Attorney Comments on Record Retention Standards for Tax-Exempt Family Housing Bonds

Dear Sir or Madame:

In response to Internal Revenue Service (the "Service") Notice 2006-63, Kutak Rock LLP is submitting the attached comments for developing record retention standards for tax-exempt bonds.

Please contact the undersigned if you have any comments or questions.

Dear Sir or Madame:

In response to Internal Revenue Service (the "Service") Notice 2006-63, Kutak Rock LLP is submitting the following comments for developing record retention standards for tax-exempt bonds.

In I.R.B. 2006-29, you requested comments regarding record retention with respect to Tax Exempt Bonds issued pursuant to the Code. For simplified review, I will direct my comments retention of records relating to Multifamily Housing Bonds.

Pursuant to Section 6001 of the Code, each person liable for tax or for the collection thereof is required to retain certain records. Broadly read, the Regulations impose the requirement to retain records on the Conduit Issuer of Multifamily Housing Bonds. There are two parties that the IRS could rationally look to for records relating to the tax exempt status of Multifamily Housing Bonds. The Issuer and the Owner of the Project are both required to file certain returns related to the Bonds. Further, in most transactions, the Bond Documents require the Issuer and the Owner to gather certain information regarding the tax exempt status of the Bonds.

On the IRS web page, the IRS supplies examples of the records they view as material to tax exempt Multifamily Bond transactions. The first example is documentation evidencing that the Project is not used on a transient basis. This documentation is easily provided by the Owner in the form of Lease Agreements. However, the more difficult question is how long is the Owner required to keep such lease agreements. Some may argue that to ensure compliance with Regulations that all Lease Agreements must be maintained until the Bonds have been paid and the statute of limitations expires. Such a reading requires that the Owner maintain hundreds, possibly thousands of Lease Agreements for years after they have expired resulting in significant storage costs for physical or electronic storage and great inefficiency. Not only will a particular rental unit have multiple leases for the same carryover tenant, but also for successor tenants. A more reasonable reading would require the Owner to maintain all Leases during their current term and for one year after termination.

The pervasive question in the first example is at what point does document retention become overly burdensome and create significant cost for the holder? That question becomes even more important in a transaction that has been refunded. The current position that documents must be maintained for the life of the original transaction until all refunded bonds have been paid and the statute of limitations has passed is unreasonably burdensome and may weigh heavily in determining whether tax exempt Bonds are an efficient financing vehicle. Clearly, that cannot be the intent of the IRS. More likely, the requirement to maintain documents is intended to ensure that agents have access to information necessary to determine whether Bonds have been issued and managed in accordance with the Code. The following comments have been weighed to ensure that information is available but at a reasonable cost. Each table below addresses a specific period for the Project and suggests appropriate documents to maintain and the appropriate period of maintenance. After each table a specific justification relevant to the table is provided.

                                ISSUANCE

                                 TENANCY

An annual certification from the Owner to the Issuer places the onus for gathering and maintaining the information on the Owner. The Owner provides a benefit to the tenant and is more likely to be successful in gathering the information. Further, if a project is transferred during the term of the Regulatory Agreement the Owner should be required to transfer the Tenancy Records to the Purchaser.

In addition, where other Federal or State programs require specific records to be retained and the interest of the regulating body is similar to or aligned with the IRS, it would be reasonable for the IRS to accept the retention standard applicable to the other Federal or State program. For example, where HUD requires certain documentation for Section 8 programs and commits resources to determining the accuracy of the documentation it would be efficient for the IRS to accept Section 8 documentation and require that the documentation be maintained for so long as HUD requires it.

Dear Sir or Madame:

In response to Internal Revenue Service (the "Service") Notice 2006-63, Kutak Rock LLP is submitting the following comments for developing record retention standards for tax-exempt single-family mortgage revenue bond programs.

Many issuers of mortgage revenue bonds have billions of dollars of such bonds outstanding, the proceeds of which have collectively financed millions of mortgage loans. As with all mortgage loans, many of the mortgage loans financed with tax-exempt bonds are prepaid and refinanced early on as the lives and circumstances of the mortgagors change. Despite the fact that issuers customarily finance long-term mortgages, the average life of such mortgage loans is often much shorter. As the mortgage loans are refinanced and/or prepaid, the prepayment proceeds are either recycled by the issuer into new mortgage loans or used by the issuer to refund the underlying mortgage revenue bonds in order to lower borrowing costs. These issuers currently maintain voluminous files with respect to each mortgage financed under their single-family mortgage revenue bond programs in order to establish compliance with the requirements under Section 143 of the Internal Revenue Code (the "Code"). In contrast, mortgage servicers operating outside the single-family mortgage revenue bond universe generally only retain a hard copy of the note evidencing the mortgage, maintaining only electronic copies of any other documents.

Not only are the large amount and maintenance of records causes of concern for issuers, but the content of such records has become problematic as well. The proliferation of federal and state privacy laws has further complicated record retention procedures as the information that issuers must maintain contains precisely the type of personal information that is governed by such laws. To complicate these matters further, issuers are subject to sunshine laws requiring them to make their inner workings transparent.

In light of these concerns and current record retention policies of issuers of mortgage revenue bonds, it is important that the Service offer clear guidance as to the type and amount of information that is sufficient to establish compliance under Section 143 of the Code. While the aim of these standards should be to maintain the integrity of single-family mortgage revenue bond programs by ensuring that proceeds of mortgage revenue bonds are used for their intended purpose, the standards should also minimize the administrative burden of issuers of mortgage revenue bonds by streamlining the record retention requirements and deleting duplicative, unnecessary and over-burdensome requirements. The regulations under Section 143 of the Code have already established such a tone through their good faith compliance and safe harbor provisions such as Sections 6a. 103A-2(c), 6a.103A-2(d)(2) and 6a.103A-2(h)(3). With these general concerns in mind, we recommend that the Service adopt the following standards with respect to record retention requirements of issuers of mortgage revenue bonds:

1. Section 143 of the Code contains several requirements with respect to any mortgagor who borrows under a single-family mortgage revenue bond program as well as any residence financed under such program. In order to establish compliance with these requirements, the issuer must maintain evidence that (1) the residence financed is the principal residence of the mortgagor, (2) the mortgagor is a first-time homebuyer, (3) the purchase price of the residence is within the applicable limit, (4) the income of the mortgagor is within the applicable limit, (5) the mortgage is a new mortgage, and (6) the mortgagor has been notified of the potential recapture tax. Thus, issuers currently maintain files evidencing that these requirements have been met with respect to each mortgage loan under its single-family mortgage revenue bond program. In addition, because of these requirements, many mortgage servicers discourage prospective mortgagors from using bond-financed mortgage financing. In order to allow issuers to streamline their record retention policies and better compete with conventional lenders, the Service should adopt the following guidelines:

3. The Service should adopt the clear position that an issuer of single-family mortgage revenue bonds may contractually assign the responsibilities for record retention to third parties that are better equipped to handle such responsibilities, such as lenders participating in the issuer's single-family mortgage revenue bond program, provided such third parties agree that the Service will have access to any relevant records should an issue be examined.

4. The Service should provide guidance as to what an issuer, or any other party responsible for maintaining records evidencing compliance with the Code and the Federal Tax Regulations, must do to reconstruct records in the event that such records are lost due to circumstances beyond the control of the issuer or such other party. For example, in the context of deductions of entertainment expenses, Section 1.274-5T(c)(5) of the Temporary Federal Tax Regulations provides that a taxpayer that has lost records due to circumstances beyond his/her control, such as by fire, flood, earthquake, or other casualty, has the right to substantiate a deduction by reasonable reconstruction of his/her expenditures or use. The Service should clarify that such relief extends to single-family mortgage revenue bond issuers. In addition, the Service has provided guidance to Indian Tribal Governments through IRS Publication 4268 as to steps such entities might take in order to reconstruct records. Similar guidance with respect to single-family mortgage revenue bond issuers would be helpful.

5. Section 143(h)(1) of the Code requires that at least 20% of the proceeds of any mortgage revenue bond issue must be made available for financing of residences in targeted areas during the first year after financing is first made available. The Service has stated in its publication entitled "Tax Exempt Bond FAQs regarding Record Retention Requirements" that documents evidencing compliance with this requirement must be maintained, but the publication does not provide details as to what such documentation would be. The Service should provide guidance as to what documentation issuers should retain to evidence compliance with this Targeted Area requirement. For example, documentary evidence that the issuer was continuously purchasing loans in targeted areas throughout the requisite one-year period should suffice to prove availability in such targeted areas. In addition, because Section 143(h)(1) of the Code does limit this requirement to the first year during which financing is available, it should be sufficient for an issuer to retain such documentary evidence for only four years following the date the proceeds are first made available.

6. The Service should adopt the position that electronic records and reports that are created in accordance with current standards provided by the Service are sufficient to meet the record retention requirements. In the publication noted in Item 5 above, the Service states that electronic records should meet the requirements of Rev. Proc. 97-22. One of the requirements of Rev. Proc. 97-22 is that the electronic records of the issuer be cross-referenced with its books and records in a manner that provides an audit trail to the source documents. This requirement implies that the issuer may not purge hard copies of such records. We believe that, provided the issuer maintains sufficient security and backup systems and can quickly produce hard copies of any electronically-stored documents, the Service should adopt the position that issuers no longer have to maintain hard copies of these records. In addition, the Service should make clear that the guidance provided with respect to lost records that are hard copies should also apply to electronic copies.