4.81.6  Closing Agreements

Manual Transmittal

January 28, 2016

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 have been made throughout this IRM. References to other IRMs and Revenue Procedures were reviewed and updated as necessary.

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

(3) Added IRM section 4.81.6.8, Review and Clearance Process for Examination Closing Agreements.

Effect on Other Documents

This supersedes IRM 4.81.6 dated August 5, 2011.

Audience

Tax Exempt and Government Entities
Government Entities and Shared Services
Tax Exempt Bonds

Effective Date

(01-28-2016)

Rebecca L. Harrigal
Director, Tax Exempt Bonds
Government Entities and Shared Services
Tax Exempt and Government Entities

4.81.6.1  (01-28-2016)
In General

  1. References to "tax-advantaged bonds" in this IRM 4.81.6 are references to tax-exempt bonds, tax credit bonds, and direct pay bonds.

    1. References to "tax-exempt bonds" are references to state or local bonds issued pursuant to section 103 of the Internal Revenue Code (the "Code" or IRC) and that pay interest that the holder may exclude from gross income.

    2. References to "tax credit bonds" are references to bonds for which the holder receives a credit against taxes instead of tax-exempt interest, such as:

      1. qualified tax credit bonds issued pursuant to IRC sections 54, 54A (and either section 54B, 54C, 54D, 54E, or 54F), 1397E and 1400N(l) of the Code;

      2. build America bonds issued pursuant to IRC 54AA(d), for which holders of such bonds are allowed credits against taxes with respect to a portion of the interest on such bonds; and

      3. any other bonds for which the holder receives a credit against taxes.

    3. References to "direct pay bonds " are references to: bonds for which the issuer receives a refund for some or all of the interest it pays on the bonds instead of the holder receiving a tax credit or tax-exempt interest, including:

      1. 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 );

      2. build America bonds issued pursuant to IRC 54AA(g)(2);

      3. recovery zone economic development bonds issued pursuant to IRC 1400U-2; and

      4. 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.

      Note:

      All of these bonds are referred to as "tax advantaged" because the bond is qualified to receive tax benefits associated with its status.

  2. The Internal Revenue Service’s (IRS) and the Office of Tax Exempt Bonds’ (TEB) policy is to resolve violations of the Code and corresponding Income Tax Regulations (the Regulations or ITR) applicable to tax-advantaged bonds by entering into closing agreements (including payment of any resolution amounts) with the issuer or other parties to the transaction that were involved with, and had knowledge of, how the proceeds were used. By doing this the holders of the bonds, who generally have no knowledge about how the proceeds were used, continue to receive tax benefits on the bonds.

  3. a This section sets forth procedures under which the IRS will enter into closing agreements with issuers and other parties to tax-advantaged bond transactions to resolve compliance failures. These procedures seek to ensure consistency of treatment and to encourage voluntary compliance throughout the municipal bond industry.

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

4.81.6.2  (01-28-2016)
Authority

  1. Pursuant to IRC 7121 and the corresponding Regulations, the IRS may enter into and approve a written closing agreement with any person relating to the liability of such person (or the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period. This authority includes conclusively resolving any specific matters jeopardizing the tax-advantaged status of bonds with the issuer of the bonds even though the issuer may have no tax liability with respect to the bonds.

  2. The IRS may enter into a closing agreement when there appears to be an advantage in having the case permanently and conclusively closed, or if the taxpayer shows good and sufficient reasons for desiring a closing agreement and the Commissioner determines that the United States will not be disadvantaged by entering into the agreement.

  3. Pursuant to Delegation Order Number 8-3 (formerly Delegation Order 97) located in IRM 1.2, Servicewide Policies and Authorities,, the Commissioner delegates to the Director, Tax Exempt Bonds and the Manager, Tax Exempt Bonds Compliance and Program Management, the authority to enter into and approve written closing agreements in cases under their jurisdiction.

  4. Typically, TEB will enter into a single closing agreement covering all identified violations and all known tax periods. However, TEB may enter into a series of closing agreements relating to a single tax-advantaged bond transaction when appropriate. For example, the IRS may enter into a subsequent closing agreement when it identifies a matter not previously identified and resolved in the prior closing agreement. Alternatively, it may enter into a subsequent closing agreement to cover additional tax periods or additional amounts of bonds that were not covered in the prior closing agreement.

4.81.6.3  (01-28-2016)
General Rules Applicable to Closing Agreements

  1. Closing agreements are final and conclusive and may not, in the absence of fraud, malfeasance, or misrepresentation of material fact, be reopened as to matters agreed upon or be modified by an officer, employee or agent of the United States. See IRM 4.81.6.7 for further details about this provision.

  2. Closing agreements are subject to sections of the Code that expressly provide that effect be given to their provisions notwithstanding any other law or rule of law.

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

4.81.6.4  (01-28-2016)
Negotiating and Drafting of Closing Agreements

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

  2. TEB enters into closing agreements with the issuer of the bond issue. In certain cases, other parties to the bond transaction may also participate in the negotiations and jointly execute the agreement. The issuer must complete a Form 8821, Tax Information Authorization, to allow parties who have not been designated as a representative under Form 2848, Power of Attorney and Declaration of Representative to participate in the negotiations. The conduit borrower for other party may designate its own representative under Form 2848 .

  3. When there is an open examination case, the issuer or TEB may initiate closing agreement negotiations at any time. In most cases, the specialist or group manager will negotiate the terms of the closing agreement. In some cases, the agent and group manager may seek assistance from the Field Office ("FO" ) representative on the Committee in negotiating or drafting of closing agreements.

  4. In most voluntary compliance cases, the specialist will negotiate the terms of the closing agreement. In some cases, the specialist and group manager may seek assistance from the Compliance and Program Management ("CPM" ) representative on the Committee in the negotiating or drafting of closing agreements.

  5. In negotiating the terms of a closing agreement, the agent, specialist, group manager, FO representative on the Committee, or CPM representative on the Committee will 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 enforcement and voluntary compliance programs established by the IRS.

  6. Closing agreements with issuers generally will not contain terms that address any potential IRC 6700 promoter penalty liabilities unless the agreement specifically resolves an open IRC 6700 examination case on a party to the agreement. An IRC 6700 examination case is opened on the date TEB sends written notification to the taxpayer of an impending IRC 6700 examination.

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

    2. In contrast, closing agreements that TEB executes under its voluntary compliance programs will generally not address any potential IRC 6700 promoter penalty liabilities.

  7. The agent, group manager or specialist will draft the closing agreements covering specific matters, following the appropriate model closing agreement. In drafting the agreement, the drafter should clearly state the violation that is being resolved with the closing agreement such that 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 agent, group manager, or specialist should consider whether the terms described under IRM section 4.81.6.5 are appropriate for the agreement. The agreement may also cover related tax issues such as the denial of interest deductions under IRC section 150(b) and any depreciation adjustments under IRC section 168 if the impacted taxpayer is a party to the agreement.

  9. The terms of TEB closing agreements generally will follow the model closing agreements created for examination cases and voluntary compliance cases.

  10. To ensure that taxpayers are treated consistently and that agreements are enforceable, the TEB Closing Agreement Committee (the "Committee" ) will review all nonstandard closing agreements. The Committee consists of one representative from TEB Field Operations appointed by the Manager, TEB Field Operation, one representative from TEB Compliance & Program Management, appointed by the Manager, TEB Compliance & Program Management, one ad hoc member from Chief Counsel, Financial Institutions & Products (Branch 5), and one ad hoc member from Chief Counsel, Procedures & Administrative.

  11. Any closing agreements that require the signature of the Director must be submitted for review and clearance using the process described in IRM 4.81.6.8 and the execution of the closing agreements is provided for in IRM 4.81.6.6 . Any closing agreements that require the signature of the Manager, Compliance & Program Management must be submitted for review, clearance and execution using the process described in IRM 7.2.3.3 and IRM 7.2.3.4 , Tax Exempt Bonds Voluntary Closing Agreement Program for voluntary compliance cases.

4.81.6.5  (01-28-2016)
Closing Agreement Terms

  1. TEB prepares the closing agreements. This section discusses some of the general terms that are used to resolve specific matters.

  2. There may be violations that are covered by a special closing agreement program. Generally, this program is set forth in a public announcement or notice and includes the closing agreement that is to be used. When this program applies, the issuer and the IRS must use the applicable standard closing agreement.

  3. In determining the resolution terms to be included in any closing agreement, the agent, specialist, group manager, and the Committee will consider the facts and circumstances surrounding the compliance failure as well as the following case resolution factors:

    1. The good faith and due diligence exercised by the transaction parties.

    2. The total taxpayer exposure (as defined in IRM 4.81.6.5.3.1) of the bondholders or the credit maintenance amount, (as defined in IRM 4.81.6.5.3.2), as applicable.

    3. The cooperation of the transaction parties with TEB.

    4. Whether the compliance failure was inadvertent or a de minimis part of the transaction.

    5. Whether the issuer had implemented appropriate post-issuance tax compliance procedures and the effectiveness of those procedures in identifying the problem.

    6. The economic benefits the issuer or other parties received because of the violation.

    7. For voluntary closing agreements, how quickly the issuer identified and told TEB about the problem.

  4. If the issuer or other party that executes the agreement fails to comply with the terms of that agreement, TEB will consider the significance of that failure. TEB will generally determine that any repeated or continuous failure occurring after the execution of a closing agreement constitutes a new deliberate action or intentional act within the meaning of the Regulations and constitutes a new violation with respect to the bond issue. As provided in IRM 4.81.6.5.2 , a subsequent closing agreement may be necessary to resolve a new violation arising after the execution of a closing agreement.

4.81.6.5.1  (01-28-2016)
Bond Redemption

  1. TEB may require as a prerequisite to entering into a closing agreement that the issuer redeem, retire or purchase and cancel bonds of the issue at the earliest possible date. For examination closing agreements, if the issuer cannot redeem the bonds prior to the closing agreement execution date, the closing agreement shall specify the date on which the bonds will be redeemed, require the issuer to call the bonds for redemption on that date, and require the issuer to provide the bondholders with an irrevocable call notice prior to the closing agreement execution date. The irrevocable call notice must include the specific date on which the issuer has stated that the redemption will occur. The issuer must provide TEB with documentation of this call notice prior to TEB executing the closing agreement.

  2. Generally for examination closing agreements, if the bonds will not be redeemed and retired or purchased and cancelled prior to the date on which the closing agreement is executed by TEB, a fully funded irrevocable defeasance escrow or similar escrow satisfactory to TEB will be established to provide for the payment of the principal and interest on the bonds to the call date. The issuer will provide written notice to TEB that it has established the irrevocable defeasance escrow prior to the date the IRS executes the closing agreement. The issuer’s statement, made under penalty of perjury, that the bonds have been irrevocably defeased is sufficient written notice.

4.81.6.5.2  (01-28-2016)
Alternative Use of Proceeds or Facility

  1. Closing agreement terms may require that the issuer expend any disposition proceeds for an alternative qualifying use. If the issuer uses disposition proceeds to redeem the bonds, prior to execution of the closing agreement, it has used the proceeds for an alternative qualifying use.

  2. Closing agreement terms may require that the bond-financed property be used for an alternative qualifying use. If so, arrangements and contracts must be finalized prior to the execution of the closing agreement.

4.81.6.5.3  (01-28-2016)
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 4.81.6.5.3.1, below. However, as appropriate, closing agreement resolution amounts may also be based upon the present value of an alternative minimum tax adjustment, IRC 150(b) adjustments, IRC section 168(g) adjustments, any excessive arbitrage profits, or IRC 6700 penalties.

  2. Generally, a closing agreement resolution amount for a tax credit bond issue or direct pay bond issue will be based on 100% of the credit maintenance amount, as computed in IRM 4.81.6.5.3.2, below. For direct pay bonds, an issuer and TEB may agree to modify the amount of future allowable credit payments that the issuer may claim by excluding a portion of interest payments on such bonds from the calculations of the credits, as appropriate under the facts and circumstances.

  3. In certain cases, a closing agreement resolution amount may be based on a computation of a fee amount. Generally, a fee amount is only appropriate when described in a closing agreement program provided in the IRM, published guidance (including Notices and Announcements), IRM 7.2.3 and IRM 4.81.6.5.3.3 .

  4. A resolution amount may consist of one or more amounts described in or computed under IRM 4.81.6.5.3.1 through IRM 4.81.6.5.3.9 , including but not limited to an amount representing taxpayer exposure, a credit maintenance amount and/or a fee. The IRS will not accept less than the amounts set forth below even if the computations in IRM 4.81.6.5.3.1 through IRM 4.81.6.5.3.9 produces a lower amount.

    1. For an examination-related closing agreement, TEB will not accept less than $5,000 per bond issue.

    2. For a voluntary compliance closing agreement, TEB will not accept less than $1,000 per bond issue.

4.81.6.5.3.1  (01-28-2016)
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. Taxpayer exposure for an examination closing agreement is computed as follows:

    1. Step 1. Determine the period to be covered under the closing agreement by identifying each past calendar year (as determined below) and each future calendar year during which the bonds 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. Past calendar years will generally include calendar years for which the holders would be taxed on the interest and that has a tax payment date that falls within three years of the date TEB identified the compliance failure. A tax payment date with respect to a calendar year is April 15th following the conclusion of that calendar year. For examination purposes, TEB identifies a compliance failure on the date it provides written notification to the issuer of that identified issue. TEB may increase the general three year period to up to six years if it determines the issuer or its representative has not acted in good faith in resolving the compliance failure.

    2. Step 2. Determine the amount of interest accrued or scheduled to accrue on the bonds in each calendar year within the closing agreement period based on the yield of such bonds. For bonds originally sold at a discount or premium of less than 5%, the actual amount of interest paid or to be paid may be used for this purpose. For variable rate bonds, the examiner 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 the facts and circumstances of each case.

    3. Step 3. Multiply each amount determined in Step 2 for each calendar year by the relevant tax percentage. The relevant tax percentage is based on the IRS’s estimate of the average investor’s highest tax bracket. Unless specifically instructed otherwise or a more accurate measure of the particular holder’s tax rate is available, the average investor’s highest bracket is 29%.

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

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

  3. The taxpayer exposure for a voluntary compliance closing agreement is computed as follows:

    1. Step 1. Determine the period to be covered under the closing agreement by identifying each past calendar year (as determined below) and each future calendar year during which the bonds 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. Past calendar years will generally include any calendar year for which the holders would be taxed on the interest and that has a tax payment date that falls within three years of the date TEB identified the compliance failure. A tax payment date with respect to a calendar year is April 15th following the conclusion of that calendar year. For voluntary compliance purposes, TEB determines the compliance failure date based upon the representations of the issuer under penalties of perjury in the voluntary compliance request.

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

    3. Step 3. Multiply each amount determined in Step 2 for each calendar year by the relevant tax percentage. The relevant tax percentage is based on the IRS’s estimate of the average investor’s highest tax bracket. Unless specifically instructed otherwise or a more accurate measure of a particular holder’s tax rate is available, the average investor’s highest tax bracket is 29%.

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

    5. Step 5. Total the present value amounts determined in Step 4 for all calendar years.

    6. Step 6. Compute the taxpayer exposure using the methodology in Step 5 of IRM 4.81.6.5.3.1 (2) computed on 100% of the bonds. The taxpayer exposure for voluntary compliance agreements is the lower of the amount computed in Step 5 and Step 6.

4.81.6.5.3.2  (01-28-2016)
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 are allowable during the credit adjustment period of the bonds, based on the interest rate or rates of the bonds issued, if the violation had not occurred. If the IRS and issuer agree, TEB may take into account modifications to future allowable credit payments on direct pay bonds described in IRM 4.81.6.5.3 in calculating the credit maintenance amount. Closing agreement resolution amounts for variable rate tax credit bonds and variable rate direct pay bonds will be determined based upon the facts and circumstances but will generally follow this computation methodology.

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

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

    2. Under certain facts and circumstances, if an issuer and TEB agree to modify future allowable credit payments with respect to direct pay bonds as described in IRM 4.81.6.5.3 , the credit adjustment period for the particular bonds ends on the date specified in the agreement.

  3. The credit maintenance amount for tax credit bonds is computed as follows:

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

    2. Step 2. Determine the amount of each 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 any credit allowance dates, scheduled after the date of the closing agreement in accordance with IRM 4.81.6.5.3.9 by assuming that each tax credit will accrue on the applicable credit allowance date.

    4. Step 4. Compute the amount of interest in accordance with 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. Total the credit allowances for credit allowance dates occurring prior to the date of the closing agreement, the interest amounts computed in Step 4, and the amount computed in Step 3. This amount is the credit maintenance amount for tax credit bonds. .

  4. 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 (taking into account scheduled sinking fund payments but without regard to any optional redemption).

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

    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 in accordance with IRM 4.81.6.5.3.9 by assuming that each refundable credit amount will be paid on the applicable interest payment date (taking into account scheduled sinking fund payments but without regard to any optional redemption).

    5. Step 5. Compute the amount of interest in accordance with 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.

    6. Step 6. Total the sum of all refundable credit amounts with respect to interest payment dates that occurred prior to the date of the closing agreement, the interest amounts computed in Step 5, and the amount computed in Step 4. This amount is the credit maintenance amount for direct pay bonds.

4.81.6.5.3.3  (01-28-2016)
Computation of Fee Amount

  1. In certain cases the agent, specialist, group manager or member of the Committee may recommend that a resolution should appropriately be conditioned on payment of a fee amount. Generally, a fee amount is only appropriate when described in a formal closing agreement program, in a Notice or an Announcement, in IRM 4.81.6.5.3 or in a resolution described under IRM 7.2.3.4

  2. The fee amount will generally be set forth in the program, but cannot be less than $500. Fee amounts have included:

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

    2. The amount required to be paid in connection with a request for a closing agreement, as published annually in the Internal Revenue Bulletin (e.g., the amount for 2016 based on paragraph (a)(3)(d) of Appendix A to Rev. Proc. 2016-1 would be $28,300); or

    3. A dollar amount (e.g., $500) multiplied by a number of specified time intervals (e.g., monthly).

    4. A fixed amount per bond issue (e.g., $5,000 in examination cases or $1,000 in voluntary compliance cases).

4.81.6.5.3.4  (01-28-2016)
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 equal to an estimate of the federal income tax liability that all holders of the bonds the closing agreement period will not be required to be paid because the agreement will provide that the interest is not a tax preference item..

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

    1. Step 1. Determine the principal amount of bonds that will be outstanding on January 1 of each calendar year 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 4.81.6.5.3.9 by assuming it is paid on April 15 in the following calendar year.

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

4.81.6.5.3.5  (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 in addition to the taxpayer exposure, a payment that recoups the tax benefit that a party to the transaction received for any deduction taken for interest paid for the tax-exempt financing of the bond-financed property that accrued during the nonqualified period.

4.81.6.5.3.6  (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 in addition to the taxpayer exposure, a payment that recoups the tax benefit that a party to the transaction received for a depreciation deduction on the financed property that was not allowed under IRC 168(g) during the nonqualified period.

4.81.6.5.3.7  (01-28-2016)
IRC Section 6700 Penalty

  1. TEB may enter into a closing agreement for an IRC 6700 violation. For these agreements, the agent should determine the section 6700 penalty by treating the sale of each bond denomination as a separate activity.

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

4.81.6.5.3.8  (01-28-2016)
Excessive Arbitrage Profit

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

4.81.6.5.3.9  (01-28-2016)
Computing Value as of the Closing Agreement Execution Date

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

  2. To value any amount representing a past payment or liability, the agent should 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 methodology as required under IRC 6622 .

  3. To value any amount representing a future payment or liability, the agent should present value that amount to the agreement execution date. In making this computation, the agent should 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 assumed April 15 tax payment date corresponding to that future tax year (with respect to tax-exempt bonds and tax credit bonds) or the future interest payment date (with respect to direct pay bonds) to the agreement execution date (in accordance with the terms provided in IRC 1274(D)(1)).

    1. In making this computation, the agent should 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.

    2. For example, a closing agreement expected to be executed on January 15, 2016 includes amounts corresponding to future tax years 2015 through 2026. The amounts representing estimated tax payments due on the assumed April 15 tax payment dates for years 2012 through 2015 would be present valued at the short-term AFR; the amounts assumed to be due on the April 15 tax payment dates for years 2019 through 2024 would be present valued at the mid-term AFR; and the amounts assumed to be due on the April 15 tax payment dates for years 2025 and 2024 would be present valued at the long-term AFR. The applicable AFRs in effect on January 15, 2016 would be the rates used in these present value computations.

4.81.6.5.4  (01-28-2016)
Adjustments to Direct Pay Credits

  1. When TEB and the issuer agree that a closing agreement will exclude from future credit calculations a portion of allowable credit payments to resolve a direct-pay bond violation as provided in IRM 4.81.6.5.3, the agreement will generally include the terms and conditions and supporting documentation specified below.

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

    2. The closing agreement will specify that it is executed with respect to the qualification for credit under IRC 6431 .

    3. The closing agreement will specify any period for which the IRS will not make an assessment of tax, interest, or penalty.

    4. Any closing agreement terms that affect the future allowability of credits should not indicate specific amounts that are to be allowed, but should describe how the amount of credit would be determined for each future interest payment date (for example, the agreement should 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 debt service schedule that the issuer originally filed with the information return should be modified to reflect the agreement between the issuer and IRS to modify future allowable credits as described in IRM 4.81.6.5.3.2 and the modified agreement must be attached as an exhibit to the closing agreement.

    6. The issuer must represent that it will not request credits with respect to any portion of interest payments on such bonds which it has agreed will be excluded from calculations of such credits.

    7. The closing agreement will provide that issuer’s ability to claim future credits is dependent upon future compliance with applicable law.

  2. For closing agreements that provide that the issuer is not entitled to a credit for interest paid on the bonds after the effective date of the agreement, the agreement should provide that:

    1. The bonds are not qualified bonds for purposes of IRC 6431 .

    2. The issuer is not entitled to a refund of a credit underIRC 6431 with respect to the bonds.

    3. The issuer will include a representation that it will not 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, the closing agreement shall include the following:

    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, such as the interest rate for one or more maturities of bonds or the rate of credit to be allowed, the closing agreement shall include the following:

    1. The specific term(s) upon which such calculation will be based.

    2. The specific bonds affected by such change.

4.81.6.5.5  (01-28-2016)
No Payment from Tax-Advantaged Bond Proceeds

  1. In general, the issuer should not make payments required under the closing agreement from proceeds of bonds described in IRC 103(a) , IRC 54A , or IRC 54AA . An exception to this rule may exist for closing agreements that resolve compliance failures with the arbitrage yield restriction and rebate requirements under IRC 148.

4.81.6.5.6  (01-28-2016)
News Release

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

  2. The inclusion of the terms of the news release must be approved by the Committee.

4.81.6.6  (01-28-2016)
Execution of Closing Agreements

  1. Closing agreements are executed first by the taxpayer and other parties to the transaction, as applicable, and then by TEB. Once the closing agreement has been through the required approval process, TEB will send an execution copy of the closing agreement to the issuer and any other applicable parties for signature.

    1. The Director executes examination closing agreements. The agent or the FO group manager will forward the executed originals to the Director for signature. The transmittal to the Director will include the Closing Agreement Approval Document, verification that the resolution amount was received by the IRS, closing letters to the other parties to the closing agreement, transmittal letters to any representative required to receive copies pursuant to Form 2848, and any other document that is appropriate to enclose such as a customer satisfaction survey.

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

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

    1. 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.. If the closing agreement payment concerns the potential tax liability of the issuer (e.g., denial of a section 6431 credit payment) or the bondholders (e.g. inclusion of interest income or denial of a tax credit), then the payment is reported using the issuer’s EIN regardless of the source of the payment. If the closing agreement amount is a payment concerning the potential tax liability of the conduit borrower (e.g. IRC 150(b) or IRC 168(g) adjustments), then the payment must be credited to the borrower using an appropriate MFT.
      If the closing agreement amount is a payment concerning a potential promoter penalty, then the payment must be credited to the taxpayer subject to the IRC 6700 penalty. In all cases, the group manager, agent or specialist must verify that the Master File entity account for the EIN of the taxpayer scheduled to submit the electronic payment is accurate. If there is no entity account for the EIN, one should be created on Master File. Entity accounts should be checked well in advance of when TEB anticipates that the closing agreement will be executed to allow time to establish the account, if needed.

    2. Once the group manager, agent or specialist receive confirmation from the Federal Reserve Bank of the payment as well as proof of any other required actions,, the closing agreement should be forwarded for TEB execution.

  3. After the Director executes an examination closing agreement, the Director’s Office will retain one executed original agreement and will mail the remaining executed original agreements to the other signatories and copies of the agreement to any representative required to receive a copy. The Director’s Office will use the closing letters and transmittal letters received from the agent or the FO group manager. That office will also arrange for an electronic version of the executed closing agreement, closing letters, and transmittal letters to be e-mailed to the agent of FO manager for inclusion in the case file.

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

4.81.6.7  (01-28-2016)
Setting Aside or Clarification of Closing Agreements

  1. An agreement entered into under IRC 7121 may be set aside by the Commissioner upon 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 to not set aside the agreement.

  2. An agreement entered into under IRC 7121 may be clarified if a provision of that agreement is 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. TEB will generally clarify 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. 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 in the event of litigation.

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

4.81.6.8  (01-28-2016)
Review and Clearance Process for Examination Closing Agreements

  1. The agent prepares a briefing memorandum summarizing the proposed resolution terms and includes the draft closing agreement. The briefing memorandum will include a discussion of the key facts, applicable law, identification of the violations, the proposed resolution terms, a description of the resolution amount methodology (if any), identification of the bonds to be redeemed or defeased (if any), and any proposed deviation from the model closing agreement language. The briefing memorandum should also describe any mitigating or aggravating factors used in arriving at the proposed resolution terms. The agent will attach the briefing memorandum and the proposed closing agreement to the Closing Agreement Approval Document that the agent will send to his or her group manager for review and concurrence. When the FO manager concurs with the recommendations, the proposed resolution terms may be discussed with the issuer, emphasizing that the resolution terms have not been approved by the FO Manager or the Committee.

  2. The FO group manager will forward the Closing Agreement Approval Document and the attached documents to the FO Manager. The FO Manager will review the briefing memorandum. If the FO Manager does not concur with the resolution terms, the Closing Agreement Approval Document will be sent to the FO group manager and agent for further consideration and resubmission. If the FO Manager concurs with the resolution terms, the FO Manager will forward Closing Agreement Approval Document to the FO representative on the Committee only if the agreement involves a nonstandard resolution (i.e., resolution terms that are not specifically prescribed in the IRM or guidance) or terms that substantively differ from the model closing agreement.

  3. The Committee will review the proposed resolution terms to determine whether the resolution terms are consistent with other TEB closing agreements for the same type of violation and, if the closing agreement language has been substantively modified from the standard model closing agreement language, that the changed terms are enforceable. In reviewing resolution terms for consistency, the Committee will consider whether the comparable agreements came in through the voluntary compliance programs versus through an examination and other relevant factors that might support different resolution terms. The FO representative on the Committee may seek advice from the Chief Counsel ad hoc Committee members, such as when a proposed closing agreement contains deviates from the model agreement. If the Committee recommends changes, it will discuss those changes with the agent and FO group manager. If they cannot agree, the Closing Agreement Approval Document will note the disagreement and the reason for the disagreement. After the Committee approves the agreement, the Closing Agreement Approval Document and attached documents will be sent to the FO Manager.

  4. If the FO Manager approves the closing agreement, the Closing Agreement Approval Document and attached documents will be sent to the FO group manager and agent. Once the FO group manager and the representative/issuer have agreed upon the approved agreement, the examiner should follow the procedures for executing the closing agreement. If the FO Manager does not concur, the FO Manager will discuss any concerns with the Committee. If there are any concerns remaining after that discussion, the FO Manager will discuss with the CPM Manager and then share conclusions with the FO group manager and the Committee. If an agreement cannot be reached between the FO Manager and the CPM Manager, the case will be elevated to the TEB Director.

  5. If the Committee, after consultation with the Chief Counsel ad hoc members, determines that changes are need to make the agreement enforceable, those changes will be shared with the agent and the FO group manager and generally, those changes must be made. If the Committee concludes that the proposed resolution is not consistent with other TEB closing agreements, the Committee will put the reasons for the disagreement on the Closing Agreement Approval Document and discuss alternative resolutions with the FO group manager and the agent. If agreement is not reached, the case will be sent to the FO Manager who will consult with the CPM Manager and, if necessary the CPM Manager and FO Manager will bring the case to the TEB Director for a final decision. All persons who approve but do not sign the agreement will sign the Closing Agreement Approval Document.

  6. The FO Manager may make or approve changes in the closing agreement which do not impact enforceability or deviate from the standard closing agreement language without additional Committee approval. For example, the resolution amount may be changed to reflect a different payment date of the resolution amount.

  7. After receiving the necessary approvals, the agent will follow the closing agreement execution procedures in IRM 4.81.6.6 .


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