4.81.7  Bondholder Referrals

4.81.7.1  (11-01-2008)
Bondholder Referral in Adverse Bond Examinations

  1. Interest and principal payments on the bonds generally do not move directly from the source of the debt service payments to the bondholders. If there is a trustee for the issue, it is likely that the trustee receives payments from the paying source and distributes the debt service payments. The trustee may be making the payments to a nominee. There may be several tiers of nominees between the paying examiner and the owner of the bond.

  2. To protect the government’s interest, when the examiner issues a proposed adverse determination letter, the examiner should make a bondholder referral to the Bondholder Unit.

  3. The bondholder referral shall be forwarded through the examiner’s manager to the Manager, Bondholder Unit, and include the following:

    1. copy of proposed adverse determination letter,

    2. a copy of the explanation of items of the proposed adverse determination (electronic format if available),

    3. a listing of all outstanding maturities of the issue, including all CUSIP numbers,

    4. the amount of interest paid with respect to the issue for the current period and past three calendar years,

    5. a copy of the series 8038 return filed by the issuer,

    6. a copy of the official statement, offering memorandum, or similar document for the issue (electronic format if available),

    7. the trustee's name, address, and contact person,

    8. contact information for the registrar or transfer agent of the issue, if any, who would have records of bond ownership,

    9. a list of any bondholders identified during the examination, including all contact and ownership information available (name, EIN, address, amount and CUSIP number of bonds acquired), and

    10. any other information that would be useful in identifying the past and present bondholders of the issue.

4.81.7.2  (11-01-2008)
Treatment of Bondholder Referrals

  1. Upon receipt of bondholder referral, the Manager, Bondholder Unit, will review it for completeness, establish the bondholder case on TREES and assign the case to an examiner.

  2. The examiner will verify that the amount and CUSIP number of each separate maturity included in the referral is complete.

  3. The examiner will review the bondholder referral and with the assistance of support personnel, will research public information sources for bondholders of the referred issue. The examiner will correspond with bondholder(s) to confirm the amount of bonds and holding period(s). See Exhibit 4.81.7-1 for Letter 4415, Bondholder Confirmation Letter and Exhibit 4.81.7-2 for Letter 4416 , Bondholder Confirmation Follow-up Letter.

  4. The examiner will obtain AMDISA for taxpayer identification numbers of confirmed bondholders and determine those return periods under exam by other operating divisions. The examiner will coordinate with the examining operating division to provide information necessary to propose the adjustment to income resulting from the proposed adverse determination. Confirmed bondholders not under examination will be mailed copies of the proposed adverse determination letter, a description of the closing agreement process, and restricted consents for statute extension related to open statute years within one year of expiration. See Exhibit 4.81.7-3 for Letter 4414, Proposed Adverse Transmittal Letter.

  5. For those confirmed bondholders that do not consent to extend statutes, the examiner will determine the amount of interest income not reported and discuss potential discrepancy adjustments with the Manager, Bondholder Unit.

  6. The examiner should periodically repeat the search of public information to determine subsequent transfers and redemptions.

  7. The examiner and Manager, Bondholder Unit will monitor all extended statutes and request additional restricted consents for statute extensions as required.

  8. On a monthly basis, the Manager, Bondholder Unit, will provide the Manager, Field Operations a list of all confirmed bondholders of an issue indicating tax periods held and any statutes extended. The Manager, Field Operations will forward the listing to the appropriate appeals manager.

  9. Within two months of assignment of the bondholder case, the examiner will determine the percentage of each maturity for which confirmed bondholders have been identified. The examiner will consult with the Manager, TEB Bondholder Unit, and determine if a John Doe summons to obtain additional bondholder names is required. If a John Doe summons is determined to be required, the examiner will follow the procedures provided in IRM 25.5.7.

4.81.7.3  (11-01-2008)
Consideration of Bondholder Request for Closing Agreement

  1. If a bondholder requests a closing agreement to resolve its potential tax liability resulting from an adverse determination, the examiner will compute the potential tax liability for the bondholder and discuss a possible resolution of the bondholder's tax liability related to interest on the bond issue.

4.81.7.4  (11-01-2008)
Action when Final Adverse Determination Letter Issued

  1. When a final adverse determination letter is issued at the group level, the manager will forward a copy of the letter to the Manager, Bondholder Unit. If a final adverse letter is issued by Appeals, the Manager, Field Operations will forward a copy to the Manager, Bondholder Unit.

  2. The Manager, Bondholder Unit, will forward a copy of the final adverse determination letter to the examiner assigned the bondholder case.

  3. The examiner will send copies of the final adverse determination letter to all identified bondholders and determine whether discrepancy adjustments are required for resolving any tax liability. See Exhibit 4.81.7-4 for Letter 4417, Final Adverse Transmittal Letter.

  4. The examiner will notify the trustee by certified mail that there has been a final adverse determination that interest on the bonds is not excluded from gross income, advise the trustee of future information reporting requirements, and solicit any corrected information returns or other documentation as may be required for interest previously paid on the bonds. See Exhibit 4.81.7-5 for Letter 4418, Trustee Notification Letter.

  5. The examiner will review information or communications provided by the trustee to the bondholders or nominees as a result of the final adverse determination.

  6. The examiner will notify bondholder nominees of the final adverse determination and request delinquent or corrected information returns. See Exhibit 4.81.7-5 Letter 4418, Trustee Notification Letter.

  7. For bondholders that are regulated investment companies, within the meaning of IRC section 851, the examiner will determine whether the final adverse determination impacts the company's status for open tax years as a regulated investment company that is eligible to pay exempt-interest dividends under IRC section 852(b)(5). If such status is impacted, the examiner will make a referral of the bondholder to the Large and Mid-Sized Business Operating Division.

  8. If the company's status as a regulated investment company that is eligible to pay exempt-interest dividends under IRC section 852(b)(5) is not impacted by the final adverse determination, the examiner will determine the amount of under-reported taxable income, considering potential disallowed deductions related to the production of tax-exempt income.

  9. The examiner will determine if the regulated investment company intends to reclassify tax-exempt interest dividends paid allocable to interest paid on the bonds as taxable dividends. If so, the examiner will obtain copies of any delinquent or corrected information reporting returns required for open tax periods.

  10. If the regulated investment company does not intend to reclassify tax-exempt interest dividends paid allocable to interest paid on the bonds as taxable dividends, the examiner shall consult with the Manager, Bondholder Unit, and determine if discrepancy adjustments on the regulated investment company are appropriate.

  11. When all identified bondholders have been notified, all required information returns have been secured, and all appropriate discrepancy adjustment cases have been established on TREES, the examiner will request closure of the bondholder case within TREES.

4.81.7.5  (11-01-2008)
Post Appeals Action when Bonds Remain Tax-Exempt

  1. When bond examinations within the jurisdiction of Appeals are resolved and the interest remains tax-exempt, the Manager, TEB Field Operations, shall notify the Manager, TEB Bondholder Unit.

  2. The Manager, Bondholder Unit, shall notify the examiner assigned the bondholder examination that the issue was resolved in Appeals. The examiner shall notify any identified bondholders that have been contacted by the Bondholder Unit that the case has been closed. See exhibit 4.81.7-6 for sample Letter 4419, Bondholder No Change Advisory Letter.

  3. The examiner shall then request closure of the bondholder case within TREES.

Exhibit 4.81.7-1  (11-01-2008)
Letter 4415, Bondholder Confirmation Letter

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Exhibit 4.81.7-2  (11-01-2008)
Letter 4416, Bondholder Confirmation Follow-up Letter

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Exhibit 4.81.7-3  (11-01-2008)
Letter 4414, Proposed Adverse Transmittal Letter

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Letter 4414, Proposed Adverse Transmittal Letter, page 2

Exhibit 4.81.7-4  (11-01-2008)
Letter 4417, Final Adverse Transmittal Letter

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Letter 4417, Final Adverse Transmittal Letter

Exhibit 4.81.7-5  (11-01-2008)
Letter 4418, Trustee Notification Letter

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Letter 4418, Trustee Notification Letter

Exhibit 4.81.7-6  (11-01-2008)
Letter 4419, Bondholder No Change Advisory Letter

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Letter 4419, Bondholder No Change Advisory Letter


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