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January 8, 198l MEMORANDUM TO: Finance Officers of Counties and Municipalities ;ROM: J.D. Foust , SUBJECT: Revenue Procedures 80-55 I am writing to draw your attention to a recent ruling by the Internal Revenue Service--"Revenue Procedures 80-55". This proposed administrative ruling, if allowed to stand, could have dramatic effects on your Cash Management Investment program (Time Deposits). In essence, the ruling states that banks will no longer be permitted to deduct for income tax purposes the interest that they pay on negotiated time deposits of state and local government units, if tile collateral securing such deposits is made up of tax-exempt obligations. As a result, you may find some banks unwilling or Unable to issue or renew Certificates of Deposit or, if issued, the rates may well be less than you have normally received. ! would encourage you to check on alternative investment vehicles such as Repurchase Agreements (Repos), Direct U.S. Treasury obligations (such as Treasury Bills, Notes and Bonds), and various U.S. Agency obligations (such as Federal Farm Credit Bank Bonds and Discount Notes, Federal Home Loan Bank Bonds and Discount Notes, Federal National Mortgage Association Debentures and D~scount Notes). Revenue Procedure 80-55 could seriously impair the sale of tax-exempt bonds by the State, municipalities and counties in North Carolina and throughout the country. Such impairment would substantially increase the borrowing costs to the State and the local government units and thereby increase the costs to the taxpayers of North Carolina. Commercial banks are major purchasers of State and municipal bonds. If this ruling stands, one major incentive for banks to purchase state and municipal bonds will be substantially reduced or completely eliminated. ! would further encourage you to ~orrespond with the North Carolina Congressional delegation to express your opposition to this administrative ruling. We are monitoring the effects of this ruling and will try to apprise you of any significant new developments. Please feel free to call us if you have questions or need help with a particular problem caused by the ruling.