4.81.6  Closing Agreements

Manual Transmittal

August 05, 2011

Purpose

(1) This transmits revised IRM 4.81.6, Tax Exempt Bonds Closing Agreements

Material Changes

(1) The procedures relating to closing agreements for Tax Exempt Bonds have been updated.

Effect on Other Documents

This supersedes IRM 4.81.6 dated November 1, 2009

Audience

TE/GE (Tax Exempt Bonds)

Effective Date

(08-05-2011)

Clifford J. Gannett
Director, Tax Exempt Bonds

4.81.6.1  (08-05-2011)
Overview

  1. References to "tax-advantaged bonds" in this section 4.81.6 are references to tax-exempt bonds, tax credit bonds, and direct pay bonds. References to "tax-exempt bonds" are to state or local bonds issued pursuant to section 103 of the Internal Revenue Code (the "Code" or "IRC" ) the interest on which is not included in the gross income of the holders thereof. References to "tax credit bonds" are references to: 1) qualified tax credit bonds issued pursuant to sections 54, 54A (and either section 54B, 54C, 54D, 54E, or 54F), 1397E and 1400N(l) of the Code; and 2) build America bonds issued pursuant to sections 54AA(d), for which holders of such bonds are allowed credits against taxes with respect to a portion of the interest on such bonds. References to "direct pay bonds" are references to: 1) specified tax credit bonds issued pursuant to sections 6431(f)(3) and 54A(d) (and either section 54C, 54D, 54E or 54F) of the Code; 2) build America bonds issued pursuant to section 54AA(g)(2) of the Code; and, 3) recovery zone economic development bonds issued pursuant to section 1400U-2 of the Code. The reference to the "tax-advantaged" status of a bond means that the bond is qualified to receive the tax benefit associated with its status.

  2. With respect to violations applicable to tax-advantaged bonds, it is the continuing policy of the Internal Revenue Service ("IRS" ) and its office of Tax Exempt Bonds ("TEB" ) to attempt to resolve such violations of the federal tax law at the transaction level and to obtain resolution of such violations (including payment of any settlement amounts) from the appropriate party to the transaction to ensure that interest income received by the holders of tax-exempt bonds continues to be exempt for federal income tax purposes and that the holders of tax credit bonds continue to be allowed the tax credit against the taxpayer’s federal income tax. Holders of tax-exempt bonds and tax credit bonds, while ultimately liable for any tax liability, are generally innocent parties. As such, the IRS attempts to resolve violations with the issuer (or other transaction participants) without taxing bondholders or reducing their tax credits. With respect to direct pay bonds, where the refundable tax credit is paid directly to the issuer, the IRS also attempts to resolve violations with the issuer at the transaction level.

  3. This section sets forth procedures under which the IRS will enter into closing agreements with issuers and other parties to tax-advantaged bond transactions with respect to the application of federal tax law requirements under the Code and corresponding Income Tax Regulations (the "Regulations" or "ITR" ) in order to resolve compliance failures and preserve the tax-advantaged status of the bonds. These procedures seek to ensure consistency of treatment and to encourage voluntary compliance throughout the municipal bond industry.

  4. TEB may execute a closing agreement to resolve specific matters identified in an examination or voluntary compliance case. TEB’s voluntary compliance programs include the closing agreement programs described in Notice 2008-31, Tax Exempt Bonds Voluntary Closing Agreement Program, and Rev. Proc. 97-15, Program for Closing Agreements for Change in Use. See also IRM 7.2.3, Tax Exempt Bonds Voluntary Closing Agreement Program.

4.81.6.2  (08-05-2011)
Authority

  1. Pursuant to IRC section 7121 and the corresponding Regulations, the IRS may enter into and approve a written closing agreement with any person relating to the liability of such person (or the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period. This authority includes conclusively resolving any specific matters jeopardizing the tax-advantaged status of bonds.

  2. A closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of such an agreement.

  3. Pursuant to Delegation Order Number 97 located in IRM section 1.2.2, Delegations of Authority, the Commissioner delegates to the Commissioner, Tax Exempt and Government Entities ("TE/GE" ), the authority to enter into and approve written closing agreements in cases under TE/GE’s jurisdiction. This authority is re-delegated to the Director, Tax Exempt Bonds, with respect to the execution of a closing agreement relating to any specific matter concerning a section of the Code which is under the jurisdiction of the Director, Tax Exempt Bonds, and to the Manager, Tax Exempt Bonds Compliance & Program Management, with respect to the execution of a closing agreement relating to any specific matter under the jurisdiction of TEB’s voluntary compliance programs.

  4. Typically, TEB will enter into a single closing agreement covering all identified specific matters and all known tax periods. However, TEB may enter into a series of closing agreements relating to a single tax-advantaged bond transaction when appropriate. For example, a subsequent closing agreement may be necessary to resolve a separate specific matter not previously identified at the time of the prior closing agreement. Alternatively, a subsequent closing agreement may be necessary to cover additional tax periods or additional amounts of bonds comprising the bond issue which were not covered in the prior closing agreement.

4.81.6.3  (08-05-2011)
Finality of Closing Agreements

  1. Closing agreements are final and conclusive and may not, in the absence of fraud, malfeasance, or misrepresentation of material fact, be reopened as to matters agreed upon or be modified by an officer, employee or agent of the United States.

  2. Closing agreements are subject to sections of the Code that expressly provide that effect be given to their provisions (including any stated exception for IRC section 7122) notwithstanding any other law or rule of law.

  3. Closing agreements with respect to a taxable period(s) ending subsequent to the date of the agreement are subject to any change in, or modification of, the law enacted subsequent to the date of the agreement and made applicable to that taxable period(s).

4.81.6.4  (08-05-2011)
Negotiating and Drafting of Closing Agreements

  1. Issuers may desire to enter into a closing agreement with the IRS to preserve the tax-advantaged status of their bonds. Issuers may be joined by other parties to a tax-advantaged bond transaction in entering into a closing agreement.

  2. Closing agreements are entered into with the issuer. In certain cases, other parties to the bond transaction may also participate in the negotiations and jointly execute the agreement. The issuer must complete a Form 8821, Tax Information Authorization, to allow participation by parties who have not been designated as a representative under Form 2848, Power of Attorney and Declaration of Representative. A conduit borrower for which the issuer has completed Form 8821 may participate in the negotiations and jointly execute the agreement. In such a case the conduit borrower may designate its own representative under Form 2848.

  3. With respect to an open examination case, closing agreement negotiations may be initiated at any time by either the issuer or TEB. The agent or group manager will, in most cases, negotiate the terms of the closing agreement. In some cases, the agent and group manager may desire to seek assistance from Area Counsel and CPM in the negotiating or drafting of closing agreements.

  4. With respect to voluntary compliance cases, the specialist will, in most cases, negotiate the terms of the closing agreement. In some cases, the specialist and group manager may desire to seek assistance from Area Counsel in the negotiating or drafting of closing agreements.

  5. In negotiating the terms of a closing agreement, the agent, group manager, or specialist will ensure that the terms:

    • are fair and equitable;

    • promote voluntary compliance and encourage due diligence in complying with all applicable federal tax laws; and

    • recognize the difference between the enforcement and voluntary compliance programs established by the IRS.

  6. Closing agreements will generally not address any potential IRC section 6700 promoter penalty liabilities for any party to the tax-advantaged bond transaction unless the agreement is in resolution of an open IRC section 6700 examination case on a party to the agreement. An IRC section 6700 examination case is opened with respect to a taxpayer as of the date written notification from TEB of an impending 6700 examination has been sent to that taxpayer.

    1. Upon the completion of an examination of a bond issue, a closing agreement resolving all identified specific matters relating to that issue may also address any potential IRC section 6700 promoter penalty liability of the issuer when appropriate.

    2. Closing agreements executed under TEB’s voluntary compliance programs will generally not address any potential IRC section 6700 promoter penalty liabilities under any circumstance.

  7. The TEB Senior Management Team, which consists of the Director, Tax Exempt Bonds, the Manager, Field Operations, and the Manager, Compliance & Program Management, is the TEB Closing Agreement Committee. Closing agreements covering specific matters will be drafted by the agent, group manager, or specialist following approval from the TEB Closing Agreement Committee. The specific matter(s) and resolution terms relating to the compliance failure should be clearly stated such that the agreement, read on its own, has only one reasonable interpretation as to the specific matter being resolved pursuant thereto.

  8. The agent, group manager, or specialist should consider the appropriateness of each closing agreement term described under IRM section 4.81.6.5. The agreement should conclusively address all issues relating to the resolution terms including, but not limited to, the deductibility of any closing agreement amount paid to the United States, any denial of interest deductions under IRC section 150(b) of the Code, and any depreciation adjustments under IRC section 168.

  9. Prior to communicating the acceptance of any proposed settlement terms to be included in a closing agreement, the agent, group manager, or specialist must obtain approval from the TEB Closing Agreement Committee of those proposed settlement terms. Once approval is obtained, the agent, group manager, or specialist may proceed with the finalization and execution of the closing agreement.

    1. The TEB Closing Agreement Committee must be provided with a briefing memorandum summarizing the proposed settlement terms for review and approval. The summary should include discussions of the issue(s) (including the principal facts and legal analysis), the proposed settlement terms, a description of the settlement amount methodology (if any), and identification of the bonds to be redeemed or defeased (if any). For examination cases, the proposed settlement terms will be presented by the Manager, Field Operations. For voluntary compliance cases, the proposed settlement terms will be presented by the Manager, Compliance & Program Management.

    2. After approval of the proposed settlement terms by the Closing Agreement Committee, only a significant change to the proposed settlement terms requires confirmation approval from the TEB Closing Agreement Committee prior to execution of the closing agreement.

    3. Any closing agreements that require the signature of the TEB Director must be submitted to the TEB Director for review and clearance prior to being sent to the issuer for signature. Any closing agreements that require the signature of the Manager, Compliance & Program Management must be submitted for review and clearance in accordance with IRM 7.2.3.2, Tax Exempt Bonds Voluntary Closing Agreement Program.

4.81.6.5  (08-05-2011)
Closing Agreement Terms

  1. Closing agreements will be prepared by TEB. General terms available to resolve specific matters include those listed in this section.

  2. In determining the resolution terms to be included in any closing agreement, the agent, group manager, or specialist will consider the facts and circumstances surrounding the compliance failure as well as the following case resolution factors: 1) the good faith and due diligence exercised by the transaction parties; 2) the total taxpayer exposure (as defined in section 4.81.6.5.3.1 hereof) of the bondholders or the credit maintenance amount, (as defined in section 4.81.6.5.3.2 hereof), as applicable; 3) the cooperation of the transaction parties with TEB; 4) whether the compliance failure was inadvertent or a de minimus part of the transaction; 5) whether the issuer had implemented appropriate written tax compliance procedures; and 6) the economic benefit derived by the issuer or other parties through the consummation of the violation.

  3. TEB will evaluate the significance of a failure of any signatory to a closing agreement to satisfy the terms of that agreement. TEB will generally determine that any failure to comply with a material term to the closing agreement constitutes a new deliberate action or intentional act within the meaning of the Regulations and constitutes a new violation with respect to the bond issue. As provided in section 4.81.6.2(4), a subsequent closing agreement may be necessary to resolve a new violation arising after the execution of a closing agreement.

4.81.6.5.1  (08-05-2011)
Bond Redemption

  1. A prerequisite to entering a closing agreement may be that the issuer redeem and retire or purchase and cancel the bonds of the issue at the earliest possible date. If the required redemption cannot be completed prior to the closing agreement execution date, the closing agreement shall specify the date on which the redemption will occur, require the issuer to call the bonds for redemption on that date, and require the issuer to provide the bondholders with an irrevocable call notice prior to the closing agreement execution date. For this purpose, the irrevocable call notice must include the specific date on which the redemption will occur. Documentation of this call notice must be provided to TEB prior to the closing agreement execution date.

  2. Generally, if the bonds are not to be redeemed and retired or purchased and cancelled prior to the date on which the closing agreement is executed by TEB, an irrevocable defeasance escrow must be established to provide for the payment of the bonds to the call date. The issuer will provide written notice to TEB of the establishment of the irrevocable defeasance escrow prior to the execution date of the closing agreement. The issuer’s statement, made under penalty of perjury, that the bonds have been irrevocably defeased is sufficient written notice.

4.81.6.5.2  (08-05-2011)
Alternative Use

  1. Closing agreement terms may include a requirement that the issuer expend any disposition proceeds for an alternative qualifying use. For purposes of this requirement, use of disposition proceeds to redeem the bonds is a qualifying use.

  2. Closing agreement terms may include a requirement that the bond-financed property be used in furtherance of an alternative qualifying use.

4.81.6.5.3  (08-05-2011)
Closing Agreement Amount

  1. Generally, a closing agreement settlement amount relating to a tax-exempt bond issue is based on 100% of the present value of the taxpayer exposure of the bond issue. However, as appropriate, closing agreement amounts may also be based upon the present value of an alternative minimum tax adjustment, IRC section 150(b) adjustments, IRC section 168(g) adjustments, any excessive arbitrage profits, or IRC section 6700 penalties.

  2. Generally, a closing agreement settlement amount relating to a tax credit bond issue or direct pay bond issue will be based on 100% of the present value of the credit maintenance amount. With respect to direct pay bond issues, an issuer and TEB may agree to modify future allowable credit payments to shorten the credit adjustment period resulting in a reduced credit maintenance amount required to be paid under the closing agreement, as appropriate under the facts and circumstances.

  3. In certain cases, a closing agreement settlement amount may be based on a computation of the fee amount. Generally, a fee amount is only appropriate when described in a closing agreement program provided in the IRM or published guidance.

  4. In determining an appropriate closing agreement amount, TEB will take into account actions taken by the issuer (or the conduit borrower when applicable) to implement written post-issuance compliance procedures and to exercise post-issuance reasonable due diligence and compliance monitoring.

4.81.6.5.3.1  (08-05-2011)
Computation of Taxpayer Exposure

  1. Taxpayer exposure represents the estimated amount of tax liability the United States would collect from the bondholders if the income realized from the bonds they held were included in gross income during the calendar year(s) covered under the closing agreement.

  2. The taxpayer exposure is the greater of $1,000 or the amount computed as follows:

    1. Step 1. Determine the period to be covered under the closing agreement by identifying each past calendar year (as determined below) and each future calendar year during which the bonds will remain outstanding. For this purpose, bonds that have been called for redemption and defeased by a defeasance escrow are considered outstanding until their date of redemption. For this purpose, past calendar years will generally include any calendar year for which a tax payment would be due within three years of the date the compliance failure was identified by TEB. A tax payment with respect to a calendar year is due on the April 15th following the conclusion of that calendar year. For examination purposes, TEB identifies a compliance failure on the date it provides written notification to the issuer of that identified issue. For voluntary compliance purposes, TEB identifies a compliance failure on the date the issuer submits its voluntary compliance request. The general three year open period may be increased to up to six years when TEB determines that the issuer or its representative has not acted in good faith in resolving the compliance failure.

    2. Step 2. Determine the amount of interest accrued or scheduled to accrue on the bonds in each calendar year within the closing agreement period based on the yield of such bonds. For bonds originally sold at a discount or premium of less than 5%, the actual amount of interest paid or to be paid may be used for this purpose. For variable rate bonds, the interest scheduled to accrue in future years may be determined using the average of the interest rates paid to date, the last interest rate paid on the bonds, or the appropriate fixed swap rate less up to 50 basis points, as appropriate under the facts and circumstances of each case.

    3. Step 3. Multiply each amount determined in Step 2 for each calendar year by the relevant tax percentage. The relevant tax percentage is based on the IRS’s estimate of the average investor’s highest tax bracket. Based on the tax brackets effective at the time this section is published, this estimate will generally equal 29% unless a more accurate assessment of the investor’s actual tax rate is determined.

    4. Step 4. Determine the present value of each amount calculated in Step 3 for each calendar year in accordance with IRM section 4.81.6.5.3.9 by assuming it was due on April 15 in the following calendar year.

    5. Step 5. Determine the sum of the present value amounts determined in Step 4 for all calendar years

4.81.6.5.3.2  (08-05-2011)
Computation of Credit Maintenance Amount

  1. Generally, the credit maintenance amount is applicable to fixed rate tax credit bonds and fixed rate direct pay bonds. With respect to tax credit bonds, the credit maintenance amount is the present value of credit amounts that would have been allowed or allowable on each credit allowance date during the credit adjustment period of the bonds if the violation had not occurred. With respect to direct pay bonds, the credit maintenance amount is the present value of the refundable credits that would have been allowed or are allowable during the credit adjustment period of the bonds, based on the interest rate or rates of the bonds issued, if the violation had not occurred. Closing agreement settlement amounts for variable rate tax credit bonds and variable rate direct pay bonds will be determined based upon the facts and circumstances but will generally follow this computation methodology.

  2. Generally, the credit adjustment period is the period from the date of the violation to the date the bonds are no longer outstanding.

    1. For this purpose, the date of the violation will generally be either the date of the deliberate action, the date of the intentional act, the issue date, or the date another action occurs which jeopardizes the tax-advantaged status of the bonds. However, in no event will the credit adjustment period begin earlier than the issue date of the bonds.

    2. Under certain facts and circumstances relating to direct pay bonds, an issuer and TEB may agree to: (i) shorten the credit adjustment period by treating the direct pay bonds as no longer outstanding as of a specified interest payment date for the bonds; and ii) modify the debt service schedule for the direct pay bonds to take into account such specified date for purposes of determining section 6431 credits payable to the issuer. In addition, the issuer must acknowledge that, following such specified date, it will have no right to request section 6431 credits with respect to any bonds not included in the modified debt service schedule. A closing agreement based in whole or in part on a modified debt service schedule described in this paragraph will require the issuer to file with TEB, in connection with the execution of the closing agreement, an amended Form 8038 Series information return that contains the modified debt service schedule for the bonds.

  3. The credit maintenance amount for tax credit bonds is the greater of $1,000 or the amount computed as follows:

    1. Step 1. Identify the applicable credit adjustment period.

    2. Step 2. Determine the amount of each credit allowance with respect to each credit allowance date occurring during the credit adjustment period in accordance with IRC sections 54(b), 54A(b) (as reduced by 54C(b), 54D(b)), or 54AA(b), as applicable.

    3. Step 3. Determine the present value of each tax credit allowance calculated in Step 2 with respect to credit allowance dates, if any, scheduled after the date of the closing agreement in accordance with IRM section 4.81.6.5.3.9 by assuming that each tax credit will accrue on the applicable credit allowance date.

    4. Step 4. Determine the amount of interest in accordance with IRC section 6621(a)(2) on each amount calculated in Step 2 relating to credit allowance dates that occurred during the credit adjustment period and prior to the date of the closing agreement, by assuming that each tax credit allowance occurred on the applicable credit allowance date.

    5. Step 5. Determine the sum of credit allowances with respect to credit allowance dates that occurred prior to the date of the closing agreement, the interest amounts on credit allowances with respect to credit allowance dates that occurred prior to the date of the closing agreement as determined in Step 4, and the present value of each tax credit allowance calculated with respect to credit allowance dates, if any, scheduled after the date of the closing agreement as determined in Step 3.

  4. The credit maintenance amount for direct pay bonds is the greater of $1,000 or the amount computed as follows:

    1. Step 1. Identify the applicable credit adjustment period.

    2. Step 2. Determine the amount of each interest payment on the bonds scheduled during the credit adjustment period (taking into account scheduled sinking fund payments but without regard to any optional redemption).

    3. Step 3. Multiply each amount determined in Step 2 by the relevant refundable tax credit rate percentage specified in IRC sections 1400U-2 or 6431, as applicable, to determine the refundable credit amount for each interest payment date.

    4. Step 4. Determine the present value of each refundable credit amount calculated in Step 3 with respect to interest payment dates, if any, scheduled after the date of the closing agreement and during the credit adjustment period to the date of the closing agreement in accordance with IRM section 4.81.6.5.3.9 by assuming that each refundable credit amount will be paid on the applicable interest payment date (taking into account scheduled sinking fund payments but without regard to any optional redemption).

    5. Step 5. Determine the amount of interest in accordance with IRC section 6621(a)(2) on each amount calculated in Step 3 with respect to interest payment dates that occurred during the credit adjustment period and prior to the date of the closing agreement, by assuming that each refundable credit amount was paid on the applicable interest payment date.

    6. Step 6. Determine the sum of all refundable credit amounts with respect to interest payment dates that occurred prior to the date of the closing agreement, the interest amounts with respect to refundable credit amounts paid with respect to interest payment dates that occurred prior to the date of the closing agreement as determined in Step 5, and the present value of refundable credit amounts with respect to interest payment dates scheduled after the date of the closing agreement as determined in Step 4.

4.81.6.5.3.3  (08-05-2011)
Computation of Fee Amount

  1. In certain cases the agent, the specialist or group manager may recommend to the Closing Agreement Committee that a settlement should appropriately be conditioned on payment of a fee amount. Generally, a fee amount is only appropriate when described in a formal closing agreement program or in a resolution described under IRM section 7.2.3.4.

  2. The fee amount is the greater of $1,000 or the amount computed using one of the following methodologies:

    1. A dollar amount equal to the par amount of the bonds held by the issuer multiplied by a specified percentage and then multiplied by a number of specified time intervals (e.g., monthly);

    2. The amount required to be paid in connection with a request for a letter ruling, as published annually in the Internal Revenue Bulletin (e.g., the amount for 2011 based on paragraph (a)(3)(c) of Appendix A to Rev. Proc. 2011-1 would be $14,000); or

    3. A dollar amount (e.g., $1,000) multiplied by a number of specified time intervals (e.g., monthly).

4.81.6.5.3.4  (08-05-2011)
Computation of Alternative Minimum Tax Adjustment

  1. In the case of a closing agreement providing that the interest on bonds will not be treated as an item of tax preference for purposes of the alternative minimum tax, the closing agreement amount is equal to an estimate of the federal income tax liability that is not required to be paid by past, present, and future bondholders because of this treatment throughout the closing agreement period.

  2. The alternative minimum tax adjustment is computed as follows:

    1. Step 1. Determine the principal amount of bonds that will be outstanding on January 1 of each calendar year commencing with the calendar year in which the compliance failure occurred and ending with the first calendar year in which the nonqualified bonds will no longer be outstanding.

    2. Step 2. Multiply each amount determined in Step 1 for each calendar year by 0.0014.

    3. Step 3. Determine the present value of each amount determined in Step 2 for each calendar year in accordance with IRM section 4.81.6.5.3.9 by assuming it is paid on April 15 in the following calendar year.

    4. Step 4. Determine the sum of the present value amounts determined in Step 3 for all calendar years.

4.81.6.5.3.5  (08-05-2011)
IRC Section 150(b) Denial of Interest Deduction

  1. In resolution of a compliance failure involving qualified private activity bonds, closing agreement terms may include a requirement that no deduction be allowed for interest on the tax-exempt financing of the bond-financed property which accrues during the nonqualified period.

4.81.6.5.3.6  (08-05-2011)
IRC Section 168(g) Depreciation Deduction

  1. In resolution of a compliance failure involving qualified private activity bonds, closing agreement terms may include an adjustment for the depreciation deduction under IRC section 168(g) for tax-exempt bond-financed property during the nonqualified period.

4.81.6.5.3.7  (08-05-2011)
IRC Section 6700 Penalty

  1. Closing agreement amounts may be based on the application of IRC section 6700 penalties. For purposes of applying this penalty to a tax-advantaged bond transaction, the sale of each bond denomination is treated as a separate activity.

  2. The closing agreement should clearly state that the payment is being made in resolution of an IRC section 6700 examination. The closing agreement should also clearly state whether the closing agreement payment is to be treated as a civil payment or a nondeductible penalty amount.

4.81.6.5.3.8  (08-05-2011)
Excessive Arbitrage Profit

  1. The excessive arbitrage profit is an estimated amount of the economic benefit realized by the issuer or other parties to the transaction in excess of the amount permitted to be realized under the arbitrage yield restriction and rebate rules under IRC section 148 and 54A.

4.81.6.5.3.9  (08-05-2011)
Computation of Present Value

  1. All closing agreement amounts based on past or future tax liabilities or payments must be valued as of the approximate date on which any payment required under the terms of the closing agreement is sent to TEB (the "agreement execution date" ).

  2. The value on the agreement execution date of any portion of a closing agreement amount representing a past tax liability or payment is determined by future valuing that amount using both the applicable underpayment rate(s) under IRC section 6621 as the discount rate and a daily compounding methodology as required under IRC section 6622.

  3. The value on the agreement execution date of any portion of a closing agreement amount representing a future tax liability or payment is determined by present valuing that amount using, as the discount rate, the appropriate short-term, mid-term, or long-term semi-annual compounding applicable federal rate (AFR) in effect on the agreement execution date and for the term from the assumed April 15 tax payment date corresponding to that future tax year (with respect to tax-exempt bonds and tax credit bonds) or the future interest payment date (with respect to direct pay bonds) to the agreement execution date (in accordance with the terms provided in IRC section 1274(d)(1)).

    1. In applying this subparagraph, any tax year whose assumed April 15 tax payment date or interest payment date is later than the agreement execution date is treated as a future tax year.

    2. For example, a closing agreement relating to tax-exempt bonds expected to be executed on January 15, 2012 includes amounts corresponding to future tax years 2011 through 2022. The amounts representing estimated tax payments due on the assumed April 15 tax payment dates for years 2011 through 2014 would be present valued at the short-term AFR; the amounts assumed to be due on the April 15 tax payment dates for years 2015 through 2020 would be present valued at the mid-term AFR; and the amounts assumed to be due on the April 15 tax payment dates for years 2021 and 2022 would be present valued at the long-term AFR. The applicable AFRs in effect on January 15, 2012 would be the rates used in these present value computations.

4.81.6.5.4  (08-05-2011)
No Payment from Tax-Advantaged Bond Proceeds

  1. In general, the issuer should not make any payment under the closing agreement from proceeds of bonds described in IRC sections 103(a), 54A, or 54AA.

  2. This general rule may not always apply to the resolution of compliance failures with the arbitrage yield restriction and rebate requirements under IRC section 148.

4.81.6.5.5  (08-05-2011)
News Release

  1. As part of the closing agreement process, the agent, group manager, or specialist may negotiate terms of a news release by the issuer or other signatory.

  2. The inclusion of the terms of such news release must be approved by the TEB Closing Agreement Committee.

4.81.6.6  (08-05-2011)
Execution of Closing Agreements

  1. Once approval of the proposed settlement terms has been obtained, the group manager or specialist will forward the closing agreement for signature to the issuer and any other applicable parties. Once the executed original closing agreements have been received from the issuer (executed by all parties other than the IRS), the agreements will be forwarded for execution by TEB.

    1. For examination closing agreements, the group manager will forward the executed originals to the Manager, Field Operations. The Manager, Field Operations will forward the approved agreements to the Director for signature.

    2. For voluntary compliance closing agreements, the specialist will follow the procedures described in IRM sections 7.2.3.3.4 and 7.2.3.3.5, Tax Exempt Bonds Voluntary Closing Agreement Program.

  2. TEB will generally receive all closing agreement payments through the Electronic Federal Tax Payment System (EFTPS) unless unusual circumstances warrant use of the procedures for manually processing payments by certified check. For example, payments should be manually processed if EFTPS is unavailable or otherwise expected to be unavailable on the anticipated due date for the payment of a closing agreement amount.

    1. Closing agreement amounts may be electronically submitted by either the issuer of the tax-advantaged bonds, the conduit borrower or, in the case of an IRC 6700 penalty exam, the taxpayer under examination. If the closing agreement amount is a payment concerning the potential tax liability of the issuer (e.g., denial of a section 6431 credit payment) or the bondholders (e.g. inclusion of interest income or denial of a tax credit), then the payment must be made on behalf of the issuer using the issuer’s EIN regardless of the source of the payment. If the closing agreement amount is a payment concerning the potential tax liability of the conduit borrower (e.g. IRC 150(b) or 168(g) adjustments), then the payment must be credited to the borrower using an MFT 46 module. If the closing agreement amount is a payment concerning a potential promoter penalty, then the payment must be credited to the taxpayer subject to the IRC 6700 examination. In all cases, the group manager, agent or specialist must verify that the Master File entity account for the EIN of the taxpayer scheduled to submit the electronic payment is accurate. If there is no entity account for the EIN, one should be created on Master File. Entity accounts should be checked well in advance of an anticipated closing agreement execution to accommodate the time period for establishment.

    2. Once the group manager, agent or specialist receive confirmation of payment receipt from the Federal Reserve Bank, the closing agreement should be forwarded for TEB execution.

  3. Once an examination closing agreement is executed, the Director, Tax Exempt Bonds will retain one executed original agreement and forward each of the remaining executed original agreements to the group manager via the Manager, Field Operations. The group manager or agent will prepare a closing letter and issue the letter accompanied by an executed original to the signatories. An original executed agreement will be included in the case file.

  4. Once a voluntary compliance closing agreement is executed, the specialist will follow the procedures described in IRM 7.2.3.3.5.

4.81.6.7  (08-05-2011)
Setting Aside or Clarification of Closing Agreements

  1. An agreement entered into under IRC section 7121 may be set aside by the Commissioner upon a showing of fraud or malfeasance, or misrepresentation of a material fact. The Commissioner’s authority in this respect has not been delegated. Any such actions must be over the Commissioner’s signature. The setting aside of a closing agreement, even though deemed justified, is not mandatory. If it is in the best interests of the United States to refrain from setting aside the agreement, then the Commissioner may refrain from doing so.

  2. An agreement entered into under IRC section 7121 may be clarified if a provision of that agreement is unclear and reasonably subject to more than one reasonable interpretation or if the application of a provision to the surrounding facts and circumstances is reasonably subject to more than one interpretation.

    1. TEB will generally clarify a closing agreement through the issuance of a letter interpreting the unclear provision and its application to the surrounding facts and circumstance.

    2. TEB may refuse to clarify a disputed closing agreement term where the challenging party’s interpretation is unreasonable and unlikely to prevail in the event of litigation.

    3. For examination closing agreements, the Director, Tax Exempt Bonds will decide whether clarification of that agreement is necessary. For voluntary compliance closing agreements, the Manager, Compliance & Program Management will decide whether clarification of that agreement is necessary.


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