7.2.3 Tax Exempt Bonds Voluntary Closing Agreement Program

Manual Transmittal

December 05, 2016

Purpose

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

Material Changes

(1) Section 7.2.3.3.2: Removed the second sentence of paragraph (4). The procedures, as previously outlined, do not agree with standard operating guidelines.

Effect on Other Documents

This IRM supersedes IRM 7.2.3 dated September 29, 2016.

Audience

Tax Exempt and Government Entities
Tax Exempt Bonds

Effective Date

(12-05-2016)

Imraan G. Khakoo
Acting Director, Tax Exempt Bonds
Government Entities and Shared Services
Tax Exempt and Government Entities

In General

  1. This section lists procedures for the voluntary closing agreement program ("TEB VCAP" ) for:

    • Tax-exempt bonds

    • Tax credit bonds

    • Direct pay bonds


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

  2. Through TEB VCAP, issuers of tax-advantaged bonds can voluntarily approach the office of Tax Exempt Bonds ("TEB" ) to resolve violations of the Internal Revenue Code ("IRC" ) and applicable Income Tax Regulations (the "Regulations" ) on behalf of their bondholders through closing agreements with the IRS.

  3. TEB Compliance & Program Management ("CPM" ) is responsible to administer and oversee TEB VCAP as part of its voluntary compliance initiatives. The TEB VCAP Inventory Coordinator ("Coordinator" ) maintains certain records of the program’s operations and sends them to the Manager, Compliance & Program Management ("CPM Program Manager" ).

  4. For general guidance on TEB VCAP’s scope of authority and procedural requirements, see Notice 2008-31.

  5. For general procedures under which TEB will enter into closing agreements for tax advantage bonds, see IRM 4.81.6.

  6. Tax-exempt bonds means: state or local bonds issued under IRC 103 and the interest on which isn’t included in the holder’s gross income.

  7. "Tax credit bonds" means bonds for which the holder receives a credit against taxes instead of tax-exempt interest, such as:

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

    • Build America bonds issued pursuant to IRC 54AA for which holders of such bonds are allowed credits against taxes with respect to a portion of the interest on such bonds.

    • Any other bonds for which the holder receives a credit against taxes.

  8. "Direct pay bonds" means 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:

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

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

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

    • Any other 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.

Objectives

  1. TEB VCAP’s primary objectives are to:

    • Encourage issuers to exercise due diligence in complying with federal tax requirements for tax advantaged bonds.

    • Ensure others that use tax-advantaged bonds’ proceeds exercise due diligence in complying with the federal tax requirements.

    • Encourage issuers to voluntarily bring forward discovered violations to the IRS.

    • Provide a way to correct these violations as expeditiously as possible.

    • Eliminate the subsidy for nonqualifed bonds as quickly as possible.

  2. Issuers can expect to settle a TEB VCAP on terms that are generally more favorable than those imposed had the IRS discovered the violation during an exam. This takes into account the issuer’s:

    • Exercise of due diligence in voluntarily making the VCAP request.

    • Statements of good faith.

    • Description of the procedures it has adopted that are intended to promote compliance and prevent future violations.

  3. TEB VCAP reflects TEB's continuing policy of resolving violations of federal tax law applicable to tax-advantaged bonds at the transaction level instead of the bondholder level.

Scope

  1. TEB VCAP requests will be accepted when the IRS has a reasonable basis to believe there has been a federal tax law violation. TEB VCAP is available only if the issuer works with CPM in good faith to resolve the matter with due diligence throughout the process.

  2. TEB VCAP is appropriate when there is an advantage to having the violation permanently and conclusively resolved and TEB determines that:

    1. It’s in the best interests of the United States to enter into the agreement.

    2. The U.S. won’t sustain a disadvantage through consummation of such an agreement, as specified in Notice 2008-31.

  3. TEB VCAP generally may be used for violations applicable to tax-exempt bonds under IRC 103 or related provisions of the IRC or applicable Regulations.

  4. Absent extraordinary circumstances or specific IRS instructions to the contrary, TEB VCAP is not available if the violation can be fixed using other actions or tax-exempt bond closing agreement programs in the Regulations or other published guidance. These other actions include:

    1. An issuer may take remediation actions impacting tax-exempt bonds under 26 CFR 1.141-12, 1.142-2, 1.144-2, 1.145-2, and 1.147-2.

    2. The change in use provisions of IRC 150(b)(3) through 150(b)(6) and 150(c), generally apply even if the issuer takes a remedial action described in the Regulations.

  5. TEB VCAP generally may be used for violations applicable to tax-credit bonds and direct pay bonds under the IRC or applicable Regulations.

  6. Absent extraordinary circumstances or specific IRS instructions to the contrary, TEB VCAP is not available if the violation can be resolved under other remedial action provisions provided by the IRC or the Regulations, including the following.

    1. An issuer must take remediation actions for failing to expend 100 percent of available project proceeds of qualified tax-credit bonds for qualified purposes under IRC 54A(d)(2)(C) by the close of an expenditure period by redeeming all of the nonqualified bonds generally within 90 days after the end of such period.

    2. In general, an issuer may take remediation actions for violations impacting qualified zone academy bonds under 26 CFR 1.1397E-1(h)(8). However, for qualified zone academy bonds that are issued under IRC 54A and IRC 54E for which the issuer elects to receive direct payments pursuant to IRC 6431, issuers and taxpayers may not rely on the remedial action provisions in 26 CFR 1.1397E-1(h).

    3. Until specific remedial action provisions are provided in the Regulations or other published guidance, an issuer may remediate deliberate actions impacting build America Bonds by taking remedial actions, other than defeasance of nonqualified bonds, under 26 CFR 1.141-12. Build America bonds, as taxable bonds, are not included in the exception from the significant modification rule for defeasance of tax-exempt bonds under 26 CFR 1.1001-3(e)(5)(ii)(B). Therefore, defeasance of a build America bond may cause a reissuance and a bond reissued after December 31, 2010 is not a build America bond pursuant to IRC 54AA(d)(1)(B).

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

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

  8. TEB VCAP is not available:

    1. To resolve matters of law relating to future events or actions that may impact the tax-advantaged status of bonds. Issuers seeking guidance on the tax implications of future events or actions may request a private letter ruling in appropriate circumstances.

    2. If the bond issue is under audit. A bond issue is generally treated as under audit on the date we mail a letter opening an audit.

    3. When the tax-advantaged status of the tax-advantaged bonds is an issue in any court proceeding or is being considered by the IRS Office of Appeals.

    4. If CPM determines that the violation was due to willful neglect.

    5. If the transaction giving rise to the violation occurred, but the issuer has not yet filed a Form 8038 series information return for the bond issue for which TEB VCAP is sought.

Effect of TEB VCAP Closing Agreement

  1. Closing agreements, including TEB VCAPs, are final and conclusive. We can’t reopen the closing agreements as to the matters agreed upon or modified. We may not annul, modify, set aside or disregard the closing agreement (or any legal action in accordance with it) in any suit, action or proceeding unless there is a showing of fraud, malfeasance or misrepresentation of material fact. (See IRC 7121 and corresponding Regulations).

Audit Selection of TEB VCAP Cases

  1. A bond issue will not be audited while under review in TEB VCAP (except as directed in this IRM or under extraordinary circumstances). Generally, the date a bond issue is "under review" in TEB VCAP is the date CPM receives a complete TEB VCAP request.

    Example:

    CPM receives an anonymous TEB VCAP request from an issuer. This doesn’t satisfy all of the requirements because the issuer didn't disclose the names of the issuer and the bond issue with other required information. Therefore, the date CPM received the incomplete request isn’t considered the date the TEB VCAP is under review.

  2. Bond issues previously reviewed in TEB VCAP are subject to general or project classification and may be selected for audit.

  3. A TEB VCAP closing resolution of any specific violation is final and conclusive and we may not reconsider the specific violation under audit except in the limited circumstances set forth in IRC 7121.

  4. During an exam, TEB may review and test source documents to confirm the accuracy of facts submitted in the VCAP request and relating to the closing agreement.

Special Procedures for Anonymous Requests

  1. TEB has numerous resolution standards for various violations described in this IRM that should advise issuers on how TEB is likely to resolve a particular violation under the VCAP.

  2. When those standards don’t provide guidance on how TEB may resolve a particular violation, the issuer may anonymously request information on that violation’s appropriate resolution method. The anonymous request option is intended to help an issuer evaluate appropriate resolution methods for novel or unique violations or when they are uncertain as to how to appropriately settle it.

    Example:

    The anonymous request option is not intended to encourage issuers to delay submitting a fully disclosed VCAP request for relatively simple or straightforward violations with reasonably clear and appropriate resolution methods. As such, CPM considers when deciding to respond, whether the anonymous submission request represents the issuer’s less than good faith effort to resolve the violation as expeditiously as possible.

  3. The anonymous request can only pertain to a general matter, question or factual scenario. CPM provides a general written response and will not discuss the matter further other than to clarify any vague or ambiguous language in its written response. CPM may decline to respond to any anonymous request that is based upon a detailed factual scenario or when it’s in the interest of sound tax administration.

  4. Because an anonymous request doesn’t satisfy all the requirements of this IRM, section 7.2.3.2, the issuer doesn’t receive TEB VCAP protection from the IRS auditing the bond issue. An anonymous request issue opened for audit prior to identification to CPM is no longer eligible for TEB VCAP.

  5. TEB’s response to an anonymous request is intended only to describe the most likely resolution standard under the general description of facts the issuer submits; it doesn’t represent TEB’s resolution offer. Moreover, if the facts submitted with the disclosed VCAP request under this IRM reveal more serious or additional violations than those described in the anonymous request, TEB’s response to the anonymous request is given no weight in arriving at the final VCAP resolution.

  6. The Specialist will:

    1. Prepare a briefing memo.

    2. Prepare the closing letter.

    3. Attach a) and b) to the required standard TEB VCAP approval document (the “Closing Agreement Approval Document”).

    4. Forward the Closing Agreement Approval Document to his/her group manager for review and concurrence.

    5. Once the CPM Program Manager approves the response letter, prepare the case for closure.

  7. The CPM Group Manager will:

    1. Consult with the CPM Program Manager for feedback

    2. Address any feedback from the CPM Program Manager with the Specialist

    3. Forward the Closing Agreement Approval Document to the Committee if the proposed closing letter describes likely resolution terms.

  8. The Committee will:

    1. Review the resolution terms and the draft closing letter.

    2. To the extent the limited information permits, consider whether the proposed terms are consistent with TEB resolution terms of other closing agreements with similar violations and if not, whether there is a valid business reason for the difference, such as one closing agreement is a result of a VCAP request and the other is the result of an exam.

    3. May recommend any changes to the proposed resolution terms or recommend that TEB not provide a response to the anonymous request if there’s inadequate information.

    4. Note any comments or recommendations on the Closing Agreement Approval Document.

    5. Return to the CPM Group Manager.

    6. In some cases, the Specialist and CPM Group Manager may ask members of the Committee to help draft the closing letters.

  9. The CPM Program Manager:

    1. If approved, the CPM Program Manager will sign the Closing Agreement Approval Document and forward to the CPM Group Manager.

    2. If not approved, the CPM Program Manager will return to the CPM Group Manager who will notify the Specialist the case needs further development.

TEB VCAP Request Submission

  1. This section describes the required TEB VCAP submission request and case assignment procedures.

Information Required in Submission Request

  1. Completed Form 14429, Tax Exempt Bonds Voluntary Closing Agreement Program Request::

    Until Form 14429 (March 2013) is updated, the issuer should make these changes:
    1. Question 6 (Note) should state: "With respect to a violation that affects multiple issuers or issues of bonds, such as a composite issue, absent extraordinary circumstances, each issuer of an affected issue must join in the request and provide the information required in lines 1-6 in an attached schedule. If an issuer is requesting that extraordinary circumstances apply, the issuer may submit an explanation for this request and forgo supplying information about the other issuers and affected issues unless and until the IRS determines that this information is necessary."

    2. Disregard question 45 and the IRS will consider the Form 14429 (March 2013) complete without this question being answered.

    3. Disregard questions 49-51 and the IRS will consider Form 14429 (March 2013) complete without these questions being answered.

    Note:

    Unless specifically stated otherwise, CPM considers the VCAP submission incomplete unless all information and items are included. CPM declines the request, and closes the case without further resolution unless they receive timely receive all required information.

  2. Statement under penalties of perjury (see IRM 7.2.3.2.1 (4)) with all required information listed in Exhibit 7.2.3-1.

  3. A statement about whether the issuer:

    • Has post-issuance procedures in place to monitor compliance with the federal tax laws.

    • Mandates that others that have control over actions that might cause a violation of the federal tax laws have compliance procedures in place for those relevant actions.

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

  4. Items (2) and (3) must contain the following declaration, signed by an individual with personal knowledge of, or responsibility over, the information in the submission and authorized by the issuer:

    "Under penalties of perjury, I declare that I have examined this submission, including accompanying documents and statements, and to the best of my knowledge and belief, the submission contains all the relevant facts relating to the request, and such facts are true, correct, and complete."

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

  6. Executed Form 2848, Power of Attorney and Declaration of Representative (POA), following additional instructions on the TEB website on www.irs.gov and declaring a representative authorized to represent the issuer before the IRS with respect to the bond issue. The request may also include an executed Form 8821, Tax Information Authorization, authorizing the IRS to communicate with a third party (e.g., conduit borrower, trustee) with respect to the bond issue.

  7. A draft of the VCAP Model Agreement, completed as appropriate:

    1. See "VCAP Model Agreement" at https://www.irs.gov/tax-exempt-bonds/model-closing-agreements-for-vcap-and-examinations and discussed in IRM 7.2.3.3.2

    2. Generally TEB won’t deviate from the VCAP Model Agreement’s specified terms, however, if the issuer believes a deviation is necessary, it should notate the proposed change on its submitted VCAP Model Agreement and the reason the deviation is necessary.

    3. If the TEB VCAP request is for a violation for which the IRS has provided a specialized closing agreement template (not a VCAP Model Agreement) in an Announcement or other form of guidance (the “Specialty Agreement Template”), the issuer should follow the announcement/other guidance instructions in its proposed agreement.

  8. TEB VCAP resolves violations of the IRC or applicable Regulations based upon the issuer’s representations of facts submitted under penalties of perjury. Subject to its discretion to require additional information in appropriate circumstances, CPM will generally rely on such representations of facts as true and accurate and won’t review books or records to confirm or verify the facts. CPM may rely on representations of facts submitted by a party other than the issuer (e.g., conduit borrower, trustee) under penalties of perjury and, in connection with such reliance, will require that the issuer certify under penalties of perjury that to the best of the issuer’s knowledge such facts are true and accurate. See IRM 7.2.3.1.3 for when a closing agreement won’t be final.

Receipt and Perfection of Submission Request

  1. The following procedures apply to the Coordinator:

  2. Issuers e-mail VCAP requests to TEBVCAP@irs.gov or mail to:

    Internal Revenue Service
    Attn: TEB VCAP
    1122 Town & Country Commons
    Chesterfield, MO 63017

  3. When you receive a VCAP request:

    1. Verify the issuer submitted Form 14429 required penalties of perjury statement and a copy of the Form 8038 series information return for the bonds.

    2. Research the bond issue’s audit history and if currently under audit, notify your group manager, return the request to the issuer and consider the TEB VCAP closed.

    3. If the submission is complete (e.g., contains the Form 14429, required penalties of perjury statement and a copy of the Form 8038 series information return for the bonds), process the case for assignment per IRM 7.2.3.3.1.

      Note:

      CPM processing a case for assignment or assigning the case to a specialist doesn’t waive the IRS’ right to close the case for failing to include all of the required information and items described in IRM 7.2.3.2.1

      .

    4. Complete review and, if necessary, request issuer to send missing or incomplete information within 10 business days:

      • Call the issuer or POA to request the missing information.

      • Inform the issuer and the POA (if Form 2848) in writing that we’ve received the request, but need more information before we process it.

      • Allow 21 days for the additional information (you may, with your group manager’s approval allow one 21-day extension).

      • Get the CPM Program Manager’s approval for any additional extensions (not granted except for extraordinary circumstances).

      • Return the VCAP case if the issuer fails to timely provide the information and consider the case closed.

TEB VCAP Case Processing Procedures

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

Case Establishment and Assignment

  1. The Coordinator will:

    1. Establish a compliance activity within the Reporting Compliance Case Management System ("RCCMS" ) and AIMS (when available) for the VCAP case. Establish each Form 8038 series information return for the submission request as a separate compliance activity.

      Note:

      It may take up to 20 business days to establish a case.

    2. Coordinate with the CPM Group Managers to determine which group is available to work the case.

    3. Assign the request to a CPM group.

    4. Let the CPM Group Manager know that the case has not been linked to AIMS for cases that have been assigned prior to establishment on AIMS.

  2. The CPM Group Manager will:

    1. Generally assign the case to a Specialist who is available to begin the case as soon as possible but no later than 15 business days.

    2. Notify the Coordinator of the assignment to a Specialist.

Case Development (Specialist)

  1. You should view a VCAP assignment as a priority assignment.

  2. Within 5 business days of a VCAP assignment, give the issuer or POA your contact information and submit Form 2848 or Form 8821 to the Centralized Authorization File. Notate your actions in the case chronology record.

  3. When you contact the issuer or POA, update the case to status 12 in RCCMS and notify the Coordinator of the status update. For cases that have been assigned prior to establishment on AIMS, the Specialist and group manager will consult with the Coordinator to link the case to AIMS once the return is available.

    1. Review the request to verify that all of the required information described in IRM 7.2.3.2.1 is provided and complete.

    2. Determine if you need any additional information. If so, request the information from the issuer or representative. The issuer/representative must submit any additional information in written statements under penalties of perjury as described in IRM 7.2.3.2.1 (2).

    3. Request the issuer submit the additional information within 21 business days. You may, with your group manager’s approval, allow one 21-day extension. The CPM Program Manager must approve any additional extensions and won’t grant them except for extraordinary circumstances.

    4. If the issuer doesn’t timely provide the information, follow the procedures in IRM 7.2.3.3.5 to determine whether the case should be closed due to the issuer’s lack of due diligence.

  4. If 100% of the bonds comprising the issue pertaining to the VCAP request have been redeemed, retired or canceled, you should immediately notify your group manager to discuss the appropriate resolution of the case.

  5. When you receive all required information, analyze it, determine the recommended case resolution, and resolve the case as quickly as possible.

    1. If the violation is... And the proposed closing agreement... Then... Need Committee’s approval?
      Described in IRM 7.2.3.4 Doesn’t substantively differ from the VCAP Model Agreement language
      • Prepare a briefing memo following the applicable resolution standard.

      • Attach the memo and the proposed closing agreement to the Closing Agreement Approval Document.

      • Forward to your manager for review, concurrence and signature.

      • If your manager agrees, discuss the proposed settlement with the issuer, emphasizing that the agreement is still subject to the approval process and any terms in the agreement, including the resolution amount, may change as a result of that interview..

      No
      Covered in a Specialty Agreement Template in an announcement or other form of guidance Complies with the guidance’s instructions (including for the required template language) Submit the agreement and the Closing Agreement Approval Document to your manager for approval and submission to the CPM Program Manager for signature. No
      1. Covered by a Specialty Agreement Template, but provides for changes from the agreement template or terms in accordance with the terms of the guidance

      2. Not covered by a Specialty Agreement Template

      3. Not covered in IRM 7.2.3.4, or

      4. The proposed closing agreement language substantively differs from the VCAP Model Agreement language

      • Prepare a briefing memo discussing key facts, applicable law, issuer’s proposed settlement offer, the changes made from the Template or Model Agreement (if applicable), the reason for those changes, and your recommended case resolution.

      • Send the Closing Agreement Approval Document to your group manager for review and concurrence.

      • If in agreement, your group manager will forward to the CPM Program Manager for discussion and feedback.

      • Once the Program Manager feedback is addressed, your group manager will forward the Closing Agreement Approval Form to the Committee for review and comments.

      • You will review, consider and discuss with your group manager any comments or recommendations made by the Committee. If the group manager disagrees with the recommendations of the Committee, forward the issue to the CPM Program Manager for resolution.

      Note:

      It is appropriate to discuss the proposed settlement with the issuer, emphasizing that the agreement is still subject to the approval process and any terms in the agreement, including the resolution amount, may change as a result of that review.

      Yes
  6. When processing the case, call the issuer or POA with regular status updates. Remind them of any outstanding requests and their due date(s). Notate all contacts, updates and reminders on the case chronology record and any granted extensions.

  7. The issuer must:

    • Meet the specific time frames in IRM 7.2.3.3.2(2) to submit additional information.

    • Resolve the TEB VCAP in good faith and with due diligence.

  8. If you determine that an issuer or POA hasn't met the required deadlines or isn’t proceeding toward case resolution in good faith and with due diligence, discuss with your manager whether it’s appropriate to issue a final demand letter:

    1. Upon your group manager’s and the CPM Program Manager’s concurrence, draft a final demand letter notifying the issuer that the case will be closed without resolution 14 days from the date of the letter unless specific actions are taken.

    2. Explain the specific actions required and the reasons for the letter.

    3. Forward the final demand letter to the Coordinator for mailing.

    4. Coordinator will secure the signature of the CPM Program Manager and mail.

    5. Coordinator will secure e-mail a copy of the signed letter to you.

  9. If at any time during the case process, you recommend (and your group manager/CPM Program Manager agree) that, due to unusual circumstances outside of TEB’s control, the case resolution will require significant additional time during which substantive progress toward resolution will not be made (for example, when the CPM Program Manager determines that extraordinary circumstances exist and grants the issuer additional time to respond):

    1. Note your recommendation (and your group manager/CPM Program Manager’s concurrence) and the expected date of next action on the case chronology record.

    2. Update the status to 38 on RCCMS and AIMS.

    3. Notify the Coordinator of the status update.

    Example:

    The CPM Program Manager determines that extraordinary circumstances, outside of TEB’s control, exist and grants the issuer additional time to submit supplemental information.

  10. In determining the appropriate settlement, apply the standard resolution terms of IRM 7.2.3.4 absent compelling reasons to deviate from those terms. However, the resolution amount may be increased by a multiplier based on factors such as time delay between the date of the violation and the submission.

  11. In no event should the resolution amount exceed 100% of taxpayer exposure.

  12. If the issuer received correspondence in response to an anonymous request, consider it in light of the facts in the complete submission in determining the appropriate resolution.

  13. If the standard resolution terms or the response to the anonymous request is insufficient to determine the appropriate resolution, consider all the facts and circumstances including:

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

    • Whether the parties exercised due diligence in discovering the federal tax law violations.

    • Whether the issuer exercised due diligence in proceeding with the current TEB VCAP following discovery of the violation.

    • Whether the issuer negotiated in good faith and with due diligence (e.g., responding promptly to resolution offers the IRS made).

    • 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.

    • The cooperation of the transaction parties with TEB.

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

    • The economic benefit derived by the issuer or other parties through the consummation of the violation.

  14. Consider also whether the same violation was resolved in a VCAP in connection with any of the issuer’s bonds in the last five years and, if the violation is one for which the issuer previously implemented post-issuance compliance procedures under a prior VCAP request submitted after August 5, 2011, why those procedures failed to prevent the same violation from occurring. In considering the weight to give a repeated violation in resolving the current VCAP request, consider whether the prior violation was solely the result of the actions of a conduit borrower and whether that conduit borrower is the subject of the current request. You may determine that the corrective actions taken for the prior request were not sufficient and the issuer must implement additional corrective actions to obtain a TEB VCAP.

Case Resolution

  1. If the case is resolved through the execution of a closing agreement and the Committee is required to review it, the CPM Group Manager forwards the Closing Agreement Approval Document with the attached documents to the Committee after his/her concurrence and discussion with the CPM Program Manager. The Committee may seek advice from the Chief Counsel ad hoc Committee members, such as when a proposed closing agreement terms contains nonstandard terms.

  2. The Committee will:

    1. Review the proposed resolution terms to determine whether they’re consistent with other TEB closing agreements for the same type of violation and if not, whether there is a valid business reason for the difference, such as a significant difference in the facts or one agreement was submitted under the VCAP and the other is from an examination case.

    2. Verify that, if the closing agreement language has been substantively modified from the standard language, the closing agreement is enforceable.

    3. Make any relevant comments or recommendations to the resolution terms and closing agreement terms.

    4. Return the Closing Agreement Approval Document with attached documents to the CPM Group Manager.

    5. If, after consultation with the Chief Counsel ad hoc members, you determine that changes are needed to make the agreement enforceable, inform the CPM group manager that those changes must be made.

    6. If you conclude the proposed resolution isn’t consistent with other TEB closing agreements, insert your reasons in the Closing Agreement Approval Document.

  3. The CPM Group Manager will:

    1. Review and consider any comments and/or recommendations from the Committee.

    2. Discuss with the CPM Program Manager recommendations from the Committee that the Specialist and CPM Group Manager propose not to adopt.

    3. Forward the Closing Agreement Approval Document to the CPM Program Manager for final review and approval indicating whether the issuer/POA has agreed to the recommended closing agreement and resolution terms.

  4. The CPM Program Manager will:

    1. Review the Closing Agreement Approval Documents.

    2. Discuss any concerns with the CPM Group Manager.

    3. If in agreement, will note approval and return the approved Closing Agreement Approval Document to the CPM Group Manager.

    4. If not in agreement, will discuss concerns with the CPM Group Manager and return the case for further development.

  5. The Specialist will, after receiving the necessary approvals, follow the closing agreement execution procedures in IRM 7.2.3.3.4.

Closing Agreement Execution

  1. The Specialist will:

    1. If any changes were made during the review process, secure CPM Group Manager’s approval on the draft closing agreement.

    2. Forward a draft of the proposed closing agreement to the issuer or POA to obtain the issuer or representative’s input on the draft.

    3. Make sure the issuer understands the terms are presented only for negotiation and are not binding on TEB or the IRS.

    4. If issuer disagrees with any revisions made to the closing agreement in the review process and proposes other changes, discuss any proposed modifications to the draft closing agreement with your group manager.

  2. If the agreement is a Specialty Template Agreement:

    1. The Specialist will determine that the Specialty Template Agreement complies with the guidance that provides for that agreement before submitting it to TEB.

    2. If the agreement complies with the requirements of the guidance, the Specialist will secure e-mail the execution letter to the Coordinator with a request to obtain the CPM Program Manager’s signature after verification of payment.

    3. The Coordinator will mail an executed copy of the agreement (when you receive it from the CPM Program Manager) to the issuer and a copy to the POA (if any).

    4. If the agreement does not meet the requirements of the guidance, the Specialist will discuss with this/her group manager and will follow the procedures for a non-Speciality Template Agreement.

  3. If the agreement is not a Specialty Template Agreement:

    1. The Specialist will, once the closing agreement is finalized and approved, secure e-mail the final closing agreement and transmittal letters (i.e., the execution cover letter and transmittal letter to the issuer’s POA, if applicable) to the Coordinator.

  4. The Coordinator will:

    1. Make the required number of agreement copies, coordinate the signing of the transmittal letters and mail the package to the issuer and a copy to the POA.

    2. Notify the Specialist that closing agreements were mailed.

  5. The Specialist notifies the issuer or POA that the closing agreement has been mailed and also reminds the issuer or POA that prior to TEB executing the closing agreement, the issuer must:

    1. Submit the closing agreement payment (if any).

    2. Return the executed agreements to the CPM office in Chesterfield, Missouri or another office designated by the Specialist.

    3. Include a copy of the confirmation of the Electronic Federal Tax Payment System (EFTPS) deposit (if any) with the executed agreements.

      Note:

      Any payments made by or on behalf of the issuer must use the issuer’s EIN unless otherwise specified in the closing agreement.

    4. Complete specified remedial actions such as filing an amended information return, redeeming bonds, or establishment of an irrevocable defeasance escrow (if any).

  6. The Specialist confirms the dates the issuer expects to execute and return the closing agreement and notate them on the case chronology record.

  7. The issuer, Specialist, or Coordinator may call the EFTPS Financial Institution Helpline at 1-800-605-9876 (Monday – Friday, 8:00 a.m. – 8:00 p.m., Eastern Time). When the Specialist confirms payment receipt, notify the Coordinator.

  8. The Coordinator will:

    1. Monitor and confirm receipt of the closing agreement payment (if any).

    2. Verify the agreement has not been altered from what was approved, check for required signatures for agreements other than pre-executed agreements.

    3. Forward the closing agreement to the CPM Program Manager for execution and notify the Specialist that the case is ready for closure.

Case Closing

  1. The Specialist will send the final case closing letter addressed to the issuer and a transmittal letter to the POA by secure e-mail to the Coordinator.

  2. The Coordinator will:

    • Coordinate the signature of the CPM Program Manager.

    • Send the final case closing letter, transmittal letter, and signed closing agreement (if applicable) to the issuer and POA (if applicable).

    • Secure e-mail electronic copies of each of the signed documents to the specialist (or assigned contact specialist, if the agreement is a Specialty Agreement Template).

  3. The Specialist will:

    • Update the issuer or POA on case status.

    • Complete the RCCMS case file.

    • Update the case to status 20.

    • Transfer the case to your group manager (or delegate) within RCCMS.

    • Notify the issuer that you are issuing an approved response letter if you are closing the case without a closing agreement.

  4. If a closing agreement resolves a violation related to bonds for which the issuer irrevocably elected to receive direct payments equal to all or a portion of the interest on the bonds, secure e-mail a final copy of the closing agreement to the TEB unit responsible for prepayment compliance review of direct payment requests.

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

  6. The case closing process should generally be completed within 10 business days from:

    • CPM execution of the closing agreement.

    • The date the closing letter is executed if the resolution doesn’t require a closing agreement.

Unresolved Cases

  1. The Specialist:

    1. In certain situations, you may close a VCAP case without a final resolution.

      Example:

      An issuer may withdraw the request, fail to reach an agreement with CPM in a reasonable period of time after we offer a closing agreement, not timely submit information requested, or fail to negotiate in good faith.

    2. If your recommendation is closing the case as unresolved, discuss with your group manager.

    3. If your group manager agrees with recommendation, prepare the appropriate closing letter explaining the reasons for closing the case and forward to your group manager.

  2. The CPM Group Manager will:

    1. If in agreement with the Specialist’s recommendations, forward the closing letter to the CPM Program Manager for review and concurrence.

    2. If the CPM Program Manager approves, notify the Specialist to close the case following the case closing procedures in IRM 7.2.3.3.5.

    3. Consider whether an audit referral is appropriate based on the facts the issuer disclosed during the VCAP process.

      Note:

      Document your consideration of an audit referral. Submit a referral if you determine it’s appropriate.

    4. If the CPM Program Manager does not approve, notify the Specialist that the case needs further development.

TEB VCAP Resolution Standards

  1. The IRS requested comments regarding the operation of TEB VCAP, including suggestions for standardized closing agreement terms and amounts for particular violations (Notice 2008-31). On June 11, 2008, the Advisory Committee on Tax Exempt and Government Entities (ACT) issued a report titled The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common Violations recommending the IRS create programs to allow streamlined treatment of certain tax law violations. On June 9, 2010, ACT issued a report titled Tax Exempt Bonds: Improvements to the Voluntary Closing Agreement Program for Tax-Exempt, Tax Credit, and Direct Pay Bonds offering additional recommendations.

  2. This section lists VCAP resolution standards for specific violations. TEB anticipates continuing to expand the list of resolution standards for specified violations.

  3. See IRM section 4.81.6, Tax Exempt Bonds Administrative Guidelines, Closing Agreements for descriptions of resolution standard methodologies.

  4. If the violation is not described in this section or if the issuer requests CPM to consider unusual factors to arrive at a different resolution, resolve the violation through the TEB VCAP general procedures on appropriate terms under the facts and circumstances.

Objectives and Scope

  1. TEB VCAP resolution standards’ primary compliance objective is to promote due diligence on the part of issuers and other parties to the tax-advantaged bond transaction in resolving violations.

  2. The IRS encourages due diligence by providing:

    • Certainty to issuers and other parties about how a particular violation is resolved

    • Financial incentives for early discovery of the violation.

  3. TEB VCAP resolution standards’ primary administrative objective is to streamline the closing agreement process for specific violations. This results in more efficient processing of cases.

  4. The resolution standards under this section aren’t available when:

    1. The TEB VCAP request covers multiple violations, even if all violations are described in this paragraph.

    2. The VCAP agreement does not meet the conditions of IRM 7.2.3.1.2.

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

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

    5. CPM determines the issuer is not acting in good faith or proceeding with due diligence towards the resolution of the request.

    6. The issuer does not timely respond to CPM’s requests for additional information or to CPM’s closing agreement proposals.

  5. An issuer's failure to submit a TEB VCAP request by the latest date specified for the applicable resolution standard does not prevent the violation from being resolved otherwise through the TEB VCAP general procedures on such terms as are determined appropriate under the facts and circumstances.

    Example:

    An issuer submitting a request more than one (1) calendar year from the date of a deliberate action resulting in excessive nonqualified use will generally be required to pay a closing agreement payment greater than 110% of taxpayer exposure on the nonqualified bonds.

  6. Generally, the resolution standards described in IRM 7.2.3.4.2 apply only to violations that relate to tax-exempt bonds. However, an issuer of tax credit bonds or direct pay bonds may propose in a TEB VCAP request, a resolution that is based upon one of the standards included in this section, if the resolution is in the best interest of the United States in light of the benefit conferred upon the issuer or bondholders from the related transaction. Process these requests under general VCAP procedures. IRM 7.2.3.4.2 contains specific resolution standards for tax credit and direct pay bonds.

  7. IRM 4.81.6.5.3 describes how to calculate taxpayer exposure and an alternative minimum tax adjustment. As stated in IRM 7.2.3.3.2 (11), in no event will the amount required to be paid in a VCAP closing agreement be greater than 100% of taxpayer exposure as computed in IRM 4.81.6.

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

  9. Generally, monies used to pay the resolution amount or to redeem, defease, retire, cancel, fund a defeasance escrow for, or otherwise remediate violations for bonds must not be proceeds of tax-advantaged bonds.

Identified Violations – Tax-Exempt Bonds

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

    1. Covered violation. A violation is covered by this paragraph when an issuer takes a deliberate action that results in the amount of proceeds allocated to nonqualified purposes exceeding the defined percentage limitations.

    2. Resolution standards. When the issuer submits a TEB VCAP request within six (6) calendar months of the date of the deliberate action giving rise to the VCAP request, the issuer may resolve the violation under the following closing agreement terms:

      1. Submit payment of an amount equal to the greater of (i) $1,000 or (ii) 100% of the taxpayer exposure on the nonqualified bonds, with the period for computing taxpayer exposure beginning on the date of the deliberate action and ending on the date the nonqualified bonds are redeemed and retired or cancelled.

      2. Redeem and retire or cancel the nonqualified bonds prior to the date the closing agreement is executed by the IRS. If the nonqualified bonds cannot be redeemed or cancelled prior to the execution date, the issuer will both:

      1. Redeem the nonqualified bonds on the earliest call date.

      2. Establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date. This action must be completed prior to the date the closing agreement is executed by the IRS.

    Note:

    When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of the deliberate action giving rise to the TEB VCAP request, substitute 110% for 100% in calculating the closing agreement payment.

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

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

    2. Resolution standards. When the issuer submits the request for TEB VCAP within six (6) calendar months of the date of the violation giving rise to the TEB VCAP request, the issuer may resolve the violation by:

      1. Paying an amount equal to the greater of (i) $1,000 or (ii)100% of the taxpayer exposure on the nonqualified bonds, with the taxpayer exposure computed for the period beginning on the date of the violation and ending on the date the nonqualified bonds are redeemed and retired or cancelled.

      2. Redeeming and retiring or cancelling the nonqualified bonds prior to the date the closing agreement is executed by the IRS. If some or all of the nonqualified bonds cannot be redeemed or cancelled prior to the execution date, the issuer will both:

      1. Redeem the nonqualified bonds on the earliest call date

      2. Establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date. This action must be completed prior to the date the closing agreement is executed by the IRS.

    Note:

    When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of the violation giving rise to the TEB VCAP request, substitute 110% for 100% in calculating the closing agreement payment.

  3. Failure to Provide Notice of Defeasance. Under 26 CFR 1.141-12(d)(3) and 26 CFR 1.150-5(a)(1), an issuer remediating nonqualified bonds through the establishment of an irrevocable defeasance escrow must provide written notice to CPM within 90 days of the date the defeasance escrow is established.

    1. Covered violation. A violation is covered by this paragraph when an issuer fails to successfully remediate nonqualified bonds because it fails to timely provide CPM with written notice that it established a defeasance escrow to remediate nonqualified bonds as required under 26 CFR 1.141-12(d).

    2. Resolution standards When the issuer submits the request for TEB VCAP within six (6) calendar months of the violation giving rise to the TEB VCAP request, the issuer may resolve the failure under a closing agreement by paying an amount equal to $1,000. When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the violation giving rise to the TEB VCAP request, substitute $2,000 for $1,000 as the resolution amount.

  4. Failure to Call Defeased Bonds Within 10.5 Years of Issuance. Under 26 CFR 1.141-12(d)(4), an issuer may only remediate nonqualified bonds (issued after May 16, 1997) through the establishment of an irrevocable defeasance escrow if the period between the issue date of the bonds and the first call date of the bonds is 10.5 years or less.

    1. Covered violation. A violation is covered by this paragraph when the issuer fails to successfully remediate nonqualified bonds through the timely establishment of an irrevocable defeasance escrow because all or a portion of the defeased bonds are not callable within 10.5 years of the issue date.

    2. Resolution standards. The issuer may resolve the violation by establishing an irrevocable defeasance escrow for all bonds, under the rules for creating a defeasance escrow under 26 CFR 1.141-12(d), other than 26 CFR 1.141-12(d)(4)) and ensuring that the IRS receives payment in an amount equal to the greater of (1) $1,000 or (2) taxpayer exposure on the bonds for only bonds that are not callable within 10.5 years of issuance, with the period for computing taxpayer exposure beginning on the later of the date 10.5 years after the issue date or the date of the deliberate action and ending on the date the bonds will be redeemed under the defeasance escrow.

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

    1. Covered violation. A violation is covered by this paragraph when a change in the use of the proceeds of a bond issue not subject to the alternative minimum tax ("non-AMT bonds" ) occurs resulting in the bonds being re-characterized as subject to the alternative minimum tax ("AMT bonds" ). A violation is covered only when the proceeds of the bonds were first expended for a purpose that at the time of the expenditure would not make the bonds subject to the alternative minimum tax.

    2. Resolution standards. When the issuer submits the request within six (6) calendar months of the date of the deliberate action giving rise to the TEB VCAP request, the issuer may resolve the violation by paying an amount equal to the greater of $1,000 or 100% of the alternative minimum tax adjustment with respect to the bonds for the period beginning on the date of the deliberate action and ending on the date the bonds are no longer outstanding.

    Note:

    When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of the deliberate action, substitute 110% for 100% in calculating the closing agreement payment.

  6. Capital Expenditure Limitation Failure. IRC 144(a)(1) requires that qualified small issue bonds have an aggregate face amount of not more than $1,000,000, unless an issuer makes an election under IRC 144(a)(4)(A) for the $10,000,000 limitation to apply instead of the $1,000,000 limitation. Under IRC 144(a)(4), in determining whether an issue meets or exceeds the $10,000,000 limitation, the issuer must include the sum of:

    • The aggregate amount of certain outstanding qualified small issue bonds described in IRC 144(a)(2).

    • The aggregate amount of capital expenditures described in IRC 144(a)(4)(A)(ii) with respect to facilities described in IRC 144(a)(4)(B) (as modified by IRC 144(a)(4)(G), when applicable).

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

    2. Resolution standards. When the issuer submits the TEB VCAP request within six (6) calendar months of the date of the deliberate action giving rise to the VCAP request, the issuer may resolve this violation by:

    1. Paying an amount equal to the greater of (i) $1,000 or (ii)100% of the taxpayer exposure on the nonqualified bonds, with the period for determining taxpayer exposure beginning on the date the violation occurs and ending on the date the nonqualified bonds are redeemed and retired or cancelled.

    2. Redeeming and retiring or cancelling the nonqualified bonds prior to the date the closing agreement is executed by the IRS. If the nonqualified bonds cannot be redeemed prior to the execution date, the issuer will:

    1. Redeem the nonqualified bonds on the earliest call date.

    2. Establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date. This should be completed prior to the date the closing agreement is executed by the IRS. For this purpose, the nonqualified bonds are bonds of the issue having a principal amount equal to the amount by which the applicable limitation is exceeded and for which the average maturity of the bonds remaining after these bonds are redeemed will not be greater than the average maturity of the bond issue before these bonds are redeemed.

      Note:

      When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of the deliberate action, substitute 110% for 100% in calculating the closing agreement payment.

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

    1. Covered violation. A violation is covered by this paragraph when the net proceeds the issuer allocates to property are from bonds that have an average maturity greater than 120% of the average reasonably expected economic life of such property.

    2. Resolution standards. When the issuer submits the TEB VCAP request within six (6) calendar months of the date of the violation giving rise to the request, the issuer may resolve the violation by redeeming or defeasing an amount of the bonds sufficient to reduce the weighted average maturity of the issue to 120% of the economic life of the financed property.

    Note:

    When an issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of the violation giving rise to the TEB VCAP request, the issuer must redeem or defease an amount of the bonds sufficient to reduce the weighted average maturity of the issue to 110% of the economic life of the financed property.

  8. Impermissible Advance Refunding. IRC 149(d) generally prohibits advance refunding of:

    1. Any qualified private activity bond issue other than a qualified 501(c)(3) bond issue, or

    2. Any governmental bond issue or qualified 501(c)(3) bond issue that has already been advance refunded.

    Note:

    IRC 149(d)(5) provides that a bond shall be treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond. Under 26 CFR 1.150-1(d)(3), a current refunding issue is defined as a refunding issue that is issued not more than 90 days before the final payment of principal and interest on the prior refunded issue and an advance refunding issue is defined as a refunding issue which is not a current refunding issue.

    1. Covered violation. A violation is covered by this paragraph when the issuer uses proceeds of a refunding issue to pay the principal or interest on a prior issue more than 90 days from the issue date of the refunding issue and the prior issue is not permitted to be advance refunded under IRC 149(d).

    2. Resolution standards. When the issuer submits the TEB VCAP request within six (6) calendar months of the date of the violation, giving rise to the request, the issuer may resolve the violation by paying an amount equal to the greater of (i) $1,000 or (ii) 100% of the taxpayer exposure on the refunding bond, with the period for computing the taxpayer exposure beginning on the issue date of the refunding bonds and ending on the date 90 days before the final redemption of the prior refunded issue.

    Note:

    When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of the violation, substitute 110% for 100% of taxpayer exposure in calculating the closing agreement payment.

  9. Failure to Timely Reinvest Proceeds into SLGS. Under IRC 148(a), an issue shall be treated as consisting of arbitrage bonds if any portion of the proceeds is intentionally used directly or indirectly to acquire higher yielding investments. Under IRC 148(b)(1), a higher yielding investment is any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue. For this purpose, definitions of materially higher yield are provided under 26 CFR 1.148-2(d).

    Example:

    Investments held in a refunding escrow are treated as higher yielding investments when the yield on those investments over the life of the escrow produces a yield which is more than 1/1000 of 1% higher than the yield on the bond issue.

    1. Covered violation. A violation is covered by this paragraph when a party to the escrow agreement violates the escrow agreement by failing to timely reinvest proceeds of a refunding issue, upon the maturity of investments (e.g., failure to reinvest proceeds of a matured guaranteed investment contract in 0% U.S. Treasury Securities – State and Local Government Series (SLGS) in an efficient escrow).

    2. Resolution standards. When the issuer submits the TEB VCAP request within 60 days of the next required computation date following the date of the reinvestment failure, the issuer may resolve the violation by ensuring that the IRS receives payment of an amount equal to the sum of the following:

      1. An amount which, if treated as a payment for the investments held in the escrow, would reduce the yield on the escrow to the bond yield; plus

      2. An amount equaling interest accrued at the underpayment rate under IRC 6621 on the payment described above, computed for the period beginning on the date the payment would have been due if treated as a yield reduction payment and ending on the date the payment is actually paid to the IRS. For this purpose, proceeds the trustee holds because it failed to reinvest as required may be treated as invested at the applicable federal funds rate when the trustee certifies under penalties of perjury that its customary practice is to invest its overnight balances at a rate that approximates the applicable federal funds rate and the proceeds were likely invested in such a manner.

  10. Failure to Satisfy TEFRA Public Approval Requirement for Certain Qualified 501(c)(3) Advance Refunding Bonds. Certain private activity bonds are not qualified bonds unless the issuer of the bonds has satisfied the public approval requirement ("TEFRA Approval" ) of IRC 147(f)(2). IRC 147(f)(2)(D) provides an exception from the TEFRA Approval requirement for certain current refunding bonds.

    1. Covered violation. A violation is covered under this paragraph when an issuer of otherwise qualified 501(c)(3) advance refunding bonds for which TEFRA Approval is required issues the bonds without obtaining TEFRA Approval.

    2. Resolution standards. When the issuer submits the request for a TEB VCAP within six (6) calendar months of the date of issuance, the issuer may resolve the violation by paying an amount equal to 7.5% of taxpayer exposure, with taxpayer exposure being computed from the date of issuance to the date of the closing agreement. The issuer must also represent in the closing agreement that:

      1. It has taken action that would have constituted TEFRA Approval for the bonds if that action had been taken prior to the issuance of the bonds;

      2. It would not have been required to obtain TEFRA Approval for the bonds if the bonds had been refunding bonds covered by the exception in IRC 147(f)(2)(D); and

      3. It misinterpreted the exception in IRC 147(f)(2)(D) or reasonably relied on advice of counsel that the exception in IRC 147(f)(2)(D) applied in connection with the issuance of the bonds.

      Note:

      When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of issue, substitute 8.25% for 7.5% in computing taxpayer exposure for the closing agreement payment.

  11. Failure to Satisfy TEFRA Public Approval Requirement in Connection with Status of Applicable Elected Representative. Certain private activity bonds are not qualified bonds unless the issuer of the bonds has satisfied the TEFRA Approval requirement.

    1. Covered violation. A violation is covered by this paragraph when an issuer of private activity bonds for which TEFRA Approval is required issues the bonds without obtaining approval from an applicable elected representative as defined in IRC 147(f)(2)(E)(i)(II).

    2. Resolution standards. When the issuer submits the TEB VCAP request within six (6) calendar months of the date of issuance, the issuer may resolve the violation by paying an amount equal to 5% of taxpayer exposure, with the period for computing taxpayer exposure beginning on the issue date of the bonds and ending on the date of the closing agreement. The issuer will represent in the closing agreement that:

      1. It made a good faith effort to obtain a TEFRA Approval prior to the issuance of the bonds.

      2. It reasonably relied on an approval from an individual that it mistakenly thought met the requirements of an "applicable elected representative" under IRC 147(f)(2)(E)(i)(II).

      3. Its records relating to the bonds (including any records relating to the issuer's good faith effort to obtain TEFRA Approval) do not indicate substantial public opposition to the bonds.

      1. The issuer has taken actions that would constitute TEFRA Approval for the bonds if taken prior to issuance of the bonds. When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of issue, substitute 5.5% for 5% when computing taxpayer exposure for the closing agreement payment.

  12. Certain Small Issue Bonds Issued as Draw Down Bonds in an Amount that Exceeds Volume Cap. Under IRC 141(e)(2), qualified small issue bonds (as described in IRC 144(a)) are not qualified bonds unless they are issued as part of an issue which meets the applicable requirements of IRC 146, among others. Under IRC 146(a), an issue meets the requirements of that section if the aggregate face amount of the private activity bonds issued pursuant to the issue, when added to the aggregate face amount of tax-exempt private activity bonds previously issued by the issuing authority during the calendar year, does not exceed the authority's volume cap for such calendar year. Section 4 of Notice 2010-81 provides that in the particular case of a "draw-down" loan under 26 CFR 1.150-1(c)(4)(i) or a commercial paper program under 26 CFR 1.150-1(c)(4)(ii), each draw or commercial paper constitutes a separate bond that is issued on the issue date of that draw or commercial paper when the issuer receives the purchase price and interest begins to accrue on that draw or commercial paper for Federal income tax purposes.

    Note:

    The special rule in Notice 2011-63, which supplements and amends Notice 2010-81, does not apply to small issue bonds under IRC 144(a) because under IRC 146 there is no carryforward period for unused volume cap for small issue bonds.

    1. Covered violation. A violation is covered by this paragraph when an issuer issues qualified small issue bonds pursuant to a draw down loan that does not meet the requirements of IRC 146 because the aggregate face amount of the private activity bonds issued pursuant to the issue, when added to the aggregate face amount of tax-exempt private activity bonds previously issued by the issuing authority during the calendar year, exceeds the authority's volume cap for such calendar year.

    2. Resolution standards. When the issuer submits the request for TEB VCAP no later than March 31, 2017, the issuer may resolve the violation by paying $1,000 for each calendar year (including partial calendar years) beginning with the first calendar year after the calendar year of the initial draw and ending on the calendar year in which the last draw on the issue was made.

      The issuer will represent the following in the closing agreement:
      1. Such qualified small issue bonds would meet the requirements of IRC 146 using the alternative approach to determining issue date provided in Notice 2011-63 if for that alternative approach the purpose of issuing qualified small issue bonds was a "carryforward purpose" within the meaning of IRC 146(f)(5).

      2. All draws on the issue occurred prior to August 5, 2011.

      3. If the request is submitted no later than September 30, 2017, substitute $2,000 for $1,000 in computing the payment.

  13. Extinguishment/Merger.Notice 2008-41, as modified by Notice 2008-88, and Notice 2010-7 provided certain temporary rules that allowed issuers to purchase and hold their own tax-exempt bonds for temporary holding periods ("extinguished bonds" ) without causing those bonds to be treated as retired under IRC 103 and 141-150. Those temporary rules expired on December 31, 2010.

    1. Covered violation. A violation is covered by this paragraph when the holder of an obligation that is extinguished for purposes of IRC sections 103 and 141-150 excludes from gross income the interest income paid on such obligation.

    2. Resolution standards. The issuer may treat the extinguished bonds as outstanding even though the issuer holds the bonds during the period. (the "extinguished period" ) that:

      1. Begins on the later of January 1, 2011, or the date the issuer purchases its own bonds.

      2. Ends on the earlier of the date 180 days after the execution of the closing agreement or such earlier date requested by the issuer. To receive this treatment, the issuer must:

      1. Adopt a resolution that it intends to resell or currently refund the extinguished bonds as tax-exempt bonds within specified timeframes.

      2. Represent in writing that the extinguished bonds are legal, valid and binding obligations under state law and that there are no other matters relating to the tax-exempt status of the bonds under IRC sections 103 and 141 through 150.

      3. Pay an amount equal to the par value of the extinguished bonds multiplied by 0.029% for each month during the extinguished period.

  14. Failure to Satisfy Information Reporting Requirements After Remedial Action. An issuer taking a remedial action under 26 CFR 1.141-12 must comply with the information reporting requirements of IRC 149(e) and 26 CFR 1.149(e)(1) if as a consequence of the remedial action, bonds are treated as reissued as described in 26 CFR 1.141-12(g).

    1. Covered violation. A violation is covered by this paragraph when the issuer fails to successfully remediate nonqualified bonds because it does not timely file with the IRS a completed information reporting form prescribed for such purpose.

    2. Resolution standards. When the issuer submits the TEB VCAP request within six (6) calendar months after the deadline for filing the appropriate information reporting form with the IRS, the issuer may correct the failure by paying an amount equal to $1,000. The issuer will be required to file the completed information reporting form prior to the IRS executing the closing agreement. When the issuer submits the request more than six (6) calendar months but within one (1) year after deadline for filing the information return, substitute $2,000 for $1,000 as the resolution payment.

Identified Violations – Certain Direct Pay Bonds

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

  2. IRM 4.81.6.5.3 describes how to calculate amounts for a specific bond issue for the resolution standards described in this section, including how to calculate the credit maintenance amount and determine the credit adjustment period.

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

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

    1. Covered violation. A violation is covered by this paragraph when the issuer takes a deliberate action that causes its build America bonds or recovery zone economic development bonds to be used in a manner that causes the bonds to be private activity bonds as defined in IRC 141(a).

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

      Note:

      When the issuer submits the request more than six (6) calendar months but within one (1) calendar year of the date of the deliberate action, the issuer may resolve the violation by paying an amount equal to 110% of the credit maintenance amount. Any closing agreement permitting the shortening of the credit adjustment period through a prospective modification of the debt service schedule for purposes of calculating IRC 6431 credits will require such modification to be structured such that the issuer is prevented from requesting refundable credits with respect to an amount of bonds equal to 110% of the nonqualified bonds.

  5. Impermissible Use of Proceeds. Under IRC 54AA(g)(2), 1400U-2, and 54A(d) and (e), as applicable, certain bond proceeds are subject to use of proceeds requirements in addition to, or instead of, the use of proceeds requirements applicable to tax-exempt bond proceeds generally. Under IRC 6431, issuers may irrevocably elect to receive direct payments as refundable credits equal to a portion of the interest on direct pay bonds issued as build America bonds described in IRC 54AA(g)(2), recovery zone economic development bonds described in IRC 1400U-2, or certain specified tax credit bonds described in IRC 6431(f)(3) equal to all or a portion of the interest or an amount calculated using the applicable qualified tax credit bond rate.

    1. Covered violation. A violation is covered by this paragraph when the issuer of direct pay bonds makes a final allocation of proceeds to an impermissible use under IRC sections 54AA(g)(2)(A), 1400U-2(b)(1)(a), or 54A, as applicable, including, but not limited to, a final allocation of proceeds to issuance costs in excess of the percentage limitation specified in IRC 54A(e)(4)(A)(ii).

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

      Note:

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

  6. De Minimis Premium Violation (Certain Build America Bonds and Recovery Zone Economic Development Bonds).. IRC 54AA(d)(2)(C) requires the issue price of build America bonds and recovery zone economic development bonds for which the issuer receives direct payments, pursuant to IRC 6431, equal to a portion of the interest on those bonds to be not greater than the principal amount of each bond plus a de minimis amount of premium over the stated principal amount of each bond.

    1. Covered violation. A violation is covered by this paragraph on the issue date when any maturity of bonds subject to the requirements of IRC 54AA(d)(2)(C) is issued at a price in excess of the permissible price.

    2. Resolution standards. When the issuer submits the TEB VCAP request with respect to one or more fixed rate direct pay build America bonds or recovery zone economic development bonds, the issuer may resolve the violation under the following closing agreement terms. For purposes of the closing agreement, the stated interest rate for each maturity originally issued at a price in excess of the permissible price will be adjusted to an interest rate that corresponds to the yield of the maturity assuming that the maturity was sold at the maximum permissible price (the "Adjusted Interest Rate" ). The issuer will pay an amount equal to 120% of the credit maintenance amount on the bond maturity, computed by assuming that the bond maturity accrued or will accrue interest (taking into account scheduled sinking fund payments but without regard to any optional call) at an interest rate equal to the difference between the original interest rate on the bond maturity and the Adjusted Interest Rate. For this purpose, the credit adjustment period used to calculate the credit maintenance amount will begin on the issue date but may be shortened when the issuer and TEB agree to modify the debt service schedule for purposes of requesting IRC 6431 credits (See IRM 4.81.6). Any closing agreement permitting the shortening of the credit adjustment period through a prospective modification of the debt service schedule may provide an Adjusted Interest Rate for each maturity that will be used for purposes of calculating IRC 6431 credits thereafter.

  7. De Minimis Premium Violation (Certain Specified Tax Credit Bonds).Notice 2010-35 imposes a rule similar to the rule in IRC 54AA(d)(2)(C) against issuance of specified tax credit bonds under IRC 6431(f)(3) with more than a de minimis amount of premium.

    1. Covered violation. A violation is covered by this paragraph, when, on the issue date, any maturity of bonds subject to the requirements of Notice 2010-35 is issued at a price in excess of the permissible price.

    2. Resolution standards. When the issuer submits the TEB VCAP request no later than six (6) calendar months from the issue date with respect to one or more fixed rate specified tax credits bonds described in IRC 6431(f)(3) for which the amount of the payments described in IRC 6431(b) is determined by using all or a portion of the interest payable on the maturity under IRC 6431(f)(1)(C)(i), the issuer may resolve the violation under the following closing agreement terms. For purposes of the closing agreement, the stated interest rate for each maturity originally issued at a price in excess of the permissible price will be adjusted to an interest rate that corresponds to the yield of the maturity assuming that the maturity was sold at the maximum permissible price (the "Adjusted Interest Rate" ). The issuer (or the conduit borrower on behalf of the issuer) will pay 100% of the credit maintenance amount on the bond maturity, computed by assuming that the bond maturity accrued or will accrue interest (taking into account scheduled sinking fund payments but without regard to any optional call) at an interest rate equal to the difference between the original interest rate on the bond maturity and the Adjusted Interest Rate. When the issuer submits the request more than six (6) calendar months from the issue date but within one (1) calendar year after the issue date 110% should be substituted for 100% in determining the payment amount. Any closing agreement permitting the shortening of the credit adjustment period through a prospective modification of the debt service schedule may provide an Adjusted Interest Rate for each maturity that will be used for purposes of calculating IRC 6431 credits thereafter.

  8. Extinguishment/Merger. A debt instrument generally is treated as retired or extinguished when an issuer acquires its own debt because a merger of the interests of the issuer and the holder occurs. When direct pay bonds are acquired by the issuer of the bonds (for purposes of this section, the "Initial Acquisition" ), such bonds become extinguished for federal tax purposes and the issuer is not entitled to refundable credit payments equal to a portion of the interest on the extinguished bonds from and after the date of the Initial Acquisition.

    1. Covered violation. A violation is covered by this paragraph when an issuer claims a refundable credit with respect to interest on extinguished bonds that accrued or that will accrue from and after the date of the Initial Acquisition. An issuer may later sell those bonds to the public, in which case the bonds may be treated as reissued.

    2. Resolution standards. When the issuer submits the TEB VCAP request no later than the later of six (6) calendar months after the Initial Acquisition with respect to one or more fixed rate direct pay bonds acquired and extinguished for federal tax purposes and subsequently sold by the issuer to the public (for purposes of this section, the "Subsequent Sale" ), the issuer may resolve the violation under the following closing agreement terms. In the request, the issuer shall represent that from the original issue date the bonds acquired by the issuer through the Initial Acquisition:

      1. Are outstanding for purposes of state law and constitute legal, valid and binding obligations of the issuer under applicable state law.

      2. Assuming that the bonds are treated as remaining outstanding for purposes of IRC 103, 141-150, or IRC 54A and either 54C, 54D, 54E, or 54F (as applicable), qualify as "obligations" of the issuer under IRC 103 or 54A, as applicable.

      The issuer may make these representations itself or the issuer may satisfy the requirement for these representations through submission of an unqualified opinion of a nationally recognized public finance attorney or law firm that addresses these representations. The issuer will pay an amount equal to 100% of the credit maintenance amount on the portion of the bonds acquired by the issuer through the Initial Acquisition (taking into account scheduled sinking fund payments on a pro rata basis, if any). For this purpose, the credit adjustment period used to calculate the credit maintenance amount will begin on the date of the Initial Acquisition and end on the first interest payment date on the bonds scheduled after the date of the closing agreement. If the Initial Acquisition occurred during the primary offering of the direct pay bonds, the amount paid will also include an amount equal to any profits realized by the issuer or any related party to the issuer from the Subsequent Sale.

      Note:

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

      Note:

      When the issuer submits the request more than six (6) calendar months after the Initial Acquisition but within the later of one (1) calendar year after the Initial Acquisition, substitute 110% for 100% in determining the resolution amount.

Statement Under Penalties of Perjury Required Information

a Bond issuer’s information
1 Name
2 EIN
3 Street address, city, state, and zip code
4 Name, title, and telephone number of an official of the issuer we may contact for additional information.

Note:

For a violation that affects multiple issuers or issues of bonds, (i.e., a composite issue, absent extraordinary circumstances) each issuer of an affected issue must join the request and provide the information required by the TEB VCAP request.

b Bond issue information
1 Name and issue date of the bond issue
2 Issue price
3 A full debt service schedule for the issue showing principal maturities and interest rates (for variable rate issues, describe how the rate is set and the interest payments to the date of the request)
4 CUSIP number(s), if any
c Violation description for TEB VCAP resolution, including a:
1 Clear statement of the specific federal tax requirement that provides a basis for finding a violation
2 Description of the identified violation(s) and the relevant facts and circumstances pertaining to the identified violation and its occurrence
3 Statement as to when and how the facts surrounding the identified violation were discovered.
If an issuer requests that TEB consider the lack of clarity about a legal answer as a factor in determining an appropriate resolution, the issuer must also include the following information to support its request:
  • Applicable law for which the issuer believes there is uncertainty

  • Established law supporting a determination that there is a credible basis for finding that a violation occurred

  • The legal questions, and how they apply to the facts of the submission

d Proposed resolution terms for violation. Describe, with respect to any proposed payment of a closing agreement amount, the:
1 Method in IRM 4.81.6 used to compute the amount or a description of an alternative method used (describe why the alternative method is appropriate under the facts and circumstances)
2 Source of funds the issuer will use to pay the closing agreement amount. If they propose: redemption, defeasance, tender, or purchase of any amount of the bonds comprising the bond issue, they must identify the source of funds it will use for this purpose and the maturities of the bonds subject to this action.
e Issuer representations
1 That the TEB VCAP request is permitted under IRM 7.2.3..
2 Whether it knew or reasonably expected on the issue date that the violation might occur.
3 That they have or plan to implement policies and/or procedures to prevent this type of violation from recurring with this or any other of the issuer's bond issues, description of those policies and procedures, (include as applicable: the title of the person responsible for monitoring compliance, the frequency of compliance check activities, the nature of the compliance check activities undertaken, and the date they originally adopted and subsequently updated (if applicable) the procedures).
4 Whether the bonds are under review in any court (other than a federal court), administrative agency, commission, or other proceeding (identify the proceeding)
5 Date(s) of the violation, the date and circumstances surrounding the discovery of the violation, and the date and nature of any actions taken in response to the discovery of violation (e.g., redemption, defeasance).
f Whether or not the issuer submitted any previous or contemporaneous VCAP requests (including anonymous requests) for:
1 This bond issue
2 A violation of the same type for another bond issue submitted in the past five years. Include: the name(s) of the bond issue(s), brief summaries of the violation(s) identified, the letter received as a result of the request, and resolution(s) of all previous requests.
3 For any closing agreements executed after August 5, 2011 and before submitting the current VCAP explain why you are requesting a VCAP for the same type of violation, the issuer should provide a description of the procedures it implemented for the prior closing agreement to prevent future violations of the same type. The issuer must explain why those procedures failed to prevent the violation now under consideration, and describe actions it has taken to prevent the violation from occurring again in any its bond issues.
g Whether or not the issuer requested a private letter ruling for the bonds for this TEB VCAP’s violation. If so, briefly summarize the matters addressed in that private letter ruling request.
h Whether or not the issuer has publicly disclosed the VCAP’s potential violation (i.e., via the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System (EMMA) or to any state or local taxing jurisdiction that grants tax-advantaged treatment to the issuer’s bonds) If so, how was the disclosure made.
I If requesting that the IRS consider that another party caused the violation in determining the appropriate resolution: provide information on the other person(s) acts or omissions that gave rise to the violation and describe the circumstances surrounding the violation (including identifying the person(s) whose acts or omissions caused the violation).
j Any other relevant information for the VCAP request and resolution.