Rulings

March 4, 2020

Charles P. Rettig
Commissioner
Internal Revenue Service
U.S. Department of the Treasury
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Supplemental Letter Relating to User Fee Charges for State and Local Governments

Dear Commissioner Rettig,

The National Association of Bond Lawyers (NABL) respectfully submits this supplemental letter for consideration by the Internal Revenue Service with respect to user fee charges to state and local governments for private letter rulings related to tax-advantaged bonds.

These supplemental comments were prepared by an ad hoc task force comprising the individuals listed on Appendix A and were approved by the NABL Board of Directors.

If NABL can provide further assistance, please do not hesitate to contact Jessica Giroux, Director of Governmental Affairs, in our Washington DC office, at (202) 503-3290 or at jgiroux@nabl.org.

Sincerely,

Richard J. Moore
President, National Association of Bond Lawyers
San Francisco, CA

CC:
Allyson Belsome, Senior Manager, Tax-Exempt Bonds, Internal Revenue Service
Michael J. Desmond, Chief Counsel, Internal Revenue Service
Ursula S. Gillis, Chief Financial Officer, Internal Revenue Service
Helen M. Hubbard, Associate Chief Counsel, Financial Institutions and Products, Internal Revenue Service
Timothy Jones, Senior Counsel, Branch 5, Internal Revenue Service
Tamera Ripperda, Commissioner, Tax Exempt and Government Entities Division, Internal Revenue Service
Johanna Som de Cerff, Acting Branch Chief of Branch 5, Financial Institutions and Products, Internal Revenue Service
Kathryn Zuba, Associate Chief Counsel, Procedure and Administration, Internal Revenue Service

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On November 4, 2019, the National Association of Bond Lawyers (NABL) submitted a letter to Commissioner Rettig (the “November Letter”) requesting that the IRS significantly reduce the $30,000 user fee charged to state and local governments (Issuers) for private letter rulings (PLRs) relating to tax-advantaged bonds. A copy of the November Letter is attached hereto. Thereafter, representatives of the IRS Office of Chief Counsel provided NABL with the opportunity to refine its request taking into account the following considerations: 1) user fees should be based on an identified category of taxpayer and not particular Internal Revenue Code sections, 2) whether there is a rationale for providing a tiered approach to user fees for the identified category of taxpayer, and 3) whether the rationale for providing reduced user fees could apply to any other category of taxpayer. This submission modifies and supplements our November Letter to address these matters.

Governmental Entities Represent an Identified Category of Users that Merit a Reduced User Fee

Revenue Procedure 2020-1 (which applies to PLRs for tax-advantaged bonds) provides a reduced user fee regime for governmental entities having operating income below certain thresholds. This regime applies regardless of the issue raised; all requests from governmental entities under that revenue procedure are subject to the same regime. NABL's November Letter recommended reducing user fees for Issuers seeking a PLR with respect to tax-advantaged bonds. While that request reflected the particular interests of NABL members and the special role of PLRs with respect to tax-advantaged bonds, it was not intended to suggest that governmental entity PLR requests outside the scope of NABL's request should remain subject to the current regime; the letter simply did not address that point. In fact, many of the arguments we raised in the November Letter apply equally to all PLR requests from governmental entities submitting a ruling request.

In our November Letter, we recommended that in setting the user fees for Issuers, the IRS should consider the unique relationship between the Federal government and state and local governments; a relationship that has been recognized since the Constitution was adopted. This special relationship, including special provisions applicable to state and local governments in the Constitution, federal statutes, and executive orders, is discussed in detail in our November Letter. We also recommended that applying the factors the IRS considers in setting user fees, the $30,000 user fee as it applies to Issuers merits reconsideration. As discussed further below, state and local governments commonly operate with little, if any, positive margin between revenues and expenses. Thus, the $30,000 fee places a significant, and in some cases insurmountable, burden on an Issuer wishing to obtain a PLR. The current user fee (i) negatively impacts an Issuer's voluntary compliance, the IRS mission, and an Issuer's taxpayer burdens and rights, and (ii) appears to have resulted in Issuers seeking fewer PLRs. Because all governmental entities generally face the same financial constraints and should receive the same deference because of their unique relationship vis-à-vis the Federal government, these same points should apply to all PLR requests from governmental entities. Accordingly, NABL believes that the currently identified category of governmental entities as defined in Revenue Procedure 2020-1 is appropriate and recommends that the proposal set forth in the November Letter, as modified herein, apply to all PLR requests from such governmental entities.

Providing a Tiered Approach to User Fees

A. A Tiered Approach Based on Revenues is Not Well Suited to Government Entities

The current reduced user fee regime falls short in how it defines those governmental entities that merit a lower user fee, resulting in most governmental entities being subject to the $30,000 user fee. The current system bases the user fee on annual operating revenue. Presumably the theory is that entities with more annual operating revenue should be able to more easily afford the user fee. The problem with this approach and with any other approach that attempts to measure a governmental entity's revenues or net income is that it does not take into account the fundamental nature of government operations. The revenues that a government generates are obligated or required for public services. Government entities that receive significant revenues are required to provide significant public services, frequently leaving them in a deficit situation. For example, it has been reported that forty states, and sixty-three of the most populous seventy-five cities, do not have enough money to pay all of their bills. Truth in Accounting (TIA) third annual, 2019 Financial State of the Cities and tenth annual, Financial State of the States 2019.

NABL recommends that the user fee for governmental entities reflect the general financial position of governmental entities; that is, that they are entities with no or very limited uncommitted income.¹ For this reason, and to reflect the fact that there is a relatively small percentage of governmental entities that have any positive net revenue, NABL recommends that the user fee for governmental entities be set no higher than $7,600, the fee currently applicable to governmental entities with annual operating revenues of between $250,000 and $1 million.

B. A Possible Tiered Approach

NABL believes that a single user fee of $7,600 for all governmental entity PLR requests would provide for the simplest processing of PLR requests and best recognize the realities of governmental entities' finances. Further, because a measure of revenues or net income is an inappropriate method for determining user fees in this context, it is difficult to arrive at a practical and effective basis on which to set a second, higher tier that would apply universally to PLR requests from governmental entities. Nevertheless, in light of your invitation to suggest a tiered approach, NABL offers the following.

One basis for setting a second, higher user fee is a measurement of the risk of loss of income tax revenue to the Treasury (referred to as “tax risk” herein). That is, when there is sufficient uncertainty about the tax position and the amount at stake is significant, a higher user fee may be justified. For governmental obligations, such a risk may be measured by the size of the obligation that would be impacted by the proposed transaction. For tax-exempt and other tax-advantaged obligations, NABL believes the tax risk is significant enough to merit the current $30,000 user fee when the size of the obligation that would be impacted by the legal issue(s) raised if the PLR request exceeds $500,000,000. If this approach were to be adopted, NABL recommends the following rules to implement such a tiered approach:

Stated simply, the user fee for governmental entities would generally be $7,600. The user fee would be increased to $30,000 if the PLR relates to an issue of obligations or prospective obligations of a governmental entity, and the size of such issue exceeds $500,000,000, determined (i) with respect to prospective issues, based on the reasonably expected size of the issue, or (ii) with respect to one or more outstanding issues of obligations, the issue to which the PLR request applies with the largest outstanding principal amount.

The Rationale for Setting a Reduced User Fee for Governmental Entities Would Apply Only to Governmental Entities

As noted above, the rationale for providing special user fees rests on the special relationship that exists between the Federal government and other governmental entities and the inability to measure financial constraints because of the unique nature of these other governmental entities. These combined considerations do not apply to other taxpayers. Accordingly, the rationale that NABL suggests should not necessarily apply to other categories of taxpayers.

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APPENDIX A
NABL AD HOC TASKFORCE MEMBERS

Rebecca Harrigal, Chair
Greenberg Traurig LLP
1717 Arch Street Suite 400
Philadelphia, PA 19103
Telephone: 215-988-7836
Email: harrigalr@gtlaw.com

Michael G. Bailey
Foley & Lardner LLP
321 N Clark St., Suite 2800
Chicago, Illinois 60654-4504
Telephone: 312-832-4504
Email: mbailey@foley.com

Johnny Hutchinson
Squire Patton Boggs (US) LLP
6200 Chase Tower
600 Travis Street Houston, TX 77002-3009
Telephone: 713-437-5603
Email: johnny.hutchinson@squirepb.com

Victoria Ozimek
Bracewell LLP
111 Congress Ave Ste 2300
Austin, TX 78701-4061
Telephone: 512-542-2103
Email: victoria.ozimek@bracewell.com

Christie Martin
Mintz Levin Cohn Ferris Glovsky and Popeo P.C.
1 Financial Center
Boston, MA 02111-2621
Telephone: 617-348-1769
Email: clmartin@mintz.com

Richard Moore
Orrick, Herrington & Sutcliffe LLP 405 Howard St
San Francisco, CA 94105-2680
Telephone: 415-773-5938
Email: rmoore@orrick.com