[Congressional Record Volume 142, Number 138 (Monday, September 30, 1996)]
[Senate]
[Page S12004]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         ADDITIONAL STATEMENTS

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                      IRS REVENUE PROCEDURE 96-41

 Mr. GRASSLEY. Mr. President, in late July, IRS issued a 
Revenue Procedure that may cost thousands of State and local 
governments and their taxpayers as much as $2 billion. The purpose of 
the IRS action is to recover funds that were diverted from the Treasury 
when local governments were overcharged by investment firms for 
securities they purchased in the course of tax-exempt municipal bond 
refinancings. If these State and local governments had caused the 
overcharges or if they themselves benefitted then the IRS ruling, even 
though costly, might be fair.
  That, however, is not the case. There has been no suggestion 
whatsoever that municipal authorities across America acted unlawfully. 
Instead, as expressed by the president of the League of Cities in a 
recent letter to Treasury Secretary Rubin, ``it appears that the IRS 
understands that cities are not at fault, but rather the IRS wants to 
use cities to go after the underwriters who overcharged us.''
  In Iowa alone the IRS ruling could cost taxpayers more than $1.5 
million. For other States the totals run even higher. In California, 
for example, Rev. Proc. 96-41 could require State and local governments 
to pay as much as $200 million to the IRS.
  If, as the IRS suggests, underwriters and investment bankers were 
responsible for use of ``a valuation method that results in prices * * 
* that exceed fair market value,'' it is those underwriters and 
investment bankers who should repay the Treasury, not towns, cities, 
State universities, school districts, transportation systems and 
utility authorities. Indeed, by some estimates, according to the New 
York Times: ``underwriters may have earned some $2 billion to $3 
billion of illegal profits.''
  Fortunately, under the False Claims Act, the Government has the 
ability to proceed directly against any party which causes financial 
loss to the Treasury and recover treble damages plus penalties. The 
False Claims Act may be helpful in the yield burning context.
  Ten years ago, President Reagan signed the 1986 amendments to the 
False Claims Act into law. As the principal sponsor of the 1986 
amendments, my purpose was to strengthen and revitalize the Justice 
Department's efforts to fight fraud against the Government wherever it 
occurs. Since then, false claims recoveries to the Treasury have 
totaled more than $1.3 billion.
  While the statute has been applied most often in the context of 
Federal defense spending and federally funded health insurance 
programs, with the narrow exception of income tax cases, the act allows 
the Government to recover treble damages and penalties against anyone 
who defrauds the Treasury. If the overcharges described by the IRS 
occurred, the U.S. Treasury may have sustained substantial losses as it 
essentially paid unlawful profits to those who sold the overpriced 
securities. If such losses occurred, the False Claims Act offers an 
ideal remedy.
  For these reasons, I intend to write to Attorney General Reno and 
urge that the Department of Justice investigate the circumstances 
underlying the IRS action, and that if so warranted, the Department 
then seek to pursue all remedies against any party which damaged the 
Government by overpricing securities sold in connection with municipal 
bond refinancings. I will also write to IRS Commissioner Margaret 
Richardson to indicate my concern that the IRS is seeking to make local 
governments the primary target for repayment of any sums that were lost 
by the Government as a result of overcharges for escrow 
securities.

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