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Part 7. Rulings and Agreements

Chapter 2. TE/GE Closing Agreements

Section 3. Tax Exempt Bonds Voluntary Closing Agreement Program

7.2.3  Tax Exempt Bonds Voluntary Closing Agreement Program

7.2.3.1  (01-01-2003)
Tax Exempt Bond Voluntary Closing Agreement Program

  1. This section sets forth procedures for entering into closing agreements with issuers of tax-exempt bonds under the voluntary closing agreement program, otherwise known as TEB VCAP.

  2. The Tax Exempt Bonds, Outreach, Planning and Review (OPR) function of TE/GE is responsible for the administration of TEB VCAP as part of its outreach and education initiatives.

  3. Although issuers are not liable for tax when a municipal financing arrangement fails to comply with section 103 and related sections of the Internal Revenue Code, an issuer may voluntarily choose to enter into a closing agreement with the Service so that its bondholders are not taxed on the interest they receive under certain circumstances.

  4. Agreements entered into under TEB VCAP must be signed by the issuer. Other parties to the financing arrangement, such as the escrow agent or a conduit borrower, may participate in the negotiations.

7.2.3.2  (01-01-2003)
Objectives

  1. The objective of TEB VCAP is to promote voluntary compliance with section 103 and related sections of the Code.

  2. TEB VCAP is intended to encourage issuers and conduit borrowers to exercise due diligence in complying with the Code and applicable regulations and to provide a vehicle to correct violations of the Code and regulations.

  3. TEB VCAP reflects the continuing policy of the Internal Revenue Service to tax bondholders only as a matter of last resort.

7.2.3.3  (01-01-2003)
Scope

  1. Violations of section 103 and related provisions of the Code, regulations or previously existing closing agreement programs may be resolved under TEB VCAP with certain exceptions.

  2. TEB VCAP is generally not available if:

    1. An issuer may take remedial action under provisions such as sections 1.141–12, 1.142–2, 1.144–2, 1.145–2, and 1.147–2 of the Income Tax Regulations, absent extraordinary circumstances.

    2. The issuer may enter into a closing agreement with respect to the bonds under the program described in Rev Proc. 97-15, 1997-1 C.B. 635, or other pre-existing formal tax-exempt bond closing agreement program.

  3. TEB VCAP is not available if the bond issue is under examination. A bond issue is under examination for these purposes when an opening letter is issued.

  4. TEB VCAP is not available if the tax-exempt status of the bonds is an issue in any court proceeding or is being considered by the IRS Office of Appeals.

  5. If the Service determines that a violation was due to willful neglect, a request for a closing agreement under TEB VCAP will not be considered.

7.2.3.4  (01-01-2003)
TEB VCAP Closing Agreement Request Procedure

  1. An issuer or its authorized representative requesting a closing agreement must submit a statement, or statements, under penalty of perjury, certifying:

    1. A description of the violation, including its nature, when it occurred and the events surrounding it, and a statement about when and how the issuer discovered the violation;

    2. The procedures and policies which will be instituted to ensure future compliance with the Code;

    3. That the bond issue is not under examination;

    4. That the tax-exempt status of the bond issue is not at issue in any court proceeding and is not being considered by the Office of Appeals;

    5. That, on the issue date, the issuer reasonably expected to comply with section 103 and related provisions of the Code;

    6. That the violation was not due to willful neglect;

    7. That the request for a closing agreement was promptly undertaken upon discovery of the violation by the issuer or the conduit borrower; and

    8. That the payment of the closing agreement amount, if any, will not be made with proceeds of bonds described in section 103(a).

  2. TEB VCAP requests should also include a statement setting forth proposed closing agreement terms based on the model closing agreement language contained in IRM section 4.81.1, Exhibit 9, and, if applicable, a computation of the proposed closing agreement amount.

  3. Submissions must include the name and phone number of a person to contact for additional information.

  4. Additional information may be required depending on the facts and circumstances. If additional information is requested and the issuer, conduit borrower or other responsible party does not submit such information within 60 days from the day of a written request for additional information or request an extension of time to provide such information, the Service will presume that the issuer does not wish to proceed with the closing agreement request.

  5. The following declaration, signed by the party making the submission, must accompany a TEB VCAP submission and any factual information submitted after the original submission or any change in the submission at a later time: "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."

7.2.3.5  (01-01-2003)
Special Procedures For Anonymous TEB VCAP Requests

  1. In appropriate circumstances, an issuer or its authorized representative may request a closing agreement on an anonymous basis.

  2. An anonymous request may be made on behalf of a group of similarly situated issuers, but the execution of the closing agreement and all terms therein must be consistent with section 7121 of the Code.

  3. Until the name of the bond issue is disclosed to the Service, a request for a closing agreement under TEB VCAP will not prevent the Service from beginning an examination of the bond issue. An issue for which a request has been submitted under this paragraph that has been placed under examination prior to the date the issue is identified to the Service will no longer be eligible for TEB VCAP.

7.2.3.5.1  (01-01-2003)
Responsibilities

  1. TEB VCAP submissions should be submitted directly to the Manager, OPR.

  2. In the event that the number of requests made for closing agreements pursuant to VCAP exceeds the ability of OPR to timely process, the excess inventory will be selected by the OPR manager, in consultation with the Manager, FO, and expeditiously transferred to the Manager, FO.

  3. The Manager, FO, shall appoint an experienced TEB field manager and the appropriate number of the most experienced agents to assist in the timely processing of this excess inventory of requests.

  4. Once transferred, the field agent and field manager should process the VCAP request on an expeditious basis. Once prepared and reviewed by the field agent and field manager, the appropriate closing agreement or recommended action will be forwarded to the Manager, FO, for review and forwarding, as appropriate, to the Manager, OPR.

  5. The Manager, OPR, will review and execute, as appropriate, any closing agreements or recommended actions, with or without consultation with the Director, TEB, as such manager determines is warranted.

  6. If the Manager, OPR, declines to follow the advice of the Manager, FO, the field manager and agent, the Manager, OPR, may reassign such request internally within OPR or return such request, with appropriate instructions, to the Manager, FO.

7.2.3.5.2  (01-01-2003)
Closing Agreement Terms

  1. Closing agreement terms must resolve violations in a fair, impartial, objective and consistent manner.

  2. Terms may include specific actions to be taken by the issuer or conduit borrower to correct the infraction.

  3. Procedures and policies to be instituted to insure future compliance with the Code may be included.

7.2.3.5.3  (01-01-2003)
Bond Redemption Terms

  1. In general, the purpose of IRC 141 through 150 is to limit the volume of tax-exempt bonds on the market.

  2. Depending on the facts and circumstances of each case, the terms of closing agreements may include provisions to the effect that:

    1. The bonds allocable to the infraction (the "nonqualified bonds" ) will be redeemed within 90 days of the date of execution of the closing agreement.

    2. The nonqualified bonds will be redeemed on the next date on which such bonds may be redeemed under the bond documents (the "next redemption date" ) and a defeasance escrow will be established within 90 days of the execution of the closing agreement.

  3. If the closing agreement includes terms described in (2), the issuer will, within 30 days of the execution of the closing agreement, provide written notice to the holders of the nonqualified bonds to the effect that the nonqualified bonds will be redeemed on their next redemption date and, if such nonqualified bonds are not redeemed on such date, interest on the bonds of the issue will be includible in gross income.

7.2.3.6  (01-01-2003)
Basis for Closing Agreement Amount

  1. Whether an issuer will be requested to make a payment under the closing agreement terms depends on the facts and circumstances of the case.

  2. If a payment is requested, it will generally be paid based on an estimate of the federal income tax liability on interest accruing on the nonqualified bonds, commencing on the date of the infraction and ending on the date the nonqualified bonds are redeemed or defeased.

7.2.3.7  (01-01-2003)
Effect of TEB VCAP Closing Agreement

  1. The closing agreement will protect bondholders from including in their gross income any interest they receive on the bonds during a period specified in the agreement for any violation described in the agreement.

  2. A closing agreement executed under TEB VCAP shall be final and conclusive except that:

    1. The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of a material fact;

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

    3. It is subject to any law, enacted after the date of the agreement, that applies to a tax period ending after the date of the agreement covered by the agreement.


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