Part 4. Examining Process

Chapter 81. Tax Exempt Bonds (TEB) Examination Program and Procedures

Section 6. Closing Agreements

4.81.6 Closing Agreements

Manual Transmittal

February 20, 2019

Purpose

(1) This transmits revised IRM 4.81.6, Tax Exempt Bonds (TEB) Examination Program and Procedures, Closing Agreements.

Material Changes

(1) Updated for minor editorial changes throughout the IRM. References to other IRMs and Revenue Procedures were reviewed and updated as necessary.

(2) Modified IRM section 4.81.6.3 (previously section IRM 4.81.6.4) to change the members of the ITG/TEB Closing Agreement Committee.

(3) Modified the procedures relating to closing agreement resolution amounts and the processing of closing agreements.

(4) Added plain language edits to comply with the Plain Writing Act. For additional information on the Plain Writing Act, see http://www.plainlanguage.gov

(5) Updated the manual for the ITG/TEB organizational changes.

(6) Updated procedures to include internal controls per IRM 1.11.2.

(7) Updated computation of tax exposure, IRM 4.81.6.4.3.1, based on Interim Guidance on Closing Agreements for Tax-Exempt Bonds, TE/GE-04-0718-0017.

(8) Removed references to Voluntary Closing Agreement Program (VCAP) and moved content to IRM 7.2.3.

Effect on Other Documents

This supersedes IRM 4.81.6 dated January 28, 2016.
This section also incorporates Interim Guidance Memorandum TEGE-04-0718-0017, Interim Guidance on Closing Agreements for Tax-Exempt Bonds.

Audience

Tax Exempt and Government Entities
Government Entities and Shared Services
Indian Tribal Governments/Tax Exempt Bonds

Effective Date

(02-20-2019)

Telly J. Meier
Acting Director, Indian Tribal Governments/Tax Exempt Bonds
Government Entities and Shared Services
Tax Exempt and Government Entities

4.81.6.1 (02-20-2019)

Program Scope and Objectives

  1. Purpose: This IRM discusses the closing agreement process used to resolve compliance issues found during an examination of tax-advantaged bonds by the office of Indian Tribal Governments/Tax-Exempt Bonds (ITG/TEB). It contains closing agreement procedures for:

    • Tax-exempt bonds

    • Tax credit bonds

    • Direct pay bonds

    Note:

    These bonds are referred to as "tax-advantaged" because they are qualified to receive tax benefits associated with their status.

  2. Policy Owner: Tax Exempt and Government Entities

  3. Program Owner: Director, Indian Tribal Governments/Tax Exempt Bonds

4.81.6.1.1 (02-20-2019)

Background

  1. A closing agreement may be entered into to resolve violations of the federal tax laws applicable to tax-advantaged bonds. A closing agreement is the vehicle used to permanently and conclusively resolve such violations. By doing this, the holders of the bonds or investors in the credits, who generally don’t know how the proceeds were used, continue to receive tax benefits on the bonds and issuers of direct pay bonds protect the subsidy associated with their bonds.

4.81.6.1.2 (02-20-2019)

Authority

  1. The Internal Revenue Service (IRS) may enter into and approve a written closing agreement with any person for his/her liability (or the person or estate for whom she/he acts) in respect of any internal revenue tax for any taxable period (IRC 7121 and the corresponding Regulations). This authority includes conclusively resolving any specific matters jeopardizing the tax-advantaged status of bonds with the issuer of the bonds even though the issuer may not have tax liability for the bonds.

  2. Regulation section 301.7121-1(a) further provides that a closing agreement may be entered into in any exam case in which there appears to be an advantage in having the exam 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. The Commissioner delegates to the Director, ITG/TEB (the Director) and the Program Manager, ITG/TEB Technical (the Technical Program Manager) the authority to enter into and approve written closing agreements involving examinations under their jurisdiction (Delegation Order Number 8-3 (formerly Delegation Order 97) in IRM 1.2, Servicewide Policies and Authorities).

  4. Typically, ITG/TEB enters into a single closing agreement covering all identified violations and all known tax periods. However, ITG/TEB may enter into a series of closing agreements for a single tax-advantaged bond transaction when appropriate.

    Example:

    The IRS may enter into a subsequent closing agreement when it identifies a matter not previously identified and resolved in the prior closing agreement. Or, it may enter into a subsequent closing agreement to cover additional tax periods or additional amounts of bonds not covered in the prior closing agreement.

4.81.6.1.3 (02-20-2019)

Terms

  1. The following acronyms, terms and definitions are applicable throughout IRM 4.81.6:

    Acronyms and Terms Definition
    Chief Counsel Associate Chief Counsel, Financial Institutions & Products (Branch 5)
    Committee ITG/TEB Closing Agreement Committee
    Director Director, Indian Tribal Governments/Tax Exempt Bonds
    Division Counsel The area field office of Division Counsel
    EIN Employer Identification Number
    Examiner ITG/TEB Revenue Agent or Tax Law Specialist
    FO Field Operations
    FOM Manager, Field Operations
    IRM Internal Revenue Manual
    ITG Indian Tribal Governments
    MFT Master File Transaction
    Rev. Proc. Revenue Procedure
    TEB Tax Exempt Bonds
    TEGE Tax Exempt Government Entities
    Technical Program Manager Program Manager, ITG/TEB Technical
    Tax-advantaged bonds Tax-exempt bonds, tax credit bonds, and direct pay bonds
    Tax-exempt bonds State or local bonds issued under IRC 103 that pay interest the holder may exclude from gross income.
    Tax credit bonds Bonds for which the holder receives a credit against taxes instead of tax-exempt interest, for example:

    • Qualified tax credit bonds issued under IRC 54, IRC 54A (and either IRC 54B, IRC 54C, IRC 54D, IRC 54E, or IRC 54F), IRC 1397E and IRC 1400N(l).

    • Build America bonds issued under IRC 54AA(d), for which holders are allowed credits against taxes for a portion of the interest on such bonds.

    • Any other bonds for which the holder receives a credit against taxes.
    Direct pay bonds Bonds for which the issuer receives a refundable credit for some or all of the interest it pays on the bonds instead of the holder receiving a tax credit or tax-exempt interest, for example:

    • Specified tax credit bonds issued pursuant to IRC 6431(f)(3) and IRC 54A(d) (and either IRC 54C, IRC 54D, IRC 54E or IRC 54F).

    • Build America Bonds issued pursuant to IRC 54AA(g)(2).

    • Recovery zone economic development bonds issued pursuant to IRC 1400U-2.

    • Any other bond for which the issuer receives a refund for some of all of the interest it pays on the bonds instead of the holder receiving a tax credit or tax- exempt interest.
4.81.6.2 (02-20-2019)

General Rules Applicable to Closing Agreements

  1. Closing agreements are:

    1. 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. See IRM 4.81.6.7 for further details.

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

    3. Subject to any change in, or modification of, the law enacted after the agreement’s date and that apply to that taxable period(s) when they cover taxable period(s) ending after the closing agreement effective date.

4.81.6.3 (02-20-2019)

Negotiating and Drafting of Closing Agreements

  1. Issuers may:

    1. Request a closing agreement with the IRS to preserve the tax-advantaged status of their bonds.

    2. Be joined by other parties to a tax-advantaged bond transaction in entering into a closing agreement.

  2. ITG/TEB enters into closing agreements with the issuer of the bond issue.

    1. In certain exam cases, other parties to the bond transaction may also participate in the negotiations and jointly execute the agreement.

    2. The issuer must complete a Form 8821, Tax Information Authorization, to allow parties who have not been designated as a representative under Form 2848, Power of Attorney and Declaration of Representative, to participate in the negotiations.

    3. The conduit borrower or other party may designate its own representative under Form 2848.

    Note:

    The 6700 penalties may apply to parties other than issuers and therefore, closing agreements regarding the 6700 penalties may not include the issuer of the bonds. See IRM 4.81.6.4.3.7 below.

  3. To ensure that taxpayers are treated consistently and that agreements are enforceable, the ITG/TEB Closing Agreement Committee (Committee) reviews all nonstandard closing agreements (See IRM 4.81.6.5(3)). The Committee consists of two members from ITG/TEB Technical appointed by the Manager, Technical. The Committee may consult with designated counsel from Associate Chief Counsel, Financial Institutions & Products (Branch 5) and designated counsel from Associate Chief Counsel, Procedures & Administrative.

  4. In an open exam case, the issuer may initiate closing agreement negotiations at any time. In most cases, the examiner or group manager negotiates the terms of the closing agreement. In some cases, the examiner and group manager may ask the Committee to help draft closing agreements.

  5. In negotiating the terms of a closing agreement, the examiner, specialist, group manager and the Committee ensure the terms:

    • Are fair and equitable.

    • Promote voluntary compliance and encourage due diligence in complying with all applicable federal tax laws.

    • Recognize the difference between the IRS enforcement and voluntary compliance programs.

  6. Closing agreements with issuers generally don’t contain terms that address any potential IRC 6700 promoter penalty liabilities unless the agreement specifically resolves an open IRC 6700 exam case on a party to the agreement.

    Note:

    When ITG/TEB completes a bond exam, it may enter into a closing agreement that resolves all identified specific matters relating to that issue and, when appropriate, any potential IRC 6700 promoter penalty liability of the issuer.

  7. The examiner drafts the closing agreement covering specific matters, following the appropriate model closing agreement (https://www.irs.gov/tax-exempt-bonds/model-closing-agreements-for-vcap-and-examinations). The drafter must clearly state the violation that is being resolved with the closing agreement so the agreement, read on its own, has only one reasonable interpretation as to the specific matter being resolved.

  8. Some of the model closing agreement terms apply only to specific situations so the examiner must consider whether the terms in IRM 4.81.6.4 are appropriate for the agreement. The agreement may also cover related tax issues if the impacted taxpayer is a party to the agreement, such as:

    1. Denial of interest deductions under IRC 150(b).

    2. Depreciation adjustments under IRC 168.

  9. Closing agreement terms generally follow the model closing agreements created for exam.

  10. The Director executes exam closing agreements under the process in IRM 4.81.6.6.

4.81.6.4 (02-20-2019)

Closing Agreement Terms

  1. ITG/TEB prepares the closing agreements. This section discusses some of the general terms we use to resolve specific matters.

  2. Some violations are covered by a special closing agreement program. Generally, this program is described in a public announcement or notice and includes the closing agreement template to use. When this program applies, the issuer and the IRS must use the closing agreement template that is provided.

  3. To determine a closing agreement’s resolution terms, the examiner, group manager, FOM and the Committee consider the compliance failure’s facts and circumstances.

  4. If the issuer or other party that executes the agreement fails to comply with its terms, ITG/TEB considers the significance of that failure. If a failure to comply with a material term of 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, you may need to prepare a later closing agreement to resolve a new violation arising after the execution of a closing agreement (See IRM 4.81.6.2).

4.81.6.4.1 (02-20-2019)

Bond Redemption

  1. ITG/TEB may require as a prerequisite to entering into a closing agreement that the issuer redeem, retire or defease callable bonds of the issue at the earliest possible date.

  2. For exam closing agreements, if the issuer can’t redeem, retire or purchase and cancel the callable bonds before the closing agreement execution date, the closing agreement must:

    1. Specify the date on which the bonds will be redeemed.

    2. Require the issuer to call the bonds for redemption on that date.

    3. Require the issuer to provide the bondholders with an irrevocable call notice. The irrevocable call notice must include the specific date on which the issuer has stated that the redemption will occur. The issuer must provide ITG/TEB with documentation of this call notice prior to ITG/TEB executing the closing agreement.

    4. Require the issuer to establish, prior to ITG/TEB executing the closing agreement, a fully funded irrevocable defeasance escrow or similar escrow satisfactory to ITG/TEB to provide for the payment of the principal and interest on the bonds to the call date. The issuer must provide ITG/TEB with documentation that it has established the irrevocable defeasance escrow prior to ITG/TEB executing the closing agreement.

      Note:

      The issuer’s statement, made under penalty of perjury, that the bonds have been irrevocably defeased and an irrevocable call notice was given to bondholders is sufficient documentation.

      Note:

      For bonds that are noncallable, payment through maturity of the applicable tax-exposure, credit maintenance amount or other basis for the resolution amount eliminates the requirement for irrevocable call notice and defeasance of the bonds.

4.81.6.4.2 (02-20-2019)

Alternative Use of Proceeds or Facility

  1. Closing agreement terms may require:

    1. The issuer to expend any disposition proceeds for an alternative qualifying use.

    2. The issuer to use the bond-financed property for an alternative qualifying use.

      Note:

      All arrangements and contracts must be finalized prior to the execution of the closing agreement.

4.81.6.4.3 (02-20-2019)

Resolution Amount

  1. Generally, a closing agreement resolution amount for a tax-exempt bond issue is based on 100% of the present value of the taxpayer exposure of the bond issue, as computed in IRM 4.81.6.4.3.1, below. However, as appropriate, you can also base closing agreement resolution amounts on:

    • The present value of an alternative minimum tax adjustment.

    • IRC 150(b) adjustments.

    • IRC 168(g) adjustments.

    • Any excessive arbitrage profits.

    • IRC 6700 penalties.

  2. Generally, a closing agreement resolution amount for a tax credit bond issue or direct pay bond issue is based on 100% of the credit maintenance amount, as computed in IRM 4.81.6.4.3.2, below. For direct pay bonds, an issuer and ITG/TEB may agree to modify the amount of future allowable credit payments the issuer may claim by excluding a portion of interest payments on those bonds from the calculations of the credits, as appropriate under the facts and circumstances.

  3. In certain exam cases, the closing agreement resolution amount may be based on a specified amount. Generally, a specified amount is only appropriate when described in a closing agreement program in the IRM, published guidance (including Notices and Announcements) and IRM 4.81.6.4.3.3.

  4. A resolution amount may consist of one or more amounts described in or computed under IRM 4.81.6.4.3.1 through IRM 4.81.6.4.3.9, including but not limited to an amount representing taxpayer exposure, a credit maintenance amount and/or a specified amount. The IRS requires a minimum amount even if the computations in IRM 4.81.6.4.3.1 through IRM 4.81.6.4.3.9 produce a lower amount. For an examination-related closing agreement, the minimum resolution amount is $5,000 per bond issue.

4.81.6.4.3.1 (02-20-2019)
Computation of Taxpayer Exposure

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

  2. Compute the taxpayer exposure for an exam closing agreement as follows:

    1. Step 1. Determine the closing agreement period. This is 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 were or will be outstanding.

      • Bonds that have been called for redemption and defeased by a defeasance escrow are considered outstanding until their date of redemption; other bonds are considered outstanding until their maturity date.

      • Past calendar years generally include calendar years that have a tax payment date that falls within three years of the date ITG/TEB identified the compliance failure.

      • A tax payment date for a calendar year is April 15th following the conclusion of that calendar year.

      • For exam purposes, ITG/TEB identifies a compliance failure on the date it notifies the issuer in writing of that identified issue.

    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 those bonds.

      • For bonds originally sold at a discount or premium of less than 5%, you may use the actual amount of interest paid or to be paid.

      • For variable rate bonds, you may determine the interest scheduled to accrue in future years by 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 each exam’s facts and circumstances.

    3. Step 3. Multiply the amount determined in Step 2 for each calendar year by the relevant tax percentage. Unless specifically instructed otherwise or a more accurate measure of the particular holder’s tax rate is available, use the rates below.

      • For calendar years before 2018, use 29%.

      • For calendar years after 2017, use the sum of (i) the backup withholding rate on interest payment pursuant to IRC 3406(a)(1) and (ii) the net investment income tax rate specified in IRC 1411(a)(1), in effect during the calendar year. For interest scheduled to accrue after the closing agreement is executed, assume no change to these tax rates from the rates in effect.

        Note:

        Notice 1036 contains early release copies of the withholding tables and includes the backup withholding rates (for example, the backup withholding rate in effect as of January 2018 is 24%).

    4. Step 4. Compute the present value of the amount calculated in Step 3 for each calendar year per IRM 4.81.6.4.3.8 by assuming it was due on April 15 in the following calendar year.

    5. Step 5. Add the present value amounts determined in Step 4 for all calendar years. This is the taxpayer exposure for exam closing agreements.

4.81.6.4.3.2 (02-20-2019)
Computation of Credit Maintenance Amount

  1. Generally, the credit maintenance amount applies to fixed rate tax credit bonds and fixed rate direct pay bonds.

    • For 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.

    • For direct pay bonds, the credit maintenance amount is the present value of the refundable credits that would have been allowed or 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.

    • If the IRS and issuer agree, ITG/TEB may consider modifications to future allowable credit payments on direct pay bonds to calculate the credit maintenance amount.

  2. Closing agreement resolution amounts for variable rate tax credit bonds and variable rate direct pay bonds are determined based upon the facts and circumstances, but generally follow the computation method described in IRM 4.81.6.4.3.1 and IRM 4.81.6.4.4.

  3. Generally, the credit adjustment period is the period from the date of the violation to the date the bonds are no longer outstanding, subject to the following:

    1. The date of the violation is generally 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. In no event will the credit adjustment period begin earlier than the issue date of the bonds.

    2. The statue for past credit allowance dates may be controlled as provided in IRM 4.82.3.4. Otherwise, the credit adjustment period must not apply to credit allowance dates that occurred more than three years before the date ITG/TEB identified the compliance failure unless the issuer filed the Form 8038-CP for such credit allowance date within three years before the date ITG/TEB identified the compliance failure.

  4. Compute the credit maintenance amount for tax credit bonds as follows:

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

    2. Step 2. Determine the amount of the credit allowance for each credit allowance date occurring during the credit adjustment period. The credit allowance amount is determined under IRC 54(b), IRC 54A(b) (as reduced by IRC 54C(b), IRC 54D(b)), or IRC 54AA(b), as applicable.

    3. Step 3. Compute the present value of each tax credit allowance calculated in Step 2 for the credit allowance dates scheduled after the date of the closing agreement per IRM 4.81.6.4.3.9, by assuming that each tax credit will accrue on the applicable credit allowance date.

    4. Step 4. Compute the amount of interest per IRC 6621(a)(2) on each amount calculated in Step 2 for credit allowance dates occurring 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. Add: (a) the credit allowances for credit allowance dates occurring prior to the date of the closing agreement plus (b) the interest amounts computed in Step 4 plus (c) the amount computed in Step 3. This sum is the credit maintenance amount for tax credit bonds.

  5. The credit maintenance amount for direct pay bonds is 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 (take into account scheduled sinking fund payments but don’t take into account any optional redemption).

    3. Step 3. To determine the refundable credit amount for each interest payment date, multiply each amount determined in Step 2 by the relevant refundable tax credit rate percentage in IRC 1400U-2(a)(2) or IRC 6431(b), as applicable, or (iii) determine the amounts to be paid pursuant to IRC 6431(f).

    4. Step 4. Compute the present value of each refundable credit amount calculated in Step 3 for 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 per IRM 4.81.6.4.3.9 by assuming that each refundable credit amount will be paid on the applicable interest payment date (take into account scheduled sinking fund payments but don’t take into account any optional redemption).

    5. Step 5. Compute the amount of interest per IRC 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. The credit allowance amount for credit allowance dates occurring during the credit adjustment period and prior to the date of the closing agreement must reflect any reduction required by sequestration under the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, or any similar reduction in credits payable.

    6. Step 6. Add: (a) the sum of all refundable credit amounts with respect to interest payment dates that occurred prior to the date of the closing agreement plus (b) the interest amount computed in Step 5 plus (c) the amount computed in Step 4. This sum is the credit maintenance amount for direct pay bonds.

4.81.6.4.3.3 (02-20-2019)
Resolutions Involving Specified Amounts

  1. In certain exams, the examiner, specialist, group manager or Committee may recommend a resolution be conditioned on payment of a specified amount. Generally, such an amount is only appropriate when described in a formal closing agreement program or in a Notice or an Announcement.

  2. The specified amount is generally listed in the program, but if not listed, it must be less than $5,000. Specified amounts have included:

    1. An 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 (for example, monthly).

    2. The amount required to be paid for a request for a closing agreement, as published annually in the Internal Revenue Bulletin (for example, the amount for 2018 based on paragraph (A)(3)(d) of Appendix A to Rev. Proc. 2018-1 would be $28,300).

    3. An amount (for example, $500) multiplied by a number of specified time intervals (for example, monthly).

    4. A fixed amount per bond issue (for example, $5,000 in exam cases).

4.81.6.4.3.4 (02-20-2019)
Computation of Alternative Minimum Tax Adjustment

  1. For closing agreements providing that interest on bonds will not be treated as an item of tax preference for the alternative minimum tax, the closing agreement amount is an estimate of the federal income tax liability that all bondholders referenced in the closing agreement period would have been or would be required to pay if the items in question were treated as subject to the alternative minimum tax.

  2. Compute the alternative minimum tax adjustment as follows:

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

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

    3. Step 3. Compute the present value of each amount determined in Step 2 for each calendar year in accordance with IRM 4.81.6.4.3.9 by assuming it is paid on April 15 in the following calendar year.

    4. Step 4. Add the present value amounts determined in Step 3 for all calendar years. This amount is the alternative minimum tax adjustment.

4.81.6.4.3.5 (01-28-2016)
IRC Section 150(b) Interest Deduction

  1. When a closing agreement addresses nonqualified private activity bonds, the closing agreement terms may require, a payment that recoups the tax benefit that a party to the transaction received for a deduction taken for interest paid for the tax-exempt financing of the bond-financed property that accrued during the nonqualified period.

4.81.6.4.3.6 (01-28-2016)
IRC Section 168(g) Depreciation Deduction

  1. When a closing agreement addresses nonqualified private activity bonds, the closing agreement terms may require, a payment that recoups the tax benefit that a party to the transaction received for a depreciation deduction on the financed property that wasn’t allowed under IRC 168(g) during the nonqualified period.

4.81.6.4.3.7 (02-20-2019)
IRC Section 6700 Penalty

  1. ITG/TEB may enter into a closing agreement for an IRC 6700 violation. IRC Section 6700 penalties may be applied to bond counsel, investment bankers, issuers, conduit borrowers, financial advisors, feasibility consultants, engineers or any other person(s) who is involved in the organization or sale of the bonds and knew or had reason to know that their opinions, documents, reports or other statements were false or fraudulent as to any matter material to the tax-advantaged status of the bonds. For these agreements, determine the IRC 6700 penalty by treating the sale of each bond denomination as a separate activity.

  2. The closing agreement must clearly state:

    1. That the payment is being made in resolution of an IRC 6700 exam.

    2. Whether the closing agreement payment is to be treated as a civil payment or a nondeductible penalty amount.

4.81.6.4.3.8 (01-28-2016)
Excessive Arbitrage Profit

  1. 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 applicable arbitrage yield restriction and rebate rules.

4.81.6.4.3.9 (02-20-2019)
Computing Value as of the Closing Agreement Execution Date

  1. Value as of the approximate date that ITG/TEB receives any payment required per the closing agreement terms (the "agreement execution date" ) including:

    • past or future tax liabilities or payments

    • past or future excessive arbitrage profit

  2. To value a past payment, liability or benefit, future value that amount to the agreement execution date using both the applicable underpayment rate(s) under IRC 6621 as the discount rate and a daily compounding method per IRC 6622.

  3. To value any amount representing a future payment, liability or benefit:

    1. Present value that amount to the agreement execution date.

    2. Use, 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 agreement execution date to the assumed April 15 tax payment date corresponding to that future tax year (with respect to tax-exempt bonds), the future credit allowance date (with respect to tax credit bonds) or the future interest payment date (with respect to direct pay bonds), as applicable, in accordance with the terms provided in IRC 1274(D)(1).

    3. Treat any tax year that has an assumed April 15 tax payment date or interest payment date later than the agreement execution date as a future tax year payment.


    Examples:

    1. A closing agreement expected to be executed on November 15, 2018, includes amounts corresponding to tax-exempt interest to be paid in future tax years 2018 through 2028.

    2. Present value the amounts representing estimated tax payments due on the assumed April 15 tax payment dates for tax years 2018 through 2020 at the short-term AFR.

    3. Present value the amounts assumed to be due on the April 15 tax payment dates for tax years 2021 through 2026 at the mid-term AFR.

    4. Present value the amounts assumed to be due on the April 15 tax payment dates for tax years 2027 and 2028 at the long-term AFR.

    5. Use the applicable AFRs in effect on November 15, 2018 for these present value computations.

4.81.6.4.4 (02-20-2019)

Adjustments to Direct Pay Credits

  1. When ITG/TEB and the issuer agree that a closing agreement will exclude a portion of allowable credit payments from future credit calculations to resolve a direct-pay bond violation IRM 4.81.6.4.3(2), the agreement generally includes these terms, conditions and supporting documentation:

    1. The closing agreement identifies the credits claimed and refunds paid to which the closing agreement applies.

    2. The closing agreement specifies that it is executed for the qualification for credit under IRC 6431.

    3. The closing agreement specifies any period for which the IRS won’t assess tax, interest, or penalty.

    4. Any closing agreement terms that affect the future allowability of credits must not indicate specific amounts to be allowed, but must describe how the credit amount is determined for each future interest payment date.

      Example:

      The agreement must specify, as applicable, the date on which bonds are no longer treated as outstanding for purposes of calculating future credits or any other changes to the terms of the bonds on which such calculations will be based.

    5. The issuer modifies the debt service schedule that they originally filed with the information return to reflect the agreement between the issuer and IRS to modify future allowable credits per IRM 4.81.6.4.3.2. Attach the modified debt service schedule as an exhibit to the closing agreement. See IRM 8.13.1.3.16 for attachment guidance.

    6. The issuer represents that it will not request credits for any portion of interest payments on bonds which it has agreed to exclude from calculations of credits.

    7. The closing agreement provides that the issuer’s ability to claim future credits depends on future compliance with applicable law and the terms of the closing agreement.

  2. For closing agreements that provide that the issuer isn’t entitled to a credit for interest paid on the bonds after the effective date of the agreement, include the following in the closing agreement:

    1. The bonds aren’t qualified bonds for purposes of IRC 6431.

    2. The issuer isn’t entitled to a refund of a credit under IRC 6431 for the bonds.

    3. The issuer includes a representation that it won’t request a refund of the credit.

  3. For closing agreements that provide that the issuer may not treat a portion of an issue of direct pay bonds as tax-advantaged bonds, include the following in the closing agreement:

    1. The portion of each maturity of outstanding bonds that is considered qualified on the effective date of the closing agreement.

    2. How the IRS and issuer treated principal payments or other adjustments affecting the outstanding amount of each maturity of bonds for determining the qualified bonds in each maturity.

    3. The portion of each maturity of outstanding bonds that is considered nonqualified on the effective date of the closing agreement.

  4. For closing agreements under which credits are calculated by treating the bonds as if a change in bond terms other than that described in paragraph (3) above had occurred (for example, a change in the interest rate for one or more maturities of bonds or the rate of credit), include the following in the closing agreement:

    1. The specific term(s) for calculations.

    2. The specific bonds affected by this change.

4.81.6.4.5 (02-20-2019)

No Payment from Tax-Advantaged Bond Proceeds

  1. In general, the issuer must not make payments required under the closing agreement, including the redemption of bonds or the establishment of a defeasance escrow, from proceeds of bonds described in IRC 103(a), IRC 54A, or IRC 54AA.

    Exception:

    Exceptions to this rule may be made for closing agreements that resolve compliance failures with the arbitrage yield restriction and rebate requirements to permit investment proceeds to be paid, and for disposition proceeds applied to redeem or defease the bonds.

4.81.6.5 (02-20-2019)

Review and Clearance Process for Examination Closing Agreements

  1. Examiner: Prepare a briefing memorandum summarizing the proposed resolution terms and include the draft closing agreement. Include in the briefing memo:

    • Discussion of the key facts

    • Applicable law

    • Identification of the violations

    • Proposed resolution terms

    • Description of the resolution amount methodology (if any)

    • Identification of the bonds to be redeemed or defeased (if any)

    • Any proposed deviation from the model closing agreement language

    • Any mitigating or aggravating factors used in arriving at the proposed resolution terms.

  2. Examiner: Attach the briefing memo and the proposed closing agreement to the Closing Agreement Approval Document and send to your group manager for review and concurrence. When your group manager concurs with the recommendations, discuss the proposed resolution terms with the representative/issuer, emphasizing that the resolution terms have not been reviewed by the Committee or approved by the FOM or the Director. Upon the issuer’s tentative approval of the terms of the proposed closing agreement, inform your group manager of the approval.

  3. The group manager forwards the Closing Agreement Approval Document and the attached documents to the FOM.

    • If the FOM concurs with the resolution terms, and the agreement involves a nonstandard resolution (i.e., resolution terms that are not specifically prescribed in the IRM or guidance) or language that differs substantively from the model closing agreement or if the FOM believes Committee review is appropriate, he/she sends the Closing Agreement Approval Document to the Committee.

    • If the FOM doesn’t agree with the resolution terms, she/he sends the Closing Agreement Approval Document back to the group manager and the examiner for further consideration and resubmission.

  4. The Committee reviews the proposed resolution terms to determine whether:

    1. The resolution terms are consistent with other ITG/TEB closing agreements for the same type of violation, considering relevant factors that might support different resolution terms, such as ITG/TEB’s discovery of the violation rather than the issuer’s submission through the Voluntary Closing Agreement Program.

    2. The closing agreement language is enforceable (if it has been substantively modified from the model closing agreement language).

      Note:

      The Committee may seek advice from the designated counsels from Division Counsel and Chief Counsel when questions of procedure or content make it appropriate, such as when proposed terms of a closing agreement are substantively modified from the model agreement.

  5. If the Committee, after consulting the Chief Counsel ad hoc members, determines that changes are needed to make the agreement enforceable, they share those changes with the examiner and the group manager. Generally, the examiner must make those changes. If the Committee concludes that the proposed resolution is inconsistent with other ITG/TEB closing agreements, or they recommend other changes, they list the changes and their reasons on the Closing Agreement Approval Document and discuss alternative resolutions with the group manager and the examiner. After review and any discussion, the Committee sends the Closing Agreement Approval Document and attached documents to the FOM.

  6. If the FOM approves the closing agreement, he/she sends the Closing Agreement Approval Document and attached documents to the group manager and examiner. If the FOM doesn’t agree, he/she discusses any concerns with the Committee and the group manager.

  7. The FOM may send the exam case back to the examiner for further consideration and resubmission. The FOM may determine that it is in the best interest of ITG/TEB to proceed with execution of the agreement without full Committee concurrence. In such a case, the FOM must notate such on the Closing Agreement Approval Document. The FOM may make or approve changes in the closing agreement which don’t impact enforceability or deviate from the model closing agreement language without Committee review or any special notation on the Closing Agreement Approval Document.

    Example:

    The FOM may change the resolution amount to reflect a different payment date or correct an issuer’s name.

  8. After receiving the FOM’s approval using the approval process, the examiner must discuss with the representative/issuer any changes to the closing agreement, emphasizing that the resolution terms still have not been approved by the Director. When the representative/issuer concur on the approved agreement, the examiner must follow the closing agreement execution procedures in IRM 4.81.6.6.

4.81.6.6 (02-20-2019)

Execution of Closing Agreements

  1. After the closing agreement has been through the required approval process, the examiner must send an execution copy of the closing agreement to the issuer and any other applicable parties for signature.

  2. Closing agreements are executed first by the taxpayer and other parties to the transaction, as applicable, and then by ITG/TEB. ITG/TEB signs the closing agreement only when the payment of the resolution amount is verified on IRS systems and proof of any other required actions is received.

  3. In the transmittal, the examiner must direct the issuer to mail the closing agreement executed by the issuer and other applicable parties directly to the examiner’s group manager, at the address set forth in the transmittal. Upon receipt of the executed agreement from the issuer, the group manager e-mails a copy of the executed agreement to the examiner.

  4. Examiner must confirm and document:

    • Payment of the Settlement Payment was made and is reflected on the proper IRS account module.

    • Any required payment was made from sources other than proceeds of tax-advantaged bonds.

    • Bonds that were described as redeemed and retired in the lettered paragraphs of the agreement have been redeemed and retired.

    • Any public statement or notice required under the agreement has been issued.

    • Any required escrow has been established and fully funded with sources other than proceeds of tax-advantaged bonds.

    • Any other required terms of the agreement have been met.

    • Signatory is someone eligible to sign a tax return or execute contracts.

  5. ITG/TEB receives all closing agreement payments through the Electronic Federal Tax Payment System (EFTPS) unless unusual circumstances warrant manually processing payments by certified check.

    Example:

    Payments must be manually processed if EFTPS is unavailable or otherwise expected to be unavailable on the anticipated due date for the payment (see IRM 4.4.24).

  6. The issuer of the tax-advantaged bonds, the conduit borrower or, in the case of an IRC 6700 penalty exam, the taxpayer, may submit the closing agreement amounts.

    1. If the closing agreement payment relates to the issuer’s potential tax liability (for example, denial of an IRC 6431 credit payment) or the bondholders (for example, inclusion of interest income or denial of a tax credit), then report the payment using the issuer’s EIN regardless of the source of the payment.

    2. If the closing agreement payment relates to the potential tax liability of the conduit borrower (for example, IRC 150(b) or IRC 168(g) adjustments), then credit the payment to the borrower using an appropriate MFT.

    3. If the closing agreement payment relates to a potential promoter penalty, then credit the payment to the taxpayer subject to the IRC 6700 penalty.

  7. In all cases, the group manager or examiner must verify that the Master File entity account for the EIN of the taxpayer who’ll submit the electronic payment is accurate. If there isn’t an entity account for the EIN, the group manager or examiner must ensure that one is created on Master File. The group manager or examiner must confirm the existence of the entity accounts in advance of execution of the closing agreement to allow time to establish the account, if necessary.

  8. The agent forwards to the group manager documentation confirming the issuer’s required performance under the terms of the closing agreement have been met, together with all necessary closing agreement transmittal letters.

  9. The group manager:

    • Confirms the executed documents are consistent with the document approved by the FOM.

    • Confirms any required actions including: settlement payments, redemptions, notices, escrows have been completed.

    • Scans the executed closing agreement received from the issuer.

    • Prints all closing and transmittal letters and affixes the signature stamp for the FOM and then scans the signed letters.

    • Securely e-mails the closing agreement package to the ITG/TEB Program Assistant or other person designated by the Director and the Director (with a cc to the FOM). The closing agreement package must contain:

      • The Closing Agreement Committee Approval, including the Closing Agreement Briefing Memo.

      • Verification that the IRS received the resolution amount.

      • The scanned executed closing agreement.

      • The scanned signed closing and transmittal letters.

  10. The ITG/TEB Program Assistant or other person designated by the Director coordinates with the Director for execution of the closing agreement. The Director may sign the closing agreement with a manual or electronic signature. The ITG/TEB Program Assistant or other person designated by the Director:

    1. Dates all closing and transmittal letters

    2. Securely e-mails an electronic copy of the dated closing and transmittal letters and one copy of the executed closing agreement to the originating group manager (with a cc copy to the FOM).

    3. Mails the executed original agreement to the issuer and sends copies of the agreement to the other signatories and any representative required to receive a copy along with the closing letters and transmittal letters.

    4. Securely e-mails an electronic version of the executed closing agreement to the Committee members.

  11. The originating group manager ensures that copies of the dated and signed closing and transmittal letters and executed closing agreement are in the case file.

  12. The originating group manager sends by secure e-mail a copy of the closing agreement involving direct pay bonds to the Direct Pay Bonds Compliance Review Coordinator in ITG/TEB Technical when the resolution involves any change in the debt service schedule for the bonds.

4.81.6.7 (02-20-2019)

Setting Aside or Clarification of Closing Agreements

  1. The Commissioner may set aside an agreement entered into under IRC 7121 if there’s a showing of fraud or malfeasance, or misrepresentation of a material fact. The Commissioner’s signature is required to set aside an agreement. Even if there is a basis to set aside the agreement, it is not mandatory. The Commissioner may refrain from doing so if it is in the best interests of the United States not to set aside the agreement.

  2. An agreement entered into under IRC 7121 may be clarified if any of its provisions are unclear and reasonably subject to more than one reasonable interpretation or if surrounding facts and circumstances result in more than one reasonable interpretation of a provision in the agreement.

    1. ITG/TEB generally clarifies its understanding of a closing agreement by issuing a letter to the issuer interpreting the unclear provision and its application to the surrounding facts and circumstances.

    2. ITG/TEB may refuse to clarify a disputed closing agreement term if it determines that the challenging party’s proposed interpretation is unreasonable and unlikely to prevail if it is litigated.

    3. For exam closing agreements, the Director decides whether it is necessary to clarify the agreement.