7.2.3  Tax Exempt Bonds Voluntary Closing Agreement Program

Manual Transmittal

September 10, 2015

Purpose

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

Material Changes

(1) Procedures for the Tax Exempt Bond Voluntary Closing Agreement Program have been updated. Modifications of and additions to certain procedures applicable to the TEB VCAP have been incorporated.

Effect on Other Documents

This supersedes IRM 7.2.3 dated August 5, 2011.

Audience

TE/GE (Tax Exempt Bonds)

Effective Date

(09-30-2015)

Rebecca L. Harrigal
Director, Tax Exempt Bonds

7.2.3.1  (09-30-2015)
In General

  1. This section sets forth procedures for the voluntary closing agreement program ("TEB VCAP" ) for tax-exempt bonds, tax credit bonds, and direct pay bonds("tax-advantaged bonds" ). Through TEB VCAP, issuers of tax-advantaged bonds may voluntarily approach the office of Tax Exempt Bonds ("TEB" ) to resolve most violations of the Internal Revenue Code (the "Code" or "IRC" ) and applicable Income Tax Regulations (the "Regulations" ) on behalf of their bondholders or themselves through closing agreements with the IRS.

  2. The Compliance & Program Management ("CPM" ) function of TEB is responsible for administration and oversight of TEB VCAP as part of its voluntary compliance initiatives. The TEB VCAP Inventory Coordinator ("Coordinator" ) will maintain certain records of the operations of the program and transmit them to the Manager, Compliance & Program Management ("CPM Manager" ).

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

  4. IRM 4.81.6 provides general procedures under which TEB will enter into closing agreements for tax-advantaged bonds.

  5. References to tax-advantaged bonds in this section are references to tax-exempt bonds, tax credit bonds, and direct pay bonds. References to "tax-exempt bonds" are to state or local bonds issued pursuant to IRC 103 the interest on which is not included in the gross income of the holders thereof. 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 IRC 54B, 54C, 54D, 54E, or IRC 54F), 1397E and 1400N(l).

    2. 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.

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

  6. 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 sections 6431(f), 54A and either IRC 54C, 54D, 54E or 54F.

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

    3. Recovery Zone Economic Development Bonds issued pursuant to IRC 1400U-2 .

    4. 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.

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

7.2.3.1.1  (09-30-2015)
Objectives

  1. The primary objectives of TEB VCAP are to encourage issuers to exercise due diligence and to ensure others that use the proceeds of tax-advantaged bonds to exercise due diligence in complying with the IRC and applicable Regulations, to encourage issuers to voluntarily bring forward to the IRS discovered violations, and to provide a vehicle to correct these violations as expeditiously as possible. Generally, based on issuer’s voluntary request for VCAP together with its statements of good faith and its adopted procedures to promote future compliance, the issuer can expect more favorable resolution terms than those had the violation been discovered on examination.

  2. 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.

7.2.3.1.2  (09-30-2015)
Scope

  1. TEB VCAP requests will be accepted when an issuer’s submissions indicate that there is a sufficient basis for TEB to conclude that there has been a federal tax law violation. TEB VCAP is available only if the issuer works with CPM in good faith to proceed toward resolution of 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 is in the best interests of the United States to enter into the agreement; and

    2. The United States will sustain no 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. Absent extraordinary circumstances or specific IRS instructions to the contrary, TEB VCAP is not available, however, if the violation can be remediated under other remedial action provisions or tax-exempt bond closing agreement programs contained in the Regulations or other published guidance, including the following:

    1. An issuer may remediate actions impacting tax-exempt bonds under sections 1.141-12, 1.142-2, 1.144-2, 1.145-2, and 1.147-2 of the Regulations (CFR). 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.

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

  4. TEB VCAP generally may be used for violations applicable to tax-credit bonds under the IRC or applicable Regulations. Absent extraordinary circumstances or specific IRS instructions to the contrary, TEB VCAP is not available if the violation can be remediated under other remedial action provisions provided by the IRC or the Regulations, including the following.

    1. An issuer must remediate failures 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 remediate violations impacting Qualified Zone Academy Bonds under 26 CFR 1.1397E-1(h)(8). In the case, however, of Qualified Zone Academy Bonds that are issued under IRC 54A and 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).

  5. TEB VCAP generally may be used for violations applicable to direct-pay bonds under the IRC or applicable Regulations. Absent extraordinary circumstances or specific IRS instructions to the contrary, TEB VCAP is not available if the violation can be remediated under other remedial action provisions provided by the IRC or the Regulations, including the following:

    1. 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).

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

  6. 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.

  7. TEB VCAP is not available unless the issuer has taken steps, including adopting and implementing procedures, to prevent future violations of the same type as in the TEB VCAP request for its tax-advantaged bonds.

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

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

  10. TEB VCAP is not available 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.

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

  12. TEB VCAP is not available if the transaction giving rise to the violation occurred, but the issuer has not yet filed a Form 8038 Series information return in connection with the bond issue for which TEB VCAP is sought.

7.2.3.1.3  (09-30-2015)
Effect of TEB VCAP Closing Agreement

  1. Under IRC 7121 and corresponding Regulations, closing agreements executed under TEB VCAP, are final and conclusive and may not, in the absence of fraud, malfeasance, or misrepresentation of material fact, be reopened as to matters agreed upon or be modified by an officer, employee or agent of the United States.

7.2.3.1.4  (09-30-2015)
Audit Selection of TEB VCAP Cases

  1. Except as set forth in this IRM provision, absent extraordinary circumstances, a bond issue will not be selected for examination while it is under review in TEB VCAP. Generally, a bond issue will be treated as under review in TEB VCAP on the date a TEB VCAP request satisfying all the requirements has been submitted in accordance with this section and received by CPM. For example, a TEB VCAP request made by an issuer on an anonymous basis does not satisfy all of the requirements because the names of the issuer and the bond issue, together with other required information, have not been disclosed.

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

7.2.3.1.5  (09-30-2015)
Special Procedures for Anonymous Requests

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

  2. For instances when those standards do not provide guidance on how a particular violation may be resolved, an issuer may request information on the appropriate resolution methods for a particular violation on an anonymous basis. The anonymous request option is intended to assist an issuer in evaluating appropriate resolution methods in instances in which its violation is novel or unique or when there is otherwise significant uncertainty regarding the appropriate settlement terms. The anonymous request option is not intended to encourage issuers to delay the submission of fully disclosed TEB VCAP requests relating to relatively simple or straightforward violations when the appropriate resolution methods are reasonably clear. As such, CPM will consider when deciding whether to respond to an anonymous request, whether the submission of the anonymous request represents a less than good faith effort on the part of the issuer to resolve the violation as expeditiously as possible.

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

  4. Because an anonymous request does not satisfy all the requirements of this IRM, the issuer will receive no protection under the TEB VCAP procedures from the IRS beginning an examination of the bond issue. An issue relating to an anonymous request which has been opened for examination prior to identification to CPM will no longer be eligible for TEB VCAP.

  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 does not represent TEB’s settlement offer. Moreover, if the facts submitted with the disclosed TEB 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 resolution.

  6. If CPM decides to respond to an anonymous request, the specialist will prepare a briefing memorandum and the suggested resolution letter attaching both to the required standard TEB VCAP approval document (the "Closing Agreement Approval Document" ) prior to forwarding to the specialist’s group manager for review and concurrence. After approval, the CPM group manager will forward the documents to the Closing Agreement Committee (the "Committee" ) as provided in IRM 4.81.6.4, if the proposed closing letter describes likely resolution terms.

  7. In reviewing the resolution terms, the Committee will consider whether the proposed terms are consistent with other TEB closing agreements on similar violations, using the process set forth in IRM 7.2.3.3.3. If the Committee does not have enough information to determine if the proposed resolution will be consistent with other TEB closing agreements, it may recommend that TEB not provide a response to the anonymous request. This recommendation will be provided on the Closing Agreement Approval Document that is returned to the specialist and group manager.

  8. If the proposed response does not require Closing Agreement Committee review, the CPM Manager will review the response letter and notify the specialist’s CPM group manager of concurrence or the need for further development. Upon approval of the CPM Manager, the specialist will prepare the case for closure.

7.2.3.2  (09-30-2015)
TEB VCAP Request Submission

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

7.2.3.2.1  (09-30-2015)
Information Required in Submission Request

  1. An issuer is required to submit a completed Form 14429, Tax Exempt Bonds Voluntary Closing Agreement Program Request, with the following information and items in a TEB VCAP submission request. The VCAP submission is not considered complete until all information and items are included. CPM will decline to consider the request, and the case may be closed without further resolution unless all the information is received in a timely manner. Until Form 14429 (March 2013) is updated, it should be completed with the following changes:

    1. Question 6 (Note) should be read "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. An issuer should disregard question 45 and the IRS will consider the Form 14429 (March 2013) complete without this question being answered.

    3. Beginning March 31, 2016, an issuer should disregard questions 49-51 and the IRS will consider Form 14429 (March 2013) complete without these questions being answered.

  2. An issuer, including any other person or entity joining the issuer requesting a closing agreement under TEB VCAP must submit a statement under penalties of perjury as described in 7.2.3.2.1(4) that includes all of the following information:

    1. The bond issuer's information including the:

      1. Issuer's name

      2. Issuer's employer identification number

      3. Street address, city, state, and zip code

      4. Name, title, and telephone number of an official of the issuer who may be contacted for additional information.

      Note:

      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 connection with a TEB VCAP request.

    2. The bond issue information including:

      1. The name and issue date of the bond issue.

      2. The issue price.

      3. A full debt service schedule for the issue showing principal maturities and interest rates (for variable rate issues include a description of how the rate is set and the interest payments to the date of the request).

      4. CUSIP number(s), if any.

    3. A description of the violation(s) for which the issuer is requesting resolution under TEB VCAP including:

      1. A clear statement of the specific federal tax requirement that provides a basis for finding a violation.

      2. A description of the identified violation(s) and the relevant facts and circumstances pertaining to the identified violation and its occurrence.

      3. A 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:

      1. The applicable law for which the issuer believes there is uncertainty.

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

      3. The legal questions, and their application to the facts of the submission.

    4. The issuer’s proposed resolution terms for resolving the violation, including with respect to any proposed payment of a closing agreement amount:

      1. The method described in IRM 4.81.6 used to compute the amount or a description of an alternative method used including a discussion of why the alternative method is appropriate under the facts and circumstances.

      2. The source of funds the issuer will use to pay the closing agreement amount.

      Note:

      If the proposal includes the redemption, defeasance, tender, or purchase of any amount of the bonds comprising the bond issue, the issuer must identify the source of funds it will use for this purpose and the maturities of the bonds subject to such action.

    5. Issuer representations:

      1. That the TEB VCAP request is permitted under IRM 7.2.3.1.

      2. As to whether the issuer knew or reasonably expected on the issue date that the violation might occur.

      3. That policies and/or procedures have been or will be implemented to prevent this type of violation from recurring with this or any other of the issuer's bond issues and a description of those policies and procedures, including 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 such procedures were originally adopted and subsequently updated (if applicable).

      4. On whether the bonds are under review in any court (other than a federal court), administrative agency, commission, or other proceeding (identify the proceeding).

      5. About the date(s) of the violation, the date and circumstances surrounding the discovery of the violation, and the date and nature of any actions taken in response to the discovery of violation (e.g., redemption, defeasance).

    6. Whether or not the issuer submitted any previous or contemporaneous TEB VCAP requests (including anonymous requests) with respect to:

      1. The bond issue that is the subject of the request, or

      2. Pertaining to a violation that is of the same type of violation that is the subject of the request for another bond issue provided that such request was submitted within the past five years, including the name(s) of the bond issue(s), brief summaries of the violation(s) identified in the letter received as a result of the request and resolution(s) of, all previous requests.

      Note:

      For any closing agreements executed after September 30, 2015, and before the submission of the current TEB VCAP request that pertained to the same type of violation as that requested in the TEB VCAP request being submitted, the issuer should provide a description of the procedures it implemented in connection with that prior closing agreement to prevent future violations of the same type, an explanation of why those procedures failed to prevent the violation now under consideration, and a description of actions it has taken to prevent the violation from occurring again for the current and any other of the issuer’s bond issues.

    7. Whether or not the issuer requested a private letter ruling for the bonds relating to the violation which is the subject of the TEB VCAP request and a brief summary of the matters addressed in that private letter ruling request.

    8. Whether or not the issuer has made any public disclosure of the potential violation described in the request, such as a disclosure through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System (EMMA) or a disclosure to any state or local taxing jurisdiction that grants tax-advantaged treatment to the issuer’s bonds, and if applicable, how the disclosure was made.

    9. If the issuer asserts the violation was caused by another party or parties and wants that fact to be taken into account by CPM, in determining the appropriate resolution, the request should provide information about the acts or omissions of the other party or parties that gave rise to the violation together with a description of the circumstances surrounding the violation (including an identification of the person or persons whose acts or omissions caused the violation).

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

  3. The issuer must include with the request a statement about whether it has post-issuance procedures in place to monitor compliance with the Federal tax laws and whether it has post-issuance procedures in place to monitor compliance with the Federal tax laws and whether the issuer mandates that others that have control over actions that might cause a violation of the Federal tax laws have compliance procedures in place with respect to those relevant actions.

  4. The information described in IRM 7.2.3.2.1 (2) and IRM 7.2.3.2.1 (3) above must be submitted under the following declaration, signed by an individual authorized by the issuer with personal knowledge of, or responsibility over, the information in the submission:

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

  5. The request must include a copy of the Form 8038 Series information return filed in connection with the issuance of the bond issue and submitted to the IRS. If the violation relates to the requirements of IRC 148, the request must also include a copy of any Forms 8038-T and Forms 8038-R related to the bond issue and submitted to the IRS. 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. The request may include an executed Form 2848, Power of Attorney and Declaration of Representative, following additional instructions on the TEB website on 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. TEB has created a VCAP model closing agreement that will be available on the TEB website (the "VCAP Model Agreement" ) and discussed in IRM 7.2.3.3.2. Once the VCAP Model Agreement is available on the TEB website, the request must include a draft of the VCAP Model Agreement, filled in as appropriate for the TEB VCAP request. Generally TEB will not deviate from the terms specified in the VCAP Model Agreement that are applicable to the TEB VCAP request, however, if the issuer believes a deviation is necessary, it should notate the proposed change on the VCAP Model Agreement it submits and the reason it believes that the deviation is necessary. If the TEB VCAP request is for a violation for which the IRS has provided a specialized closing agreement template (as contrasted with the VCAP Model Agreement) in an Announcement or other form of guidance (the "Specialty Agreement Template" ), the issuer should follow the instructions provided in that announcement or other guidance when submitting the 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 not review books or records to confirm or verify such 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 will not be final.

7.2.3.2.2  (09-30-2015)
Receipt and Perfection of Submission Request

  1. Unless specifically instructed otherwise, submission requests under TEB VCAP should be emailed to TEBVCAP@irs.gov and/or may be mailed to:

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

  2. When the Coordinator receives a TEB VCAP request, the Coordinator will review the request to verify that the issuer submitted Form 14429 and included the required penalties of perjury statement and a copy of the Form 8038 Series information return for the bonds. The Coordinator will research the exam history of the bond issue and if the bond issue is currently under examination, the Coordinator will notify the CPM Manager and return the request unprocessed to the issuer, at which point the TEB VCAP is considered closed.

  3. If the Coordinator determines that the submission request contains the documents referenced in IRM 7.2.3.2.1, the Coordinator will process the case for assignment in accordance with IRM 7.2.3.3.1. Neither processing the case for assignment nor assignment of the case to a specialist waives the IRS’s right to close the case for failure to include all of the required information and items described in IRM 7.2.3.2.1.

  4. The Coordinator will generally complete this review and, if necessary, request missing or incomplete information within 10 business days following the Coordinator’s receipt of the request.

  5. If the Coordinator determines that the submission request does not contain the documents specified in IRM 7.2.3.2.1, the Coordinator will provide the issuer and the authorized representative (if any) as directed in the issuer’s Form 2848 with written notification that the request has been received, but that certain missing information is required before the request can be processed for assignment. The Coordinator will also contact the issuer or authorized representative by telephone to request the missing information. Generally, the Coordinator will allow 21 days for the additional information to be submitted. The Coordinator, with approval of the Coordinator’s manager, may approve one 21 day extension. Any additional extensions must be approved by the CPM Manager and will not be granted absent extraordinary circumstances. If the issuer fails to timely provide the information, the VCAP case will be returned to the issuer, at which point the TEB VCAP is considered closed.

7.2.3.3  (09-30-2015)
TEB VCAP Case Processing Procedures

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

7.2.3.3.1  (09-30-2015)
Case Establishment and Assignment

  1. The Coordinator will initiate establishment of a compliance activity within the Reporting Compliance Case Management System ("RCCMS" ) and AIMS for the TEB VCAP case. For this purpose, each individual Form 8038 Series information return relating to the submission request is established as a separate compliance activity. The completion of the establishment process may take up to 20 business days.

  2. Once establishment of the compliance activity within RCCMS has been initiated, the CPM Manager or the Coordinator will assign the activity to a CPM group. The CPM group manager will generally assign an employee to contact the issuer or authorized representative within 5 business days of the group’s receipt of the assignment to confirm receipt of the request. Additionally, the CPM group manager will generally assign the request to a CPM specialist who is available to begin developing the case within 15 business days of the receipt of the assignment. The CPM group manager will notify the Coordinator of the assignments.

7.2.3.3.2  (09-30-2015)
Case Development

  1. Generally, within 5 business days of being assigned a TEB VCAP case, the specialist will (a) provide the issuer or its authorized representative the specialist’s contact information and (b) take such actions as specified by the IRM or current procedures to make a submission to the Centralized Authorization File for any Form 2848 or Form 8821 submitted as a part of TEB VCAP case. The specialist will notate the actions taken as required by (a) and (b) in the case chronology record.

  2. Upon initiation of the case(and receipt of the compliance activity within RCCMS), the specialist will update the case to status 12 within RCCMS and notify the Coordinator of the status update.

    1. The specialist will review the request to verify that all of the required information described in IRM 7.2.3.2.1 is provided and complete. The specialist will also review the request to determine if any additional information is necessary. If such information is necessary, the specialist will request the information from the issuer or its authorized representative. Any additional submissions must be in written statements under penalties of perjury as described in IRM 7.2.3.2.1(2) .

    2. The specialist will request that the additional information be submitted within 21 days of the date the specialist makes the request. The specialist, with the approval of the specialist’s reviewer or manager, may approve one 21 day extension. Any additional extensions must be approved by the CPM Manager and will not be granted absent extraordinary circumstances. If the issuer fails to timely provide the information(, the TEB VCAP case may be closed and the request returned to the issuer. (See IRM 7.2.3.3.6 for procedures.

  3. Upon receipt of all required information, the specialist will analyze the information, make a determination as to the recommended resolution of the case, and take appropriate steps to resolve the case as expeditiously as possible.

    1. If the violation identified in the request is covered in IRM 7.2.3.4 and the language in the proposed closing agreement does not substantively differ from the VCAP Model Agreement language, the specialist will prepare a briefing memorandum following the applicable resolution standard and will attach the memo and the proposed closing agreement to the Closing Agreement Approval Document and forward to the specialist’s CPM group manager for review, concurrence and signature. If the CPM group manager concurs, the specialist will discuss the proposed resolution with the issuer, emphasizing that the resolution terms have not been approved by the CPM Manager. These agreements do not require approval of the Committee.

    2. If the violation is covered by a Specialty Agreement Template set forth in an announcement or other form of guidance and the agreement, including the required template language, complies with the instructions in the guidance, the agreement and the Closing Agreement Approval Document should be submitted to the specialist’s CPM group manager for approval and submission to the CPM Manager for signature. Committee approval is not required.

    3. If 1) the violation is covered by a Specialty Agreement Template and the guidance permits changes to the template or settlement terms or, 2) the violation is not covered by a Specialty Agreement Template and either the request is not covered in IRM 7.2.3.4 or the proposed closing agreement language substantively differs from the VCAP Model Agreement language, the specialist will prepare a briefing memorandum which will include a discussion of the key facts, applicable law, issuer’s proposed resolution offer, the changes made from the Template or Model Agreement the reason for those changes, and the specialist’s recommendation for case resolution. The specialist will attach the briefing memorandum and the proposed closing agreement to the Closing Agreement Approval Document that will be sent to the specialist’s CPM group manager for review and concurrence. Upon concurrence by the CPM group manager, the proposed resolution will be discussed with the issuer, emphasizing that the resolution terms have not been approved by the Committee or CPM Manager. These cases require Committee approval.

  4. Throughout the case development process, the specialist will provide the issuer or its authorized representative with status updates at regular intervals via telephone. These updates will include a reminder of any outstanding requests for information and the due date(s) for those requests The specialist will notate such updates and reminders on the case chronology record along with any extensions that CPM has given the issuer for submitting the information.

  5. In addition to meeting the specific time frames set forth in IRM 7.2.3.3.2(2) for submission of additional information, the issuer must proceed toward resolution of the TEB VCAP with good faith and due diligence. If at any time during the case development process, the specialist determines that an issuer or its authorized representative is not proceeding toward resolution in good faith and with due diligence, the specialist will discuss the appropriateness of issuing a final demand letter with the CPM group manager. Upon concurrence of the CPM Manager, the specialist will 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. The letter will explain the specific actions required and the reasons for the letter. The specialist will forward the final demand letter to the Coordinator to arrange the execution and mailing of the letter. The Coordinator will electronically forward a copy of the executed letter to the specialist.

  6. The specialist will update the case to status 38 if at any time during the case development process, the specialist with concurrence of the CPM group manager recommends and receives agreement from the CPM Manager that due to unusual circumstances the resolution of the case will require significant additional time during which substantive progress toward resolution will not be made (for example, when the CPM manager determines that extraordinary circumstances exist and grants the issuer additional time for submitting supplemental information in support of the request). Both the recommendation by the specialist and the concurrence of the CPM Manager shall be entered into the case chronology along with the expected date of next action. The specialist will update the status to the 38 on RCCMS and AIMS, and shall notify the Coordinator of the status update.

  7. In determining the appropriate resolution, if applicable, the specialist will apply the standard resolution terms of IRM 7.2.3.4.1, IRM 7.2.3.4.2, or IRM 7.2.3.4.3, absent compelling reasons to deviate from those terms. If the issuer received correspondence in response to an anonymous request, the specialist will consider that response in light of the facts in the complete submission in determining the appropriate resolution. If the standard resolution terms or the response to the anonymous request is insufficient to determine the appropriate resolution, the specialist will consider all the facts and circumstances, including the good faith and due diligence exercised by the transaction parties, including but not limited to 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; and the economic benefit derived by the issuer or other parties through the consummation of the violation. The specialist will also consider 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 TEB VCAP request submitted after September 30, 2015, why those procedures failed to prevent the same violation from occurring. In considering the weight to give a repeated violation in resolving the current TEB VCAP request, the specialist will 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. The specialist may determine that the corrective actions taken under IRM 7.2.3.2.1(2) for the prior request were not sufficient and the issuer must implement additional corrective actions to obtain a TEB VCAP.

7.2.3.3.3  (09-30-2015)
Case Resolution

  1. If the case will be resolved through the execution of a closing agreement and review by the Committee is required, the CPM group manager will forward the Closing Agreement Approval Document and the attached documents to the Committee after his or her concurrence with the proposal. 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 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 language, that the closing agreement is enforceable. In reviewing the resolution terms for consistency, the Committee will consider whether the comparable agreements came in through the TEB VCAP program versus through an examination and other relevant factors that might support different resolution standards. After the resolution terms and closing agreement terms are approved, the Closing Agreement Approval Document and attached documents, as applicable, will be returned to the CPM group manager. Once the CPM Group manager and the representative/issuer have agreed upon the Committee approved agreement, the CPM group manager will then forward the Closing Agreement Approval Document and attachments to the CPM Manager for concurrence. If the CPM Manager concurs, she/he will sign the Closing Agreement Approval Document and return it to the CPM group manager with a copy to the Committee. If the CPM Manager does not concur, she/he will discuss his/her concerns with the CPM group manager and the Committee. If there are any concerns remaining after that discussion, the CPM Manager will discuss with the FO Manager and then share conclusions with the CPM group manager and the Closing Agreement Committee. If an agreement cannot be reached, the case will be elevated to the TEB director.

  3. If the Committee, after consultation with the Chief Counsel ad hoc members, determines that changes are needed to make the agreement enforceable, those changes will be shared with the specialist and the CPM 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 in the Closing Agreement Approval Document and discuss alternative resolutions with the CPM group manager and the specialist. If agreement is reached, the case will be approved by the Committee. If agreement is not reached, the case will be sent to the CPM Manager who will consult with the FO Manager and, if necessary the CPM and FO Manager will bring the case to the TEB Director for final decision. All persons who approve but do not sign the agreement will sign the Closing Agreement Approval Document.

  4. After receiving the necessary approvals, the specialist will follow the closing agreement execution procedures provided in IRM 7.2.3.3.4.

7.2.3.3.4  (09-30-2015)
Closing Agreement Execution

  1. With the consent of the specialist's CPM group manager, the specialist will forward a draft of the proposed closing agreement to the issuer or its authorized representative to obtain input from the issuer or representative on the draft. This draft may or may not reflect the terms that the IRS will accept; it is meant only to expedite the negotiation process. The specialist should be sure that the issuer understands that the terms are presented only for negotiation and are not binding on TEB or the IRS. The specialist will discuss any proposed modifications with the specialist’s CPM group manager, and the Committee, as appropriate.

  2. If the Coordinator determines that the Specialty Template Agreements required to be signed before submission to TEB ("Pre-executed Agreements" ) complies with the guidance that provides for that agreement, the Coordinator should forward the agreement to the CPM Manager for signature with a notation that the agreement meets the requirements of the guidance. Once signed and returned to the Coordinator, the Coordinator should mail an executed copy of the agreement to the Issuer and send a copy to the authorized representative (if any) as indicated on the Issuer’s Form 2848, Power of Attorney and Declaration of Representative. For all other TEB VCAP agreements, once the closing agreement is in final form and has received all necessary approvals within TEB, the specialist will electronically send the closing agreement in final form and the transmittal letters (i.e., the execution cover letter and transmittal letter to the issuer's authorized representative, if applicable) to the Coordinator via secure messaging. The Coordinator will make the required number of agreement copies, coordinate the signing of the transmittal letters and mail the package to the issuerwith a copy to the authorized representative (if any) as indicated in the issuer’s Form 2848, "Power of Attorney and Declaration of Representative."

  3. For agreements that are not Pre-executed Agreements, the Coordinator will notify the specialist following the mailing of the packages. The specialist will notify the issuer or its authorized representative that the closing agreements have been mailed. The specialist will also remind the issuer or its authorized representative that: (i) the closing agreement payment (if any) must be submitted prior to execution by the CPM Manager; (ii) the executed agreements must be returned to the CPM office in Chesterfield, Missouri or another office designated by the specialist; (iii) a copy of the confirmation of the Electronic Federal Tax Payment System ("EFTPS" ) deposit (if any) must be included with the executed agreements; and (iv) specified remedial actions such as filing an amended information return, redeeming bonds, or establishment of an irrevocable defeasance escrow (if any) must be completed prior to the execution of the closing agreement by TEB. The specialist will confirm the dates the issuer expects to execute and return the closing agreement and notate such dates on the case chronology record.

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

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

  6. The coordinator will monitor for receipt and proper accounting of any closing agreement payment and, for agreements other than pre-executed agreements, upon receipt of the executed closing agreement from the issuer, the Coordinator will verify that the agreement has not been altered from what was approved, check for required signatures. Once the payment has been confirmed, the Coordinator will forward the closing agreement to the CPM Manager for execution and notify the specialist that the case is ready for closure.

7.2.3.3.5  (09-30-2015)
Case Closing

  1. The specialist will electronically forward to the Coordinator the final case closing letter addressed to the issuer and a transmittal letter to the authorized representative the issuer authorized this correspondence in the issuer’s Form 2848, Power of Attorney and Declaration of Representative. The Coordinator will sign all appropriate closing letters using the CPM Manager’s signature stamp, and transmit the final case closing letter, the transmittal letter, and the signed closing agreement (if applicable)to the issuer and authorized representative (if applicable.). The Coordinator will send electronic copies of each of the signed documents to the specialist (or assigned contact specialist, if the agreement is a Specialty Agreement Template) via secure messaging. The specialist will then provide the issuer or its authorized representative with a status update, complete the RCCMS case file, update the case to status 20, and transfer the case to the CPM group manager (or delegate) within RCCMS.

    1. If the case is not being resolved with a closing agreement, the issuer will be notified that the case is closed through the approved response letter.

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

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

  4. The case closing process should generally be completed within 10 business days from execution of the closing agreement by CPM or the date on which the closing letter is executed if the resolution does not require a closing agreement.

7.2.3.3.6  (09-30-2015)
Unresolved Cases

  1. In certain situations, it is appropriate to close a TEB VCAP case without a final resolution. For example, an issuer may withdraw the request, an issuer and CPM may fail to reach an agreement in a reasonable period of time after an offer is made by CPM to enter into a closing agreement, an issuer may not timely submit information requested, or an issuer may fail to negotiate in good faith. In these or other situations, the specialist may recommend initiating an unresolved closure of the case. The specialist will present this recommendation through the specialist's CPM group manager to the CPM Manager for review and concurrence.

  2. The specialist (or assigned contact specialist if a Specialty Agreement Template) will prepare the appropriate closing letter and forward through the specialist’s CPM group manager to the CPM Manager for review and concurrence. Upon approval of the CPM Manager, the specialist will follow the case closing procedures in IRM 7.2.3.3.5.

  3. When a TEB VCAP case closes without a final resolution, the specialist should consider whether a referral for examination is appropriate based on the facts disclosed by the issuer during the VCAP process, document the specialist’s conclusion with respect to such consideration, and submit such referral if determined to be appropriate.

7.2.3.4  (09-30-2015)
TEB VCAP Resolution Standards

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

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

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

  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, the violation will be resolved through the TEB VCAP general procedures on such terms as are determined appropriate under the facts and circumstances.

7.2.3.4.1  (09-30-2015)
Objectives and Scope

  1. The primary compliance objective of the TEB VCAP resolution standards identified in this section is to promote due diligence on the part of issuers and other parties to the tax-advantaged bond transaction in resolving violations. The IRS encourages due diligence by providing certainty to issuers and other parties about how a particular violation will be resolved and by providing financial incentives for early discovery of the violation.

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

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

    1. The TEB VCAP request covers multiple violations, even if all violations are described in IRM 7.2.3.4.1.

    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 that 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 requests for additional information or to CPM’s closing agreement proposals.

  4. 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 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.

  5. Generally, the resolution standards described in IRM 7.2.3.4.2 apply only to violations that relate to tax-exempt bonds. See IRM 7.2.3.4.3 for resolution standards for tax credit and direct pay bonds. An issuer of tax credit bonds or direct pay bonds may propose in a TEB VCAP request, however, a resolution that is based upon one of the following standards, and the IRS may accept the proposal if it is in the best interests of the United States in light of the benefit conferred upon the issuer or bondholders from the related transaction.

  6. IRM 4.81.6.5.3 describes how to calculate taxpayer exposure and an alternative minimum tax adjustment.

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

  8. 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.

7.2.3.4.2  (09-30-2015)
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 IRM 7.2.3.4.2 (1) 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 6 calendar months of the date of the deliberate action giving rise to the TEB VCAP request, the issuer may resolve the violation under the following closing agreement terms :

      1. The issuer will ensure the IRS receives 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 by the issuer.

      2. The issuer will 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. Prior to the date the closing agreement is executed by the IRS, establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date.

    Note:

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the deliberate action giving rise to the TEB VCAP request, 110% will be substituted 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 IRM 7.2.3.4.2 (2) 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 6 calendar months of the date of the violation giving rise to the TEB VCAP request, the issuer may resolve the violation by:

      1. Ensuring that the IRS receives a payment in 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 by the issuer.

      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. Prior to the date the closing agreement is executed by the IRS, establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date.

    Note:

    When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the violation giving rise to the TEB VCAP request, 110% should be substituted 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 IRM 7.2.3.4.2 (3) 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 6 calendar months of the violation giving rise to the TEB VCAP request, the issuer may resolve the failure under a closing agreement ensuring that the IRS receives payment an amount equal to $1,000. When the issuer submits the request more than 6 calendar months but within 1 calendar year of the violation giving rise to the TEB VCAP request, $2,000 will be substituted for $1,000 as the settlement 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 IRM 7.2.3.4.2 (4) 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 IRM 7.2.3.4.2 (5) 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 6 calendar months of the date of the deliberate action giving rise to the TEB VCAP request, the issuer may resolve the violation by ensuring that the IRS receives payment in 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 6 calendar months but within 1 calendar year of the date of the deliberate action, 110% should be substituted 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:

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

    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 IRM 7.2.3.4.2 (6) 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 6 calendar months of the date of the deliberate action giving rise to the TEB VCAP request, the issuer may resolve this violation by:

      1. Ensuring that the IRS receives 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 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. Prior to the date the closing agreement is executed by the IRS, establish and fund an irrevocable defeasance escrow to defease the nonqualified bonds to their first call date. For this purpose, the nonqualified bonds are bonds of the issue having a principal amount equal to the amount by which the applicable limitation is exceeded and for which in 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. When the issuer submits the request more than 6 calendar months but within 1 calendar year of the date of the deliberate action, 110% should be substituted 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 IRM 7.2.3.4.2 (7) when the net proceeds the issuer allocates to property are from bonds that have an average maturity of more than 120% of the average reasonably expected economic life of such property.

    2. Resolution standards. When the issuer submits the TEB VCAP request within 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 6 calendar months but within 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 IRM 7.2.3.4.2 (8) 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 6 calendar months of the date of the violation, giving rise to the request, the issuer may resolve the violation by ensuring that the IRS receives payment of 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 6 calendar months but within 1 calendar year of the date of the violation, 110% should be substituted 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 1/1000th of 1% higher than the yield on the bond issue.

    1. Covered violation. A violation is covered by IRM 7.2.3.4.2 (9) 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 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 IRM 7.2.3.4.2 (10) 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 6 calendar months of the date of issuance, the issuer may resolve the violation by ensuring that the IRS receives payment in 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, and

      2. It

        1. 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

        2. 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 6 calendar months but within 1 calendar year of the date of issue, 8.25% should be substituted 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 IRM 7.2.3.4.2 (11) 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 6 calendar months of the date of issuance, the issuer may resolve the violation by ensuring that the IRS receives payment of 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:

      1. 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.

      2. 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 6 calendar months but within 1 calendar year of the date of issue, 5.5% should be substituted for 5% for 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. 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 IRM 7.2.3.4.2 (12) 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, 2016, the issuer may resolve the violation by ensuring that the IRS receives payment of $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 that:

      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 3, 2011. If the request is submitted no later than September 30, 2016, $2,000 should be substituted 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 IRM 7.2.3.4.2 (13) 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. When the issuer submits the TEB VCAP request no later than March 31, 2016, 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 IRM 7.2.3.4.2 (14) 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 6 calendar months after the deadline for filing the appropriate information reporting form with the IRS, the issuer may correct the failure by ensuring that the IRS receives payment of 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 6 calendar months but within 1 year after deadline for filing the information return, $2,000 will be substituted for $1,000 as the settlement payment.

7.2.3.4.3  (09-30-2015)
Identified Violations – Certain Direct Pay Bonds

  1. Generally, the resolution standards described in this section only apply to violations that relate to the direct pay bonds 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. Such requests will be processed 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 IRM 7.2.3.4.3 (4) 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 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 6 calendar months but within 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 IRM 7.2.3.4.3 (5) 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 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 f 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 ensure that the IRS receives payment in 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 6 calendar months but within 1 calendar year from the date of the deliberate action, this violation may be resolved with a closing agreement payment equal to 110% of the credit maintenance amount. 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 IRM 7.2.3.4.3 (6) 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 by no later than December 31, 2015, 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 ensure that the IRS receives payment in 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 4.81.6.5.3.2(2)). 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 IRM 7.2.3.4.3 (7), 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 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 6 calendar months from the issue date but within 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 IRM 7.2.3.4.3 (8) 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 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 ensure that the IRS receives payment in 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 6 calendar months after the Initial Acquisition but within the later of 1 calendar year after the Initial Acquisition, 110% will be substituted for 100% in determining the settlement amount.

7.2.3.4.4  (09-30-2015)
Termination of Certain Modifications to Resolution Standards Based on Timing of Discovery of Violation

  1. One of the factors the specialist considers in determining the appropriate resolution of a TEB VCAP request is how quickly the issuer discovered the violation and requested a TEB VCAP. In addition, the resolution standards described in IRM 7.2.3.4.2 or IRM 7.2.3.4.3 factor the issuer’s timeliness into the settlement by creating a two tier standard, with the more favorable tier applying to issuers that discover and submit the TEB VCAP request earlier

  2. Under the previous version of IRM 7.2.3.4.4, additional relief was provided for an issuer that had adopted written procedures to ensure that its tax-advantaged bonds remain in compliance with all post-issuance related federal tax requirements that are conditions to the tax-advantaged status of the bonds. That relief also applied when such post-issuance compliance procedures were implemented after the date of the violation if the issuer both timely identified the violation following implementation of such procedures and submitted its TEB VCAP request no later than 90 days after identification. Such procedures had to meet certain minimum requirements: that is, they must specify the official(s) with responsibility for monitoring compliance, a description of the training provided to such responsible official(s) with regard to monitoring compliance, the frequency of compliance checks (must be at least annually), the nature of the compliance activities required to be undertaken, the procedures used to timely identify and elevate the resolution of a violation when it occurs or is expected to occur, procedures for the retention of all records material to substantiate compliance with the applicable federal tax requirements, and an awareness of the availability of TEB VCAP and other remedial actions to resolve violations. Generally, a reference to reliance on the bond documents, without more, would not meet this written procedures requirement. If the issuer had these procedures in place, it could apply more favorable tier resolution standards even if the date for submission would otherwise have required the less favorable tier to apply. For requests submitted after March 31, 2016, this additional relief procedure no longer applies.

  3. Under this revision of the IRM, post issuance compliance procedures are not required to be in any other pre-specified format. To obtain a TEB VCAP, however, an issuer is required to provide evidence that it has implemented a change to its procedures that is reasonably expected to prevent the same type of violation from happening in any of its bond issues. This change to the procedures is being made to allow issuers to develop their own best practices for post-issuance compliance procedures and to measure the benefit of those procedures by their effectiveness, that is, whether they enable the issuer to capture a violation quickly. TEB continues to strongly encourage issuers to have post-issuance compliance procedures that effectively monitor compliance with all of the IRC and Regulations requirements applicable to the bonds.


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