7.2.3  Tax Exempt Bonds Voluntary Closing Agreement Program

Manual Transmittal

August 05, 2011

Purpose

(1) This transmits revised IRM 7.2.3, Tax Exempt Bonds Voluntary Closing Agreement Program.

Material Changes

(1) Procedures for the Tax Exempt Bond Voluntary Closing Agreement Program have been updated. The scope of authority and procedural requirements with respect to certain tax credit bonds and modifications of and additions to certain other procedures applicable to the TEB VCAP have been incorporated.

Effect on Other Documents

This supersedes IRM 7.2.3 dated November 1, 2008

Audience

TE/GE (Tax Exempt Bonds)

Effective Date

(08-05-2011)

Clifford J. Gannett
Director, Tax Exempt Bonds

7.2.3.1  (08-05-2011)
In General

  1. This section sets forth procedures for the voluntary closing agreement program for tax-exempt bonds, tax credit bonds, and direct pay bonds known as TEB VCAP. Through TEB VCAP, issuers of such bonds can voluntarily resolve violations of the Internal Revenue Code (the "Code" or "IRC" ) and applicable Income Tax Regulations (the "Regulations" or "ITR" ) on behalf of their bondholders or themselves through closing agreements with the Service.

  2. The Compliance & Program Management (“CPM”) function of Tax Exempt Bonds ("TEB" ) is responsible for the administration and oversight of TEB VCAP as part of its voluntary compliance initiatives. The TEB VCAP Inventory Coordinator will review the operations of the program and report to the Manager, Compliance & Program Management ("CPM Manager" ).

  3. Notice 2008-31 provides general guidance on the scope of authority and procedural requirements applicable to TEB VCAP.

  4. IRM 4.81. 6 provides general procedures under which TEB will enter into closing agreements for tax-exempt bonds, tax credit bonds, and direct pay bonds.

  5. References to" tax-advantaged bonds" in this section 7.2.3 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 Code 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 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), 54A and either section 54C, 54D, 54E or 54F of the Code; 2) build America bonds issued pursuant to sections 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.

7.2.3.1.1  (08-05-2011)
Objectives

  1. The primary objective of TEB VCAP is to encourage issuers and other parties to the tax-advantaged bond transaction to exercise due diligence in complying with the Code and applicable Regulations and to provide a vehicle to correct violations of the Code and applicable Regulations as expeditiously as possible. As such, TEB VCAP is appropriate when the issuer (and any other parties) submitting the request work with CPM in good faith and proceed toward resolution of the matter with due diligence throughout the process.

  2. TEB VCAP reflects the continuing policy of TEB to attempt to resolve all violations of federal tax law applicable to tax-advantaged bonds at the transaction level instead of the bondholder level.

  3. Generally, in consideration of the issuer’s voluntary action in making the TEB VCAP request, its statements of good faith, its description of a violation, and its description of the procedures it has adopted that are intended to promote compliance and prevent violations, the issuer submitting a TEB VCAP request can expect to settle the case on terms that are no less favorable, and generally on terms that are more favorable, to the issuer than the settlement terms that would be expected had the violation been discovered as a result of an examination. The benefit the issuer received as a result of the violation is one factor, among others, that may be considered in resolving TEB VCAP requests.

  4. A closing agreement may be entered into under TEB VCAP with respect to any violation when there appears to be an advantage to having the violation permanently and conclusively resolved and it is determined by CPM that the United States will sustain no disadvantage through consummation of such an agreement. While a TEB VCAP request may be submitted in advance of an event or action resulting in a violation, the closing agreement will be executed after the violation has occurred.

  5. TEB VCAP is not an appropriate forum to conclusively resolve matters of law relating to future events or actions that may impact the tax-advantaged status of bonds. Issuers seeking guidance on the tax implications of future events or actions to occur should request a private letter ruling.

7.2.3.1.2  (08-05-2011)
Scope

  1. Gross income does not include interest on any state or local bond that meets the requirements of section 103 and related provisions of the Code. Violations of section 103 or related provisions of the Code or applicable Regulations may be resolved under TEB VCAP with certain exceptions. TEB VCAP is generally not available if, absent extraordinary circumstances, the action can be remediated under existing remedial action provisions or tax-exempt bond closing agreement programs contained in regulations or other published guidance.

    1. An issuer may remediate actions impacting tax-exempt bonds under sections 1.141-12, 1.142-2, 1.144-2, 1.145-2, and 1.147-2 of the Regulations. The change of use provisions of sections 150(b)(3) through 150(b)(6) and 150(c), however, apply, with certain exceptions, even if the issuer takes a remedial action described in the regulations.

    2. An issuer may resolve certain violations resulting from a change in the use of tax-exempt bond proceeds or tax-exempt bond-financed property through the execution of a closing agreement under the program described in Rev. Proc. 97-15, 1997-1 C.B. 635.

    3. An issuer may execute a closing agreement to treat certain tax-exempt bonds purchased and held by the issuer as continuing to remain outstanding (and not extinguished) for purposes of section 103 of the Code under the program described in Announcement 2011-19.

  2. A credit against tax is provided to a holder of tax credit bonds issued under applicable sections of the Code. Violations of such sections of the Code or applicable Regulations may be resolved under TEB VCAP with certain exceptions. TEB VCAP is generally not available if, absent extraordinary circumstances, the action can be remediated under existing remedial action provisions provided by the Code or Regulations.

    1. An issuer must remediate failures to expend 100 percent of available project proceeds of qualified tax credit bonds for qualified purposes under section 54A(d)(2)(C) by the close of an expenditure period by redeeming all of the nonqualified bonds within 90 days after the end of such period unless an extension of time to remediate is granted under section 54A(d)(2)(B)(iii).

    2. In general, an issuer may remediate violations impacting qualified zone academy bonds under section 1.1397E-1(h)(8) of the Regulations. In the case, however, of qualified zone academy bonds that are issued under sections 54A and 54E for which the issuer elects to receive direct payments pursuant to section 6431 of the Code, issuers and taxpayers may not rely on the remedial action provisions in section 1.1397E-1(h) of the Regulations.

  3. A refundable credit payment is provided to an issuer of direct pay bonds issued under applicable sections of the Code. Violations of such sections of the Code or applicable Regulations may be resolved under TEB VCAP with certain exceptions. TEB VCAP is generally not available if, absent extraordinary circumstances, the action can be remediated under existing remedial action provisions provided by the Regulations.

    1. Until specific remedial action provisions are provided in regulations or other published guidance, an issuer may remediate deliberate actions impacting build America bonds by taking remedial actions, other than defeasance of nonqualified bonds, under section 1.141-12 of the Regulations. Build America bonds, as taxable bonds, are not included in the exception from the significant modification rule for defeasance of tax-exempt bonds under ITR section 1.1001-3(e)(5)(ii)(B). Therefore, defeasance of a build America bond may cause a reissuance and a bond reissued after December 31, 2010 is not a build America bond pursuant to IRC section 54AA(d)(1)(B).

    2. Line 21 of Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds, allows issuers of direct pay bonds to adjust by a net increase or net decrease previous credit payments to correct prior clerical or computational errors. This Form is not intended to and does not remediate violations of the Code or Regulations applicable to direct pay bonds.

  4. TEB VCAP is available to resolve violations of the Code or applicable Regulations based upon facts submitted by the issuer in its request under penalties of perjury. CPM will generally rely on such facts as true and accurate and not review any books or records to confirm or verify such facts. For this purpose, CPM will only accept facts submitted by a party other than the issuer (e.g., conduit borrower, trustee) under penalties of perjury if the issuer also certifies under penalties of perjury that to the best of the issuer’s knowledge that such facts are true and accurate.

  5. TEB VCAP is also available to issuers to resolve errors made on Form 8328 that cannot be corrected under Rev. Proc. 2005-30, 2005-1 C.B. 1148.

  6. TEB VCAP is not available if the bond issue is under examination. A bond issue is generally treated as under examination on the date a letter opening an examination on the bond issue is mailed.

  7. TEB VCAP is not available if the tax-advantaged status of the tax-advantaged bonds is at issue in any federal court or is being considered by the IRS Office of Appeals. TEB VCAP may not be available if the tax-advantaged status of the tax-advantaged bonds is at issue in any court, administrative agency, commission, or other proceeding.

  8. TEB VCAP is not available if CPM determines that the violation was due to willful neglect.

7.2.3.1.3  (08-05-2011)
Effect of TEB VCAP Closing Agreement

  1. Under section 7121 of the Code and corresponding Regulations, closing agreements, including closing agreements executed under TEB VCAP, 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.

7.2.3.1.4  (08-05-2011)
Audit Selection of TEB VCAP Cases

  1. Absent extraordinary circumstances, a bond issue will not be classified and selected for examination while it is under review in TEB VCAP. Generally, a bond issue will be treated as under review in TEB VCAP on the date a VCAP request satisfying all the requirements has been submitted in accordance with section 7.2.3 and received by CPM. A VCAP request made by an issuer on an anonymous basis does not satisfy all of the requirements if the names of the issuer and the bond issue have not been disclosed.

  2. Any bond issue previously reviewed in TEB VCAP will be subject to general or project classification and may be selected for examination. However, the resolution of any specific violation through a closing agreement under TEB VCAP will be final and conclusive and may not be reconsidered under examination except in the limited circumstances set forth in section 7121 of the Code. For example, source documents may be reviewed and tested to confirm the accuracy of factual representations submitted in the TEB VCAP request and relating to the closing agreement.

7.2.3.1.5  (08-05-2011)
Special Procedures for Anonymous Requests

  1. A TEB VCAP request may be submitted to inquire as to the appropriate resolution methods for a violation on an anonymous basis. The anonymous request option is intended to assist issuers in evaluating appropriate resolution methods in instances where the violations are complex or unique or in instances where there is significant uncertainty regarding the appropriate settlement terms. The anonymous request option is not intended to encourage issuers to delay the submission of fully disclosed TEB VCAP requests relating to relatively simple or straightforward violations where the appropriate resolution methods are reasonably clear. As such, when evaluating an anonymous request concerning a straightforward violation, CPM will consider whether the submission of the anonymous request represents a less than good faith effort on the part of the issuer to resolve the violation as expeditiously as possible.

  2. The anonymous request shall only pertain to a general matter, question or factual scenario. CPM will provide a general response in writing and will not participate in further discussion on the matter other than to clarify any vague or ambiguous language in its written response. CPM will decline to respond to any anonymous request that is based upon a detailed factual scenario.

  3. Until a fully disclosed VCAP request satisfying all the requirements of this section 7.2.3 is submitted to TEB, including disclosure of the name of the issuer and the bond issue to the Service, a request for a closing agreement under TEB VCAP will not prevent the Service from beginning an examination of the bond issue. An issue relating to an anonymous request which has been opened for examination prior to identification to CPM will no longer be eligible for TEB VCAP.

7.2.3.2  (08-05-2011)
TEB VCAP Request Submission

  1. This section sets forth the information required to be provided by the issuer in its TEB VCAP submission request as well as the case assignment procedures.

7.2.3.2.1  (08-05-2011)
Information Required in Submission Request

  1. The following information and items are required to be included in a TEB VCAP submission request. The failure to include any of these items will result in CPM declining to consider the request, and the case will be closed without resolution.

  2. An issuer, including any other person or entity joining the issuer requesting a closing agreement under TEB VCAP must submit a statement under penalty of perjury including all of the following information:

    1. Information identifying the issuer of the bond issue including: (1) the name; (2) employer identification number; (3) street address, city, state, and zip code; and (4) name, title, and telephone number of an official of the issuer who may be contacted for additional information. With respect to a violation that affects multiple issuers or issues of bonds, such as a composite issue, each issuer of an affected issue must join in the request and provide the information required in connection with a TEB VCAP request.

    2. Information identifying the bond issue including: (1) the name of the bond issue; (2) the issue price; (3) a full debt service schedule for the issue showing principal maturities and interest rates (for variable rate issues include a description of how the rate is set and the interest payments to the date of the request); and (4) CUSIP number(s), if any.

    3. Information including: (1) a clear statement of the specific federal tax requirement which provides a basis for finding a violation; (2) a description of the identified violation(s), and the facts and circumstances pertaining to the nature of the identified violation and its occurrence; and (3) a statement as to when and how the facts surrounding the identified violation were discovered. In the event that the issuer identifies a violation but requests CPM to consider as a factor in determining an appropriate resolution that certain legal questions apply, the issuer must also include the following information in its request: (1) a description of established law supporting a determination that there is a credible basis for finding that a violation occurred; and (2) as well as a description of such legal questions, and their application to the facts of the submission, supporting why CPM should consider such legal questions as a factor in the appropriate resolution of the violation.

    4. Description of the issuer’s proposed settlement terms for resolving the identified violation. If the proposal includes the payment of a closing agreement amount, the issuer must include: (1) an identification of the computation methodology described in IRM section 4.81.6 used to determine the amount or a description of an alternative computation methodology including a discussion of why such an alternative is appropriate under the facts and circumstances; and (2) an identification of the source of funds to be used to pay the closing agreement amount. If the proposal includes the redemption, defeasance, tender, or purchase of any amount of the bonds comprising the bond issue, the issuer must identify the source of funds to be used to effectuate such action and the maturities of the bonds subject to such action.

    5. Statements of good faith including: (1) a statement that the bond issue is not under examination or under consideration by the IRS Office of Appeals; (2) a statement that the tax-advantaged status of the bonds is not at issue in any federal court; (3) a statement as to whether the bonds are under review in any court (other than a federal court), administrative agency, commission, or other proceeding (identify the proceeding); (4) a statement as to whether the issuer knew or reasonably expected on the issue date that the violation might occur; (5) a description of the policies or procedures which have been or will be implemented to prevent this type of violation from recurring with this or any other bond issues; and (6) a statement that the request for a closing agreement was promptly undertaken upon the discovery of the identified violation, including the date(s) of the violation, the date and circumstances surrounding the discovery of the violation, and the date and nature of any actions taken in response to the discovery of violation (e.g., redemption, defeasance).

    6. Identification of any previous and contemporaneous VCAP requests (including anonymous requests) submitted by the issuer (or the conduit borrower in a conduit financing) either: (1) with respect to the bond issue that is the subject of the request; or (2) pertaining to a violation that is the same as the subject of the request provided that such request was submitted within the past five years. With respect to identified requests include the name(s) of the related bond issue(s) and brief summaries of the violation(s) identified in, and resolution(s) of, all previous requests. If no previous or contemporaneous VCAP requests have been submitted, then a statement to that effect.

    7. Identification of all previous or contemporaneous private letter ruling requests submitted by the issuer with respect to the bonds and relating to the violation which is the subject of the TEB VCAP request. With respect to identified ruling requests include a brief summary of the matters addressed therein. If no previous or contemporaneous ruling requests have been submitted, then a statement to that effect.

    8. A statement describing any explanation the representative(s) or other professionals have made to the issuer regarding conflicts of interests relating to the bonds that might exist under Circular 230.

    9. If the identified violation has been disclosed on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System (EMMA) or to any state or local taxing jurisdiction that grants tax-advantaged treatment to the issuer’s bonds, a statement describing the disclosure and how it was made. If no such disclosure has been made, a statement to that effect.

    10. If the issuer wishes to assert that the violation was caused by another party and requests CPM to consider this as a factor in determining an appropriate resolution, a statement that the violation was due to the acts or omissions of a person or persons other than the issuer, together with a description of the circumstances surrounding the violation thereof, and any information that the issuer has regarding such acts or omissions (including an identification of the person or persons) whose acts or omissions caused the violation).

    11. Any other information relevant to the matters contained in or resolution of the VCAP request.

  3. The issuer must include with the request an affirmative or negative statement as to whether it has adopted comprehensive written procedures intended to promote post-issuance compliance with, and to prevent violations of, the provisions of the Code related to tax-advantaged bonds. The issuer must also include a detailed description of the portion of such comprehensive procedures which relate to the violation which is the subject of the TEB VCAP request. The description of such written procedures should identify the authorized person(s) that adopted the procedures, the officer(s) with responsibility for monitoring compliance, the frequency of compliance check activities, the nature of the compliance check activities undertaken, and the date such procedures were originally adopted and subsequently updated (if applicable). The extent to which an issuer has appropriate written compliance procedures will be an equitable factor that will receive consideration in determining appropriate resolution terms with respect to VCAP requests.

  4. The statement(s) described in paragraphs (2) and (3) above must be submitted under the following declaration, signed by an individual with personal knowledge of, or responsibility over, the information in the submission and authorized by the issuer:: "Under penalties of perjury, I declare that I have examined this submission, including accompanying documents and statements, and to the best of my knowledge and belief, the submission contains all the relevant facts relating to the request, and such facts are true, correct, and complete."

  5. The request must include a copy of the Form 8038 Series information return filed in connection with the issuance of the bond issue and submitted to the IRS. If the request relates to a direct pay bond issue, the request must also include a copy of any Forms 8038-CP related to the bond issue and submitted to the IRS. If the violation relates to the requirements of section 148 of the Code, the request must also include a copy of any Forms 8038-T and Forms 8038-R related to the bond issue and submitted to the IRS.

  6. The request may include an executed Form 2848, Power of Attorney and Declaration of Representative, declaring a representative authorized to represent the issuer before the Service with respect to the bond issue. The request may also include an executed Form 8821, Tax Information Authorization, authorizing the IRS to communicate with a third party (e.g., conduit borrower, trustee) with respect to the bond issue.

7.2.3.2.2  (08-05-2011)
Receipt and Perfection of Submission Request

  1. Submission requests under TEB VCAP are typically emailed to TEBVCAP@irs.gov and/or may be mailed to:

    Internal Revenue Service

    Attn: TEB VCAP

    1122 Town & Country Commons

    Chesterfield, MO 63017

  2. Upon receipt of a TEB VCAP submission request, the TEB VCAP Inventory Coordinator will review the submission request to verify that all of the required information described in section 7.2.3.1.6 is complete. The Inventory Coordinator will verify that the issuer signed the request and included the required penalties of perjury statement. The Inventory Coordinator will research the exam history of the bond issue and notify the CPM Manager if the bond issue is currently under examination.

  3. If the TEB VCAP Inventory Coordinator determines that the submission request appears complete, the Inventory Coordinator will process the case for assignment in accordance with section 7.2.3.3.1. Neither processing the case for assignment nor assignment of the case to a specialist waives the IRS’s right to close the case for failure to include all of the required information and items.

  4. If the TEB VCAP Inventory Coordinator determines that the submission request is not complete, the Inventory Coordinator will provide the issuer and the authorized representative (if any) as directed in the issuer’s Form 2848 Power of Attorney and Declaration of Representative with written notification that the request has been received, but that certain missing information is required before the request can be processed for assignment. The Inventory Coordinator will also contact the issuer or authorized representative by telephone to request the missing information. If the Inventory Coordinator is unable to obtain the missing information after reasonable attempts, the submission request will be closed without resolution.

  5. The Inventory Coordinator will generally complete this review and, if necessary, request missing or incomplete information within 3 business days following receipt of the request.

7.2.3.3  (08-05-2011)
TEB VCAP Case Processing Procedures

  1. This section sets forth the case processing procedures for TEB VCAP cases.

7.2.3.3.1  (08-05-2011)
Case Establishment and Assignment

  1. Immediately upon determining that the submitted request appears complete, the TEB VCAP Inventory Coordinator will establish a compliance activity within the Reporting Compliance Case Management System ("RCCMS" ) for the TEB VCAP case. For this purpose, each individual Form 8038 Series information return relating to the submission request is established as a separate compliance activity.

  2. Once the compliance activity is established within RCCMS, the CPM Manager will assign the activity to a CPM group. The CPM group manager will generally assign the activity to a CPM specialist who is available to begin developing the case within 15 business days of the receipt of the request. The CPM group manager may also assign the activity to a reviewer. The CPM group manager will update the case to status 10 within RCCMS concurrent with assignment to a CPM specialist and notify the TEB VCAP Inventory Coordinator of the assignment and status update.

7.2.3.3.2  (08-05-2011)
Case Development

  1. Upon receipt of an assigned TEB VCAP case within RCCMS, the specialist will immediately notify the issuer or its authorized representative of the specialist’s contact information.

  2. Upon initiation of the case, the specialist will update the case to status 12 within RCCMS and notify the TEB VCAP Inventory Coordinator of the status update.

    1. The specialist will review the request to determine if any additional information is necessary. If additional information is necessary, the specialist will request the information from the issuer or its authorized representative and will generally follow up with a written request specifying the information requested and the due date.

    2. The specialist will generally request such information be provided within 21 days from the date of the written request is mailed to the issuer.

    3. The specialist will notate on the case chronology record any failures by the issuer or its authorized representative to timely provide requested information. Such failures may be considered as a lack of good faith in proceeding with due diligence toward resolution of the matter for purposes of establishing eligibility for TEB VCAP (See IRM section 7.2.3.3.2(6)).

  3. Generally, the specialist will review the request and provide written notification of any missing or additional information necessary to continue developing the request within 30 days of the receipt of the assigned RCCMS compliance activity.

  4. Upon receipt of all required information, the specialist (with the assistance of any assigned reviewer) will analyze the information, make a determination as to the recommended resolution of the case, and take appropriate steps for case resolution.

    1. If the violation identified in the request is covered in section 7.2.3.4, the specialist will prepare the VCAP Briefing Memorandum following the applicable resolution standards and forward the VCAP Briefing Memorandum through the specialist’s CPM group manager to the CPM Manager for review and concurrence.

    2. If the violation identified in the request is not covered in section 7.2.3.4, the specialist will prepare a Memorandum for Reviewers which will include a discussion of the key facts, applicable law, issuer’s proposed settlement offer, and specialist’s recommendation for case resolution. The specialist will forward the Memorandum for Reviewers to the specialist’s CPM group manager for review and concurrence. Upon concurrence, the specialist will prepare a VCAP Briefing Memorandum to be forwarded through the CPM group manager to the CPM Manager.

    3. If it is determined to resolve the case through the execution of a closing agreement, upon concurrence of the CPM Manager, the specialist will prepare and forward a draft closing agreement through the specialist’s CPM group manager to the CPM Manager for review and concurrence. In preparing the closing agreement, the specialist will follow applicable provisions of IRM section 4.81.6.

    4. If it is determined to resolve the case through correspondence (e.g. an anonymous request), upon concurrence of the CPM Manager, the specialist will prepare and forward the appropriate resolution letter through the specialist’s CPM group manager to the CPM Manager for review and concurrence.

  5. Throughout the case development process, the specialist will provide the issuer or its authorized representative with status updates via telephone. These updates will include a reminder of any outstanding requests for information. The specialist will notate such updates and reminders on the case chronology record. The specialist will also clearly document in the case file any delays by the issuer or its authorized representative in providing requested information because such documentation may be necessary to determine that an issuer’s failure to respond to requests for additional information indicates an absence of good faith by the issuer in proceeding toward resolution with due diligence for purposes of establishing eligibility for TEB VCAP (See IRM section 7.2.3.3.2(6)).

  6. If at any time during the case development process, the specialist determines that an issuer or its authorized representative is not proceeding toward resolution in good faith and with due diligence, the specialist will discuss the appropriateness of issuing a final demand letter with the CPM group manager.

    1. Upon the concurrence of the CPM group manager, the specialist and CPM group manager will brief the CPM Manager of their recommendation to issue a final demand letter to the issuer providing notification that the TEB VCAP request will be closed without resolution of the identified violations if the requested information is not provided within 15 days of the issuance of the letter.

    2. Upon concurrence of the CPM Manager, the specialist will draft a final demand letter identifying the overdue information, the dates upon which such information was requested, and the due dates (including any extensions) for submitting such information. The specialist will forward the final demand letter to the TEB VCAP Inventory Coordinator to coordinate the execution and mailing of the letter. The Inventory Coordinator will electronically forward a copy of the executed letter to the specialist.

    3. The issuance of a final demand letter will be a factor in determining the appropriate resolution terms for a TEB VCAP request.

7.2.3.3.3  (08-05-2011)
Case Resolution

  1. If the proposed closing agreement requires approval of the TEB Senior Management Team as provided in section 4.81.6.4 (the “Closing Agreement Committee” or the "Committee" ), the CPM Manager will forward the VCAP Briefing Memorandum and present the proposed resolution to the Closing Agreement Committee. If approved by the Committee, upon notification from the CPM Manager, the specialist will follow the closing agreement execution procedures provided in section 7.2.3.3.4. If disapproved by the Committee, the CPM Manager will notify the specialist and CPM group manager of the need for further development.

  2. If the CPM Manager confirms that the proposed closing agreement does not require approval of the TEB Closing Agreement Committee, the specialist will follow the closing agreement execution procedures provided in section 7.2.3.3.4,

  3. If the proposed resolution does not require a closing agreement, the CPM Manager will review the resolution letter and notify the specialist’s CPM group manager of concurrence or the need for further development. Upon approval of the CPM Manager, the specialist will prepare the case for closure.

7.2.3.3.4  (08-05-2011)
Closing Agreement Execution

  1. Upon approval by the CPM Manager, the specialist will forward a draft closing agreement to the issuer or its authorized representative. The specialist will discuss any comments with the reviewer (if any), the specialist’s CPM group manager, and the CPM Manager, and make any appropriate changes.

  2. Once the closing agreement is finalized, the specialist will electronically send the final closing agreement, the transmittal letters (i.e., the execution cover letter and transmittal letter to the issuer's authorized representative) to the TEB VCAP Inventory Coordinator via secure messaging. The Coordinator will make the required number of agreement copies (number of signatories plus one), coordinate the signing of the transmittal letters and mail the package to the issuer. A copy of the closing agreement and transmittal letter to the issuer will be mailed to the authorized representative (if any) as indicated in the issuer’s Form 2848, Power of Attorney and Declaration of Representative.

  3. The Coordinator will notify the specialist following the mailing of the packages. The specialist will notify the issuer or its authorized representative that the closing agreements have been mailed. The specialist will also remind the issuer or its authorized representative that: (i) the closing agreement payment (if any) must be submitted prior to execution by the CPM Manager; (ii) the executed agreements must be returned to the CPM office in Chesterfield, Missouri; (iii) a copy of the confirmation of the Electronic Federal Tax Payment System ("EFTPS" ) deposit (if any) must be included with the executed agreements; and (iv) specified remedial actions such as filing an amended information return, redeeming bonds, or establishment of an irrevocable defeasance escrow (if any) must be completed prior to the execution of the closing agreement by TEB. The specialist will confirm the dates the issuer expects to execute and return the closing agreement and notate such dates on the case chronology record.

  4. Any payments made by or on behalf of the issuer must be made using the EIN of the issuer unless otherwise specified in the closing agreement.

  5. The issuer or specialist can confirm receipt of the closing agreement payment (if any) by calling the EFTPS Financial Institution Helpline at 1-800-605-9876 (Monday – Friday, 8:00 a.m. – 8:00 p.m., Eastern Standard Time). Upon receipt of such confirmation, the specialist shall notify the Coordinator.

  6. Upon receipt of the closing agreement from the issuer, the Coordinator will verify that the agreement has not been altered, check for required signatures, and monitor receipt and proper accounting of the closing agreement payment, if applicable. Once the payment has been confirmed, the Coordinator will forward the closing agreement to the CPM Manager for execution and notify the specialist that the case is ready for closure.

7.2.3.3.5  (08-05-2011)
Case Closing

  1. The specialist will electronically forward to the TEB VCAP Inventory Coordinator the final case closing letter addressed to the issuer and a transmittal letter addressed to the authorized representative if required by the issuer’s Form 2848 Power of Attorney and Declaration of Representation. The Inventory Coordinator will coordinate signature and transmission of the final case closing letter, the transmittal letter, and the signed closing agreement (if applicable). The Inventory Coordinator will send electronic copies of each of the signed documents to the specialist via secure messaging.

    1. If the case resolution requires a closing agreement, the issuer is notified that the case is closed through the executed closing agreement letter transmitted with the executed copy(s) of the closing agreement.

    2. If the case resolution does not require a closing agreement, the issuer is notified that the case is closed through the approved resolution letter.

  2. If a closing agreement resolves a violation related to bonds for which the issuer irrevocably elected to receive direct payments equal to all or a portion of the interest on the bonds, the specialist will electronically forward a final copy of the closing agreement to the TEB unit responsible for prepayment compliance review of such direct payment requests.

  3. Upon the execution and mailing of the applicable closing letter, the Coordinator will notify the specialist that the applicable closing letter has been signed and transmitted. The specialist will then provide the issuer or its authorized representative with a status update, complete the RCCMS case file, update the case to status 20, and transfer the case to the CPM group manager (or delegate) within RCCMS.

  4. After reviewing the case file to confirm it is complete, the CPM group manager will request closure of the case within RCCMS and update to status 51.

  5. The case closing process should generally be completed within 10 business days from receipt of the closing agreements from the issuer or the date on which the closing letter is executed if the resolution does not require a closing agreement.

7.2.3.3.6  (08-05-2011)
Unresolved Case Resolution

  1. In certain situations, it is appropriate to close a TEB VCAP case without a final resolution. For example, an issuer may withdraw the request or the issuer and CPM may fail to reach an agreement in a reasonable period of time after an offer is made by CPM to enter into a closing agreement. CPM may also determine that an issuer’s failure to respond to requests for additional information indicate an absence of good faith by the issuer in proceeding toward resolution with due diligence for purposes of establishing eligibility for TEB VCAP. In these or other situations, the specialist may recommend to initiate an unresolved closure of the case. The specialist will present this recommendation through the specialist's CPM group manager to the CPM Manager for review and concurrence.

  2. The specialist will prepare the appropriate closing letter and forward through the specialist’s CPM group manager to the CPM Manager for review and concurrence. Upon approval of the CPM Manager, the specialist will follow the case closing procedures in section 7.2.3.3.5.

7.2.3.4  (08-05-2011)
TEB VCAP Resolution Standards

  1. Under Notice 2008-31, the Service requested comments regarding the operation of TEB VCAP, including suggestions with regard to the standardization of closing agreement terms and amounts that may be specified for particular violations. On June 11, 2008, the Advisory Committee on Tax Exempt and Government Entities (ACT) issued a report titled The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common Violations providing recommendations for the creation of programs to provide streamlined treatment of certain tax law violations. On June 9, 2010, ACT issued a report titled Tax Exempt Bonds: Improvements to the Voluntary Closing Agreement Program for Tax-Exempt, Tax Credit, and Direct Pay Bonds providing additional recommendations.

  2. This section sets forth resolution standards under TEB VCAP for specific violations. TEB anticipates continuing to expand the list of resolution standards for specified violations over time.

  3. All methodologies relating to the resolution standards referenced in this section are fully described in IRM section 4.81.6, Tax Exempt Bonds Administrative Guidelines, Closing Agreements.

  4. If the violation is not described in this section 7.2.3.4 or if the issuer requests CPM to consider special factors, the violation will be resolved through the TEB VCAP general procedures on such terms as are determined appropriate under the facts and circumstances.

7.2.3.4.1  (08-05-2011)
Objectives and Scope

  1. The primary compliance objective of the TEB VCAP resolution standards identified in this section is to promote due diligence on the part of issuers and other parties to the tax-advantaged bond transaction in resolving violations. The Service recognizes that due diligence is encouraged by providing certainty to issuers and other parties in understanding the methodology available to resolve particular violation(s).

  2. The primary administrative objective of the TEB VCAP resolution standards identified in this section is to streamline the closing agreement process with respect to the specific violations resulting in more efficient processing of cases.

  3. The resolution standards under this section are not available when:

    1. The specific violation is not within the jurisdiction of TEB VCAP.

    2. The specific violation identified in the TEB VCAP request is not a violation specifically described in this section.

    3. The issuer submits a TEB VCAP request after the latest date specified for the applicable resolution standard.

    4. CPM determines that the issuer is nonresponsive to requests for missing information or otherwise not acting in good faith or not proceeding with due diligence towards the resolution of the request.

  4. Although the failure to submit the request within the time allotted will be a consideration, failure by the issuer to submit a TEB VCAP request by the latest date specified for the applicable resolution standard does not prevent the violation from being resolved otherwise through the TEB VCAP general procedures on such terms as are determined appropriate under the facts and circumstances. For example, an issuer submitting a request more than 1 calendar year from the date of a deliberate action resulting in excessive nonqualified use will generally be required to pay a closing agreement payment greater than 110% of taxpayer exposure on the nonqualified bonds.

7.2.3.4.2  (08-05-2011)
Identified Violations – Tax-Exempt Bonds

  1. Generally, the resolution standards described in this section 7.2.3.4.2 will only apply to violations that relate to tax-exempt bonds. An issuer of tax credit bonds or direct pay bonds may propose, however, a resolution that is based upon one of the following standards for a violation if the resolution is in the best interests of the United States in light of the benefit conferred upon the issuer or bondholders from the related transaction.

  2. IRM section 4.81.6.5.3 provides guidance on the calculations necessary to apply the resolution standards described in this section to a specific bond issue. This includes guidance on how to calculate taxpayer exposure and an alternative minimum tax adjustment.

  3. If the issuer represents that certain facts and circumstances relating to the identified violation warrant special consideration, the issuer should propose a modification to the proposed closing agreement terms. Such requests will be processed under general TEB VCAP procedures.

  4. Excessive Nonqualified Use. Certain use of proceeds requirements are imposed upon governmental bonds and various qualified private activity bonds under IRC sections 141(b), 142(a), 143(b)(1), 144(a)(12)(B), 144(b)(2), 144(c)(1), 145(a)(2), 147(g), 1394(a), 1400L(d), 1400N(a)(2),, and 7871(c)(3)(B). These provisions allow for certain defined percentages of proceeds to be allocated to nonqualified purposes.

    A violation occurs when an issuer makes an allocation of proceeds resulting in the amount of proceeds allocated to nonqualified purposes exceeding the defined percentage limitations.

    When the issuer submits the request within 6 calendar months of the date of the deliberate action, this violation may be resolved under the following closing agreement terms when the amount of proceeds allocated to nonqualified purposes exceeds the applicable percentage: (1) the issuer (or the conduit borrower on behalf of the issuer) will pay an amount equal to the greater of $1,000 or 100% of the taxpayer exposure on the nonqualified bonds for the period beginning on the date of the deliberate action and ending on the date the nonqualified bonds are redeemed and retired or purchased and cancelled by the issuer; and (2) the issuer will redeem and retire or purchase and cancel the nonqualified bonds prior to the date the closing agreement is executed by the IRS. If the nonqualified bonds cannot be redeemed or purchased and cancelled prior to the execution date, the issuer will both: (a) redeem the nonqualified bonds on the earliest call date; and (b) prior to the date the closing agreement is executed by the IRS, establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date.

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the deliberate action, this violation may be resolved under the terms described in the above paragraph, substituting 110% of taxpayer exposure for 100% of taxpayer exposure in calculating the closing agreement payment.

  5. Ownership of Qualified 501(c)(3) Bond-Financed Property. Under section 145(a)(1), all property provided by the net proceeds of a qualified 501(c)(3) issue is to be owned by a 501(c)(3) organization or a governmental unit.

    A violation occurs when property provided with the net proceeds of a qualified 501(c)(3) issue is owned by a person other than a 501(c)(3) organization or a governmental unit.

    When the issuer submits the request within 6 calendar months of the date of the violation, this violation may be resolved under the following closing agreement terms: (1) the issuer (or the conduit borrower on behalf of the issuer) will pay an amount equal to the greater of $1,000 or 100% of the taxpayer exposure on the nonqualified bonds for the period beginning on the date of the violation and ending on the date the nonqualified bonds are redeemed and retired or purchased and cancelled by the issuer; and (2) the issuer will redeem and retire or purchase and cancel the nonqualified bonds prior to the date the closing agreement is executed by the IRS. If the nonqualified bonds cannot be redeemed or purchased and cancelled prior to the execution date, the issuer will both: (a) redeem the nonqualified bonds on the earliest call date; and (b) prior to the date the closing agreement is executed by the IRS, establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date.

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the violation, the violation may be resolved under the terms described in the above paragraph, substituting 110% of taxpayer exposure for 100% of taxpayer exposure in calculating the closing agreement payment.

  6. Failure to Provide Notice of Defeasance. Under ITR sections 1.141-12(d)(3) and 1.150-5(a)(1), an issuer remediating nonqualified bonds through the establishment of an irrevocable defeasance escrow must provide written notice to CPM within 90 days of the date the defeasance escrow is established.

    A failure to successfully remediate nonqualified bonds occurs when the issuer fails to timely provide CPM with written notice of the establishment of a defeasance escrow to remediate nonqualified bonds under ITR section 1.141-12(d).

    When the issuer submits the request within 6 calendar months of the violation, the failure may be resolved under a closing agreement whereby the issuer agrees to pay an amount equal to $1,000. When the issuer submits the request more than 6 calendar months but within 1 calendar year of the violation, the failure may be resolved under a closing agreement whereby the issuer agrees to pay an amount equal to $2,000.

  7. Failure to Call Defeased Bonds Within 10.5 Years of Issuance. Under ITR section 1.141-12(d)(4), an issuer may only remediate nonqualified bonds (issued after May 16, 1997) through the establishment of an irrevocable defeasance escrow if the period between the issue date of the bonds and the first call date of the bonds is 10.5 years or less.

    A failure to successfully remediate nonqualified bonds through the timely establishment of an irrevocable defeasance escrow occurs when all or a portion of the defeased bonds are not callable within 10.5 years of the issue date.

    When an issuer timely establishes an irrevocable defeasance escrow for the nonqualified bonds, this failure may be resolved under a closing agreement whereby the issuer agrees to pay an amount equal to the greater of $1,000 or taxpayer exposure on the bonds with the offending maturities for the period beginning on the later of the date 10.5 years after the issue date or the date of the deliberate action and ending on the date the bonds will be redeemed under the defeasance escrow.

  8. Alternative Minimum Tax Adjustment. Under IRC section 57(a)(5), the interest on certain qualified private activity bonds is treated as an item of tax preference for purposes of the alternative minimum tax. IRC section 57(a)(5)(C)(ii) provides an exception to this rule for qualified 501(c)(3) bonds.

    A violation occurs where a change in the use of the proceeds of a bond issue not subject to the alternative minimum tax ("non-AMT bonds" ) occurs resulting in the bonds being re-characterized as subject to the alternative minimum tax ("AMT bonds" ).

    When the issuer submits the request within 6 calendar months of the date of the deliberate action, this violation may be resolved under a closing agreement requiring the payment of an amount equal to the greater of $1,000 or 100% of the alternative minimum tax adjustment with respect to the bonds of the issue from the date of the deliberate action to the date the bonds are no longer outstanding.

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the deliberate action, this violation may be resolved as described in the above paragraph, substituting 110% of the alternative minimum tax adjustment for 100% of the alternative minimum tax adjustment in calculating the closing agreement payment.

    The settlement terms of this identified violation only apply when the proceeds of the bonds were first expended for a purpose that at the time of the expenditure would not make the bonds subject to the alternative minimum tax.

  9. Capital Expenditure Limitation Failure. IRC section 144(a)(1) requires that qualified small issue bonds have an aggregate face amount of not more than $1,000,000, unless an issuer makes an election under IRC section 144(a)(4)(A) for the $10,000,000 limitation to apply instead of the $1,000,000 limitation. Under IRC section 144(a)(4), in determining whether an issue meets or exceeds the $10,000,000 limitation, the sum of: (a) the aggregate amount of certain outstanding qualified small issue bonds described in IRC section 144(a)(2); and (b) the aggregate amount of capital expenditures described in IRC section 144(a)(4)(A)(ii) with respect to facilities described in IRC section 144(a)(4)(B) (as modified by IRC section 144(a)(4)(G), when applicable).

    A violation occurs when the sum of outstanding bonds and capital expenditures to be taken into account for purposes of this requirement exceeds $10,000,000 (as modified by IRC section 144(a)(4)(G), when applicable).

    When the issuer submits the request within 6 calendar months of the date of the deliberate action, this violation may be resolved under the following closing agreement terms: (1) The issuer (or the conduit borrower through the issuer) will pay an amount equal to the greater of $1,000 or 100% of the taxpayer exposure on the nonqualified bonds for the period beginning on the date the violation occurs and ending on the date the nonqualified bonds are redeemed and retired or purchased and cancelled; and (2) The issuer will redeem and retire or purchase and cancel the nonqualified bonds prior to the date the closing agreement is executed by the IRS. If the nonqualified bonds cannot be redeemed prior to the execution date, the issuer will both (a) redeem the nonqualified bonds on the earliest call date; and (b) prior to the date the closing agreement is executed by the IRS, establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date. For this purpose, the nonqualified bonds are an amount of the bonds equal to the amount exceeding the applicable limitation that will not result in the average maturity of the remaining bonds being greater than the average maturity of the bond issue.

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the deliberate action, this violation may be resolved under the terms described in the above paragraph, substituting 110% of taxpayer exposure for 100% of taxpayer exposure in calculating the closing agreement payment.

  10. Maturity Exceeding 120% of Economic Life. Under IRC section 147(b), the average maturity of certain qualified private activity bonds may not exceed 120% of the average reasonably expected economic life of the facilities being financed with the net proceeds of the issue.

    Upon an issuer’s allocation of proceeds to property, a violation occurs when the average maturity of the bonds exceeds 120% of the average reasonably expected economic life of such property.

    When an issuer submits the request within 6 calendar months of the date of the violation, this violation may be resolved under a closing agreement where the issuer and conduit borrower agree to redeem or defease an amount of the bonds sufficient to reduce the weighted average maturity to 120% of the economic life of the financed property.

    When an issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the violation, this violation may be resolved under a closing agreement where the issuer and conduit borrower agree to redeem or defease an amount of the bonds sufficient to reduce the weighted average maturity to 110% of the economic life of the financed property.

  11. Impermissible Advance Refunding. Under IRC section 149(d), there is a general prohibition on the advance refunding of: (1) any qualified private activity bond issue other than a qualified 501(c)(3) bond issue; or (2) any governmental bond issue or qualified 501(c)(3) bond issue that has already been advance refunded. IRC section 149(d)(5) provides that a bond shall be treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond. Under ITR section 1.150-1(d)(3), a current refunding issue is defined as a refunding issue that is issued not more than 90 days before the final payment of principal and interest on the prior refunded issue and an advance refunding issue is defined as a refunding issue which is not a current refunding issue.

    A violation occurs when the proceeds of a refunding issue are used to pay the principal or interest on a prior issue more than 90 days from the issue date of the refunding issue when the prior issue is not permitted to be advance refunded under IRC section 149(d).

    When the issuer submits the request within 6 calendar months of the date of the violation, this violation may be resolved under a closing agreement where the issuer agrees to pay an amount equal to the greater of $1,000 or 100% of the taxpayer exposure on the refunding bonds for the period beginning on the issue date of the refunding bonds and ending on the date 90 days before the final redemption of the prior refunded issue.

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the violation, this violation may be resolved under the terms described in the above paragraph, substituting 110% of taxpayer exposure for 100% of taxpayer exposure in calculating the closing agreement payment.

  12. Failure to Timely Reinvest Proceeds into 0% SLGS. Under IRC section 148(a), an issue shall be treated as consisting of arbitrage bonds if any portion of the proceeds is intentionally used directly or indirectly to acquire higher yielding investments. Under IRC section 148(b)(1), a higher yielding investment is any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue. For this purpose, definitions of materially higher yield are provided under ITR section 1.148-2(d). For example, investments held in a refunding escrow are treated as higher yielding investments when the yield on those investments over the life of the escrow produces a yield which is more than 1/1000th of 1% higher than the yield on the bond issue.

    A violation occurs when a party to the escrow agreement fails to meet their obligations under the agreement in a manner that results in a failure to timely reinvest proceeds of a refunding issue, upon the maturity of investments, as directed by the escrow instructions (e.g., failure to reinvest proceeds of a matured guaranteed investment contract in 0% U.S. Treasury Securities – State and Local Government Series (SLGS) in an efficient escrow).

    When the issuer submits the request within 60 days of the next required computation date following the date of the reinvestment failure, this violation may be resolved under a closing agreement whereby the issuer (or the escrow agent or other party through or on behalf of the issuer) agrees to pay an amount equal to the sum of the following: (1) An amount which, if treated as a payment with respect to the investments held in the escrow, reduces the yield on the escrow to the bond yield; plus (2) An amount equaling interest accrued at the underpayment rate under IRC section 6621 beginning on the date the payment would have been due if treated as a yield reduction payment and ending on the date the payment is actually paid to the IRS. For this purpose, proceeds held by the trustee due to this reinvestment failure may be treated as invested at the applicable federal funds rate where the trustee certifies under penalty of perjury that its customary practice is to invest its overnight balances at a rate which approximates the applicable federal funds rate and the proceeds were likely invested in such a manner.

  13. Extinguishment/Merger. An issuer generally may not purchase and hold its own tax-exempt bonds without causing a retirement or extinguishment of such bonds for purposes of section 103 of the Code. Notice 2008-41, as modified by Notice 2008-88, and Notice 2010-7 provided certain temporary rules that allowed issuers to purchase and hold their own tax-exempt bonds for temporary holding periods without resulting in a retirement of the purchased tax-exempt bonds for purposes of sections 103 and 141-150. However, such temporary rules expired on December 31, 2010.

    A violation occurs when the holder of an obligation which is extinguished for purposes of sections 103 and 141-150 excludes from gross income the interest income paid on such obligation.

    Under Announcement 2011-19, when the issuer submits the request no later than December 31, 2012, this violation may be resolved under a closing agreement that treats the bonds as outstanding during the extinguished period. For this purpose, the extinguished period: (1) begins on the later of January 1, 2011 or the date the issuer purchases its own bonds; and (2) ends on the earlier of the date 180 days after the execution of the closing agreement or such earlier date requested by the issuer. The closing agreement will be conditioned on the issuer: (1) adopting a resolution of its intent to resell or currently refund the extinguished bonds as tax-exempt bonds within specified timeframes; (2) providing written representations that the extinguished bonds are legal, valid and binding obligations under state law and that there are no other matters relating to the tax-exempt status of the bonds under sections 103 and 141 through 150; and (3) payment of a fee amount equal to the par value of the outstanding bonds held by the issuer multiplied by 0.029% for each month during the extinguished period. These conditions are more fully described in section 2 of Announcement 2011-19.

7.2.3.4.3  (08-05-2011)
Identified Violations – Certain Direct Pay Bonds

  1. Generally, the resolution standards described in this section 7.2.3.4.3 will only apply to violations that relate to the direct pay bonds described in this section. In a TEB VCAP request, an issuer of tax-advantaged bonds may propose a resolution that is based upon one of the following standards for any violation if the resolution is in the best interests of the United States in light of the benefit conferred upon the issuer or bondholders from the related transaction.

  2. IRM section 4.81.6.5.3 provides guidance on the calculations necessary to apply the resolution standards described in this section to a specific bond issue. This includes guidance on how to calculate the credit maintenance amount and determine the credit adjustment period.

  3. If the issuer represents that certain facts and circumstances relating to the identified violation warrant special consideration, the issuer should propose a modification to the proposed closing agreement terms. Such requests will be processed under general TEB VCAP procedures.

  4. Private Activity Violation. Build America bonds under section 54AA or recovery zone economic development bonds under section 1400U-2 are taxable state and local government bonds that cannot be private activity bonds under section 141.

    A violation occurs when an issuer takes a deliberate action that causes its build America bonds or recovery zone economic development bonds to be private activity bonds as defined in section 141(a) of the Code.

    When the issuer submits the request within 6 calendar months from the date of the deliberate action with respect to an issue of fixed rate build America bonds as specified in section 54AA or recovery zone economic development bonds as specified in section 1400U-2, a violation may be resolved under the following closing agreement terms. In the request, the issuer shall identify the bonds that are the nonqualified bonds in a manner which reduces the principal payment schedule of the bonds from the date of the violation to the final maturity date of the bonds on a pro rata basis (taking into account scheduled sinking fund payments). The issuer (or the conduit borrower on behalf of the issuer) will pay 100% of the credit maintenance amount calculated with respect to the nonqualified bonds. For this purpose, the credit adjustment period used to calculate the credit maintenance amount will begin on the date of the violation, but may be shortened when the issuer and CPM agree to modify the debt service schedule to treat the nonqualified bonds as no longer outstanding for purposes of requesting section 6431 credits (See IRM section 4.81.6.5.3.2(2).

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the deliberate action, this violation may be resolved with a closing agreement payment equal to 110% of the credit maintenance amount calculated by using the provisions of the preceding paragraph. In addition, any closing agreement permitting the shortening of the credit adjustment period through a prospective modification of the debt service schedule for purposes of calculating 6431 credits will require such modification to be structured such that the issuer is prevented from requesting refundable credits with respect to an amount of bonds equal to 110% of the nonqualified bonds.

  5. Under IRC section 6431, issuers may irrevocably elect to receive direct payments as refundable credits equal to a portion of the interest on direct pay bonds issued as build America bonds described in section 54AA(g)(2), recovery zone economic development bonds described in section 1400U-2, or certain specified tax credit bonds described in section 6431(f)(3). These direct pay bonds are subject to additional requirements on the uses of bond proceeds in addition to, or instead of the use of proceeds requirements, applicable to tax-exempt governmental bonds under sections 54AA(g)(2), 1400U-2, and 54A(d) and (e), respectively.

    A violation occurs when an issuer makes a final allocation of proceeds to an impermissible use under IRC sections 54AA(g)(2)(A), 1400U-2(b)(1)(a), or 54A, including, but not limited to, a final allocation of proceeds to issuance costs in excess of the percentage limitation specified in IRC section 54A(e)(4)(A)(ii).

    When the issuer submits the request within 6 calendar months from the date of the deliberate action with respect to an issue of fixed rate direct pay bonds, a violation may be resolved under the following closing agreement terms. In the request, the issuer shall identify the nonqualified bonds as those bonds corresponding to either the amount of the impermissible use or the amount in excess of a percentage limitation determined in a manner which reduces the principal payment schedule of the bonds from the date of issue of the bonds to the final maturity date of the bonds on a pro rata basis (taking into account scheduled sinking fund payments). The issuer (or the conduit borrower on behalf of the issuer) will pay 100% of the credit maintenance amount calculated with respect to the nonqualified bonds. For this purpose, the credit adjustment period used to calculate the credit maintenance amount will begin on the issue date but may be shortened when the issuer and CPM agree to modify the debt service schedule to treat the nonqualified bonds as no longer outstanding for purposes of requesting section 6431 credits (See IRM section 4.81.6.5.3.2(2).

    When the issuer submits the request more than 6 calendar months but within 1 calendar year from the date of the deliberate action, this violation may be resolved with a closing agreement payment equal to 110% of the credit maintenance amount calculated by using the provisions of the preceding paragraph. In addition, any closing agreement permitting the shortening of the credit adjustment period through a prospective modification of the debt service schedule for purposes of calculating 6431 credits will require such modification to be structured such that the issuer is prevented from requesting refundable credits with respect to an amount of bonds equal to 110% of the nonqualified bonds.

  6. De Minimis Premium Violation. IRC section 54AA(d)(2)(C) requires the issue price of build America bonds and recovery zone economic development bonds for which the issuer receives direct payments pursuant to IRC section 6431 equal to a portion of the interest on those bonds to be not greater than the principal amount of each bond plus a de minimis amount of premium over the stated principal amount of each bond. In addition, Notice 2010-35 imposes a rule similar to the rule in IRC section 54AA(d)(2)(C) against issuance of specified tax credit bonds under IRC section 6431(f)(3) with more than a de minimis amount of premium.

    A violation occurs on the issue date when any maturity of bonds subject to the requirements of IRC section 54AA(d)(2)(C) or section 6.2 of Notice 2010-35 is issued at a price in excess of the permissible price.

    When the issuer submits the request by no later than the later of 6 calendar months after the issue date or February 1, 2012 with respect to one or more fixed rate direct pay bonds, this violation may be resolved under the following closing agreement terms. For purposes of the closing agreement, the stated interest rate for each maturity originally issued at a price in excess of the permissible price will be adjusted to an interest rate that corresponds to the yield of the maturity assuming that the maturity was sold at the maximum permissible price. The issuer (or the conduit borrower on behalf of the issuer) will pay 100% of the credit maintenance amount on the bond maturity calculated assuming that the bond maturity accrued or will accrue interest (taking into account scheduled sinking fund payments but without regard to any optional call) at an interest rate equal to the difference between the original interest rate on the bond maturity and the adjusted interest rate. For this purpose, the credit adjustment period used to calculate the credit maintenance amount will begin on the issue date but may be shortened when the issuer and CPM agree to modify the debt service schedule to treat the nonqualified bonds as no longer outstanding for purposes of requesting section 6431 credits (See IRM section 4.81.6.5.3.2(2).

    When the issuer submits the request more than 6 calendar months after the issue date but within the later of 1 calendar year after the issue date or August 1, 2012 with respect to one or more fixed rate direct pay bonds, the violation may be resolved with a closing agreement payment equal to 110% of the credit maintenance amount calculated by using the provisions of the applicable preceding paragraph. In addition, any closing agreement permitting the shortening of the credit adjustment period through a prospective modification of the debt service schedule for purposes of calculating 6431 credits will require such modification to be structured such that the issuer is prevented from requesting refundable credits with respect to an amount of bonds equal to 110% of the nonqualified bonds.

  7. Extinguishment/Merger. A debt instrument generally is treated as retired or extinguished when an issuer acquires its own debt because a merger of the interests of the issuer and the holder occurs.

    When direct pay bonds are acquired by the issuer of the bonds (for purposes of this section, the "Initial Acquisition" ), such bonds become extinguished for federal tax purposes and the issuer is not entitled to refundable credit payments equal to a portion of the interest on the extinguished bonds from and after the date of the Initial Acquisition. A violation occurs on the date when an issuer claims a refundable credit with respect to interest on extinguished bonds that accrued or that will accrue from and after the date of the Initial Acquisition.

    When the issuer submits the request by no later than the later of 6 calendar months after the Initial Acquisition or February 1, 2012 with respect to one or more fixed rate direct pay bonds acquired and extinguished for federal tax purposes and subsequently sold by the issuer to the public (for purposes of this section, the "Subsequent Sale" ), a violation or anticipated violation may be resolved under the following closing agreement terms. In the request, the issuer shall represent that from the original issue date the bonds acquired by the issuer through the Initial Acquisition: (a) are outstanding for purposes of State law and constitute legal, valid and binding obligations of the issuer under applicable State law; and (b) assuming that the bonds are treated as remaining outstanding for purposes of sections 103, 141-150, or sections 54A and either 54C, 54D, 54E, or 54F (as applicable), qualify as “obligations” of the issuer under section 103 or 54A, as applicable. The issuer may make these representations itself or the issuer may satisfy the requirement for these representations through submission of an unqualified opinion of a nationally recognized public finance attorney or law firm that addresses these representations. The issuer (or the conduit borrower on behalf of the issuer) will pay 100% of the credit maintenance amount on the portion of the bonds acquired by the issuer through the Initial Acquisition (taking into account scheduled sinking fund payments on a pro rata basis, if any). For this purpose, the credit adjustment period used to calculate the credit maintenance amount will begin on the date of the Initial Acquisition and end on the first interest payment date on the bonds scheduled after the date of the closing agreement. If the Initial Acquisition occurred during the primary offering of the direct pay bonds, the amount paid will also include an amount equal to all profits (if any) realized by the issuer or any governmental unit, agency, instrumentality, or other related entity of the issuer from the Subsequent Sale.

    The closing agreement will provide that: (i) the Initial Acquisition will not have resulted in an extinguishment of the bonds prior to the effective date of the closing agreement for federal tax purposes (except for purposes of direct payments under section 6431 as otherwise provided by the terms of the closing agreement); and (ii) the Service will treat the bonds as having not been extinguished as a result of the Initial Acquisition or reissued as a result of the Subsequent Sale.

    When the issuer submits the request more than 6 calendar months after the Initial Acquisition but within the later of 1 calendar year after the Initial Acquisition or August 1, 2012, this violation may be resolved with a closing agreement payment equal to 110% of the credit maintenance amount calculated by using the provisions of the preceding paragraph.

7.2.3.4.4  (08-05-2011)
Certain Modifications to Resolution Standards Based on Timing of Discovery of Violation

  1. If the requirements of paragraph (2) of this section 7.2.3.4.4 are satisfied, a resolution standard described in section 7.2.3.4.2 or section 7.2.3.4.3 that is applied by reference to a period of time after the date of the violation shall be modified so that the resolution standard is applied by reference to a period of time after the earlier of the date the issuer discovered the violation or the date the issuer should have discovered the violation.

  2. The requirements of this paragraph are satisfied if the issuer had, prior to the date of the violation, adopted written procedures to ensure that its tax-advantaged bonds remain in compliance with all post-issuance related federal tax requirements that are conditions to the tax-advantaged status of the bonds. The requirements of this paragraph are also satisfied when such post-issuance compliance procedures are implemented after the date of the violation if the issuer both timely identifies the violation following implementation of such procedures and submits its TEB VCAP request no later than 90 days after identification.

    1. Such procedures must, at a minimum, specify the official(s) with responsibility for monitoring compliance, a description of the training provided to such responsible official(s) with regard to monitoring compliance, the frequency of compliance checks (must be at least annually), the nature of the compliance activities required to be undertaken, the procedures used to timely identify and elevate the resolution of a violation when it occurs or is expected to occur, procedures for the retention of all records material to substantiate compliance with the applicable federal tax requirements, and an awareness of the availability of TEB VCAP and other remedial actions to resolve violations. Generally, a reference to reliance on the bond documents, without more, will not qualify as written procedures that satisfy this paragraph.

    2. For purposes of applying this paragraph 7.2.3.4.4 in resolving a violation with respect to a specific bond issue, such procedures only need to ensure compliance with the post-issuance related federal tax requirements applicable to that bond issue.


More Internal Revenue Manual