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Part 4. Examining Process

Chapter 81. Tax Exempt Bonds (TEB)

Section 1. TEB Administrative Procedures (Cont. 1)

4.81.1  TEB Administrative Procedures (Cont. 1)

4.81.1.16  (01-01-2003)
Special Procedures Related to Conduit Borrower Examinations

  1. When appropriate, the agent should check the IDRS when initiating an examination of a municipal financing arrangement to determine if the return of the conduit borrower or bondholders is under examination or in unstarted inventory. The agent should coordinate with the appropriate Operating Division if a return is charged out to a group.

4.81.1.17  (01-01-2003)
Judicial Review Option

  1. In General (Reserved)

  2. Conduit Borrowers If the examination of a bond issue uncovers a problem with the bonds, the conduit borrower may have a liability independent from the bondholders under the provisions of section 150(b) of the Code. In these circumstances, the agent will often base the adjustment under section 150(b) on the same facts and legal analysis used to determine that interest on the bonds should be includible in income.

    1. General Rule - To minimize the impact of bond examinations on conduit issuers and bondholders, the agent generally will offer conduit borrower(s) the option to pursue a judicial review of its/their tax liability under section 150(b) prior to the date the Service institutes any proceedings or attempt to collect taxes from the bondholders. This "judicial review option" requires that the conduit borrower agrees to expeditiously pursue its legal rights through a judicial review and that, during the time the judicial review is being sought, the bonds remain outstanding.

    2. Applicable Procedures - (Reserved)

    3. Option not binding on Service - (Reserved)

    4. Closing Agreement with Issuer - (Reserved)

    5. After Adjudication - (Reserved)

4.81.1.18  (01-01-2003)
Obtaining Bondholder Names

  1. Interest and principal payments on the bonds generally do not move directly from the source of the debt service payments to the bondholders. If there is a trustee for the issue, it is likely that the trustee receives payments from the paying source and distributes the debt service payments. The trustee may be making the payments to a nominee. There may be several tiers of nominees between the paying agent and the owner of the bond.

  2. As soon as the agent makes a preliminary adverse determination, the agent should consider requesting bondholders' names from the issuer.

  3. If the issuer does not timely provide the bondholders' names, the agent should seek the names from the trustee or the respective nominees. If the agent has a reasonable basis to believe that the trustee cannot provide the names, the first summons may be issued to the first tier nominee. Area Counsel may be consulted for assistance.

  4. The agent may also be able to obtain a continuing John Doe summons to eliminate the need for repetitive court approval. A dual purpose summons may be available if the person to whom the summons is being issued is also a possible beneficial owner of the bonds.

4.81.1.19  (01-01-2003)
Discrepancy Adjustments/Other Remedies

  1. In addition to collecting any income tax owed by the bondholders, the agent should also consider other actions that may be taken.

    1. Certain participants to the municipal financing arrangement may be subject to Preparer/Promoter penalties under section 6700 and other sections of the Code. Refer to the IRM sections regarding Preparer/Promoter Penalties for applying penalties provisions to return Preparers and Tax Shelter Promoters. Prior to opening an examination under 6700, the agent and field manager must receive the written concurrence of the Manager, FO; and

    2. Under IRC 150(b), certain users of facilities financed with qualified private activity bonds may lose deductions or may have unrelated trade or business income if they fail to use the facilities for qualified purposes.

  2. The agent after securing approval of his/her group manager and Manager, FO, must coordinate the IDRS check to determine if another operating division is examining the entity subject to the discrepancy adjustment.

  3. If the entity is not currently under examination, the agent will notice the entity of the discrepancy adjustment and send the report showing the tax due with necessary explanation.

  4. If the entity is under examination, the agent will coordinate the discrepancy adjustment with that operating division.

4.81.1.20  (01-01-2003)
Closing Agreements

  1. It is the policy of the Tax Exempt Bond Program to attempt to resolve violations of the Code without taxing bondholders.

  2. This section sets forth procedures for entering into closing agreements with issuers and other parties to the transaction with respect to bonds that do not comply with the Code and regulations. These procedures seek to ensure consistency of treatment and to encourage increased voluntary compliance by the bond community.

  3. Although issuers are not liable for tax when a municipal financing arrangement fails to comply with IRC 103, an issuer may be willing to enter into a closing agreement so that bondholders are not taxed on the interest they receive. The issuer generally signs the Closing Agreement. Other parties to the financing arrangement, such as the conduit borrower, may wish to participate in the negotiations and jointly execute the closing agreement. The issuer must complete a Form 8821 to allow participation by parties who have not been designated under Form 2848 (Power of Attorney and Declaration of Representative) as a representative.

4.81.1.20.1  (01-01-2003)
Coordination of Closing Agreements for Examination Cases

  1. If the Service is going to initiate closing agreement discussions in an examination case, the agent does not need to issue a preliminary adverse determination letter to the issuer.

  2. The agent and group manager will, in most cases, negotiate the terms of the closing agreement. In some cases, the agent and group manager may desire to seek Area Counsel assistance in the negotiating, drafting, or reviewing of closing agreements.

  3. Prior to entering into a closing agreement with an issuer, the group manager will forward a summary of the proposal to the Manager, FO, for review. The summary should include a description of the issue(s) with related legal analysis, proposed terms of the agreement, and the basis on which the proposed settlement amount was reached.

  4. Once the agreement has been executed by the issuer, three executed copies should be forwarded to the Manager, FO, for review and concurrence. The Manager, FO, will forward the agreement to the Director, TEB, for review and signature. See Exhibit 4.81.1-9 for model closing agreement language.

  5. The Director, TEB, will return the three fully executed original Closing Agreements associated with an examination to the Manager, FO. The Manager, FO, will return the agreements to the field group. The agent will include the agreements with the closed case file. The group manager/agent will issue the closing letter with the original closing agreement to the issuer; one original closing agreement will remain in the TEB case file; and OPR will at case closing pull and file the remaining original.

4.81.1.20.2  (01-01-2003)
Coordination of Closing Agreements for VCAP Cases

  1. OPR, will secure the three fully executed original closing agreements associated with a VCAP.

  2. OPR, will forward one copy of the fully executed closing agreement to the issuer. One copy will be sent to the Ogden Service Center and the third copy will be filed in OPR.

4.81.1.20.3  (01-01-2003)
Closing Agreement Terms

  1. A closing agreement should be narrowly drafted to cover only those issues raised during the examination process. The form of the closing agreement should, generally, closely follow the model agreement.

  2. Once a closing agreement is executed, the Service treats the interest paid on the bonds as excludible from gross income. The Service may, however, determine that additional issues except those that are covered by the closing agreement cause the interest to be taxable. For example, if the issuer fails to rebate the appropriate amount of arbitrage after the settlement date and this failure was not specifically covered by the terms of the closing agreement, the Service may open a new examination on the bonds notwithstanding the existence of the prior closing agreement.

  3. When negotiating a closing agreement, it is important that all potential adjustments, such as adjustments to the conduit borrower's depreciation allowance, adjustments pursuant to the provisions of section 150(b) of the Code, and the deductibility of any closing agreement payment, be included in the terms of the closing agreement where appropriate.

  4. When redemption of outstanding bonds is required as part of the terms of the closing agreement and such redemption will not occur within a short period of time after the closing agreement is executed, the closing agreement consideration should require that the issuer send early notices of redemption to current bondholders.

  5. The terms or existence of a closing agreement is return information protected by IRC 6103. The agreement should include a disclosure consent provision. The agent may obtain a separate disclosure consent to disclose certain aspects of the agreement that the taxpayer should sign simultaneously with the closing agreement. See Exhibit 4.81.1-10.

4.81.1.21  (01-01-2003)
News Release

  1. As part of the closing agreement process, the agent may negotiate terms of press releases by the issuer or other party to the transaction, but only upon the concurrence of either the Manager, OPR, or the Manager, FO, as appropriate.

4.81.1.22  (01-01-2003)
Bond Redemption

  1. In general, the purpose of IRC 141 through 150 is to limit the volume of tax exempt bonds on the market. When negotiating a closing agreement, the primary consideration is to ensure that the bonds will be redeemed early. If the closing agreement requires early redemption, but the redemption will not occur until after the closing agreement is finalized, the closing agreement will generally require the issuer to send a notice of redemption to current bondholders.

4.81.1.23  (01-01-2003)
Basis for Closing Agreement Amount

  1. Closing agreements should be based on one of the following:

    1. Taxpayer Exposure — Generally, the closing agreement amount should be based on taxpayer exposure, which is the amount of tax the Service could collect if bondholders paid tax on the interest they have earned and will earn on the bonds. Taxpayer exposure for any year is equal to (i) the interest both accrued and scheduled to accrue in that year on the outstanding bonds multiplied by the relevant tax percentage plus (ii) interest at the underpayment rate on that amount. Interest on variable rate bonds for future periods may be determined to exceed the average of the interest rates paid to date, the last interest rate paid on the bonds, or the appropriate fixed swap rate less 50 basis points, as appropriate under the facts and circumstances of each case. The relevant percentage is based on the Service's estimate of the average investor's highest tax bracket, and will generally equal 29%, unless a more accurate assessment of the investors' actual tax rate is known. Taxpayer exposure for future years should be computed on a present value basis, using the taxable applicable federal rate (semiannual compounding) as the discount rate;

    2. Section 150(b) - As an alternative, in cases where the conduit borrower is subject to tax under section 150(b) of the Code, agents and field managers may seek an adjustment equal to 100% of this amount as an alternative remedy;

    3. Arbitrage - In certain cases, the closing agreement amount can be based on the amount of arbitrage earned by the issuer or another party to the transaction; and

    4. Section 6700 - In addition to the above, or as an alternative, closing agreement amounts may be based on the application of section 6700 penalties to one or more parties to the transaction. In these cases, the closing agreement should normally state that the payment is being made pursuant to section 6700 of the Code and that the payment is a nondeductible penalty amount.

4.81.1.24  (01-01-2003)
Case Resolution Terms

  1. Generally, agents and field managers should primarily focus their settlement discussions on securing the agreement from the issuer to redeem outstanding bonds.

  2. Settlement payments, if any, should generally focus on the past years with open statutes of limitation and all future years during which bonds will be outstanding. For purposes of determining the amount of the settlement payment, agents and field managers should in most cases, seek, as a maximum amount, a payment of 100% of total taxpayer exposure for all open and future tax years. The agent, with concurrence of group manager and Manager, FO, must adjust this amount to reflect the severity of the violation(s). In determining the relevant percent of tax exposure, the agent and field manager should be guided by the factors listed in part 4.81.1.24.1.

    1. Adjustments under section 150(b) of the Code that are applied to the conduit borrower's tax return may be utilized as a basis to reach the appropriate settlement amount determined above. In only rare and unusual cases will adjustments under section 150(b) increase the total settlement amount beyond an amount equal to the total due under section 150(b), the total taxpayer exposure, or the amount calculated as a reasonable settlement amount. In these instances, the full consent and approval of the Manager, FO, should be secured prior to any negotiations; and

    2. If an issuer fails for reasons other than willful neglect to make a timely payment of the full amount of arbitrage rebate due, and pays the amount described in IRC 148(f)(7), then the issuer will be treated as if it had made a full, timely payment. If other bases exist besides the failure to make a timely rebate payment, and if taxpayer exposure exceeds the amount of rebate due, then an amount greater than the amount described in IRC 148(f)(7) may be required to enter into a closing agreement.

  3. In those cases where taxpayer exposure calculations or intermediate sanctions do not properly reflect the nature and extent of the violation, agents and managers will work with the Manager, FO, to arrive at an equitable settlement amount. The Manager, FO, will, in turn, work closely with the Manager, OPR, to ensure that any settlement payments sought will not be less than those sought in similar cases where the issuer approached the Service on a voluntary basis.

  4. Adjustments to the conduit borrower's depreciation allowance on bond-financed assets should be made, where warranted, during the bond examination and should be included as part of any final closing agreement with respect to the bonds. Note a closing agreement may be jointly executed. See section 168(g).

  5. Intermediate Sanctions for Minor Violations (Reserved)

4.81.1.24.1  (01-01-2003)
Closing Agreement Amount--Case Resolution Factors

  1. In determining the appropriate basis for the closing agreement, the agent and field manager may take into account the good faith of the transaction parties; the collectability of the total taxpayer exposure from bondholders; the complexity of the transaction and hazards of litigation; the cooperation of the transaction participants with the Service during the examination; whether the violation was inadvertent and the extent of the violation; and the economic benefit derived by the transaction participants through the consummation of the transaction.

4.81.1.25  (01-01-2003)
Procedures for Processing Payments received in Closing Agreement Cases

  1. If there is a Master File entity account for the EIN and the payment is not an IRC 6700 penalty, prepare Forms 3244A, Payment Posting Voucher - Examination and 3210, Document Transmittal. On Form 3244-A:

    1. Complete the TIN, MFT, Tax Period, Transaction Received Date, Name of Taxpayer sections of the form. The MFT is 46. Do not include the entity's address.

    2. Enter the amount of the payment in the TC570, TC670 and Total Payment blocks under Transaction Data.

    3. In the Remarks section instruct the teller to "post the payment to the entity's report number" which you will provide from IDRS. The number "000" is not a report number.

    4. Provide on Form 3210 the name and TIN of the entity as well as the MFT, tax period, amount of the check and the check number.

    5. To ensure that the payment is posted to the correct Master File module include the report number (000 is not a report number) for the module on the Form 3244-A. The report number is available through IDRS. If you need assistance in determining if there is a report number, please contact the OPR AIMS Coordinator.

    6. Retain a copy of the payment posting voucher, the check and transmittal for the case file.

    7. Use the following mailing and express delivery address on the From 3210:

    8. Exception: If you have a check in excess of $100,000, send the payment to Mail Stop 2003 instead of Mail Stop 1999. Also, telephone the Teller Unit (801-620-6246) in the service center to alert them that a check exceeding $100,000 is being sent for processing.

      Note:

      You do not need to forward copies of closing agreements to Ogden in cases in which payments are posted to an entity's Master File account.

    Ogden Submission and Processing Center

    1973 N. Rulon White Blvd.

    Mail Stop 1999

    Ogden, Utah 84201

  2. If the payment is an IRC 6700 penalty payment, it must be posted to a Master File Civil Penalty Module. Prior to receipt of the IRC 6700 penalty payment contact the OPR AIMS Coordinator and request that he/she set up a Dummy Civil Penalty Module in the name of the promoter to which the service center will post the payment. Once the module is established, the OPR AIMS Coordinator will notify the agent that the payment can be sent to the service center.

    1. Prepare Forms 3244-A and 3210.

    2. Complete the TIN, MFT, Tax Period, Transaction Received Date, Name of Taxpayer sections of the form. The MFT is 13. Do not include the entity's address.

    3. Enter the amount of the payment in the TC570, TC670 and Total Payment blocks under Transaction Data.

    4. In the Remarks section, instruct the teller to "Post the payment to dummy MFT 13 module set up on _____."

    5. Provide on Form 3210 the name and TIN of the entity as well as the MFT, tax period, amount of the check and the check number. Address the Form 3210 as described in 1(g) above.

    6. Retain a copy of the payment voucher, the check and the transmittal for the case file.

4.81.1.26  (01-01-2003)
Quarterly Reports

  1. This section outlines the various reporting requirements for the tax exempt bond examination program.

  2. Each group manager will complete a quarterly report of tax exempt bond examinations containing the following information:

    1. The name and E.I.N. of the bond issuer and/or conduit borrower;

    2. A brief description of the project type;

    3. The current AIMS status code;

    4. The issue date of the bonds;

    5. The amount of the bonds;

    6. The date the examination was started and the number of hours spent on the examination;

    7. the name of the agent assigned to the examination;

    8. A brief description of the status and/or issues in the examination; and,

    9. The cycle time for closed cases.

  3. The quarterly report is due to Manager, FO, on or before the fourth business day following the end of each calendar quarter.

  4. Managers will submit reports to the Manager, FO, who will then forward them to the Director, TEB, by the seventh business day following the end of each calendar quarter.

4.81.1.27  (01-01-2003)
Review Procedures

  1. Cases Subject to Review

    1. All cases are subject to review by the Group Manager at closing;

    2. If the case is unagreed or selected by the manager for review, it is subject to review by the Manager, FO, and/or the Manager, OPR;

    3. Selected cases may be presented by a TEB agent for preclosing review at the Bond Focus Group meetings;

    4. If the case involves a claim for recovery of arbitrage payments in excess of $1,000,000, it is subject to review by the Manager, FO, and the Manager, OPR. Any disagreement will be briefed to the Director, TEB, for final decision; and

    5. Cases selected for, "Sample Review" for data/trend analysis.

4.81.1.28  (01-01-2003)
Bond Focus Group

  1. The TEB Focus Group will consist of members from TEB, including agents, field manager(s), and one or more representatives from OPR; attorneys from the Office of Chief Counsel, including representatives from both the Washington office and Area Counsel; and representative(s) from the Office of Appeals.

  2. The TEB Focus Group will meet periodically and as necessary to fulfill its purposes of enhancing compliance with the Code and regulatory requirements relating to tax-exempt bonds, facilitating quality examinations, and ensuring uniform, consistent treatment of issues nationwide.

  3. To accomplish its stated purposes, the TEB Focus Group will provide technical and procedural assistance to examiners and field managers; identify new trends and issues and provide assistance in establishing yearly workplan goals; establish a communications network of agents, field managers, and others; provide suggestions for the development of educational materials and programs; assist in the development of criteria for case selection; conduct periodic, in-process/preclosing ( "peer" or "live" ) case assistance; recommend changes and improvements to TEB forms and publications; recommend changes and improvements to TEB training programs; and, recommend improvements to procedural and audit guidelines.

  4. One of the duties of the Bond Focus Group is to conduct open (preclosing) case reviews ( "peer" or "live" ). These reviews provide the agents with current feedback facilitating development and closure of the cases.

    1. Prior to the Focus Group visitation, the manager and agent will select a case for review;

    2. The agent will present the case during the meeting with assistance as needed from the manager; and

    3. The Focus Group will provide feedback to the agent and the manager.

4.81.1.29  (01-01-2003)
Appeals Cases

  1. All examination cases involving an appeal of a proposed adverse determination will be sent through FO to OPR prior to submission to the Office of Appeals.

  2. If OPR is in concurrence, OPR will close the case to Appeals. If OPR does not agree with the conclusions reached by the field, OPR will work with FO to address its concerns.

  3. A timely request to review by the Office of Appeals to any proposed adverse letter will be granted unless withdrawn by the party requesting Appeals review.

4.81.1.30  (01-01-2003)
Technical Advice (TA) Cases

  1. Field managers will forward cases involving requests for Technical Advice (TA) through the Manager, FO, to OPR for consideration of the technical and procedural accuracy of the request.

    1. If OPR is in concurrence, OPR will send the request to the appropriate Chief Counsel Office.

    2. If OPR does not agree, OPR will return the case to FO for reconsideration of the request.

  2. When Chief Counsel issues a TA on a case, Chief Counsel will return the case to OPR for consideration of the TA.

    1. If OPR is in concurrence, OPR will return the case to the Manager, FO, for appropriate action.

    2. If OPR does not agree with the conclusions, OPR will request Chief Counsel to reconsider the TA.

  3. The issuer may request a TA. The Manager, FO, must approve the request before it is forwarded to OPR. If the Manager, FO, denies the request, the Manager will forward the request to the Director, TEB, for final decision.

4.81.1.31  (01-01-2003)
Field Service Advice Requests

  1. Agents should request field service advice from Area Counsel only in examinations where formal assistance is required or necessary for case development or to assess hazards of litigation. Before seeking field service advice, the agent must obtain approval from the Manager, FO. The Manager, FO, will keep an updated listing of all pending requests for field service advice and will provide a report of pending advice requests on a quarterly basis to the Director, TEB. The Manager, FO will ensure that a copy of any field service advice memorandum issued to any field office is provided in a timely manner to the Director, TEB.

4.81.1.32  (01-01-2003)
Closing Procedures

  1. Prior to closing examinations:

    1. Agents must complete all necessary documents and workpapers;

    2. Managers must complete the necessary review of case files and related documents; and

    3. OPR must complete the review of the selected cases and complete closing actions on all cases.

4.81.1.32.1  (01-01-2003)
Agent Responsibility

  1. Upon completion of the examination, the TEB agent is responsible for ensuring that the conclusion reached is technically correct and that the case is procedurally accurate. This includes but is not limited to:

    1. Appropriate workpaper documentation supporting the conclusion;

    2. Case File Assembly: Examination case file should be assembled as set forth in Sections 4.81.1.37 and 4.81.1.38.

    3. Current AMDISA print showing AIMS status;

    4. Correct use of Activity Code and Project Code (see Document 6379 for current codes);

    5. Correct completion of closing documents including: 5599, Examined Closing Record; 3198, Special Handling Notice; 5772, Workpaper Summary; 5773, Workpaper Summary Continuation Sheet; and 5464, Case Chronology Record; and

    6. Timely transfer of the case file to the group manager.

  2. Field group managers will complete Forms 5599 on cases involving closing agreements. Agents complete Forms 5599 on all other cases ensuring that the appropriate lines are completed.

4.81.1.32.2  (01-01-2003)
Manager Responsibility

  1. The Group Manager is responsible for:

    1. Reviewing the case timely;

    2. Determining if the case is technically and procedurally correct;

    3. Returning the case to the agent where appropriate including: returning any case which is not technically or procedurally correct; and in the interest of customer service, returning cases where there are substantial or repetitive issues warranting further case development;

    4. Pulling and mailing to the appropriate parties, including the power of attorney if any, the original and/or copies of the examination closing letter, power of attorney letter, and the executed closing agreement.

    5. Forwarding case to AIMS Closing Coordinator in OPR when the case is being closed agreed or no change and is substantially correct (technically and procedurally); and

    6. Forwarding case to Manager, FO, if unagreed or TA is being requested.

4.81.1.32.3  (01-01-2003)
Field Operation Manager's Responsibility

  1. The Manager, FO, is responsible for:

    1. Reviewing of cases sent to the Manager, FO, for forwarding to OPR for closing;

    2. Returning the case to group if further development or correction is needed;

    3. If the case involves a closing agreement, ensuring that the closing agreement meets all requirements and seeks an appropriate remedy, then forwarding to Director, TEB, for execution;

    4. If the case involves a TA request or the appeal of an adverse determination, forwarding to OPR if complete and correct;

    5. Reviewing all proposed adverse determination letters prior to mailing;

    6. Reviewing other outgoing correspondence, such as preliminary adverse determination letters, as appropriate or as requested by Director, TEB;

    7. Determining appropriateness of TA and FSA requests, including TA requests made by the issuer;

    8. Determining appropriateness of expanding an examination of a rebate claim to an examination of other legal and factual issues;

    9. Distributing TA Memorandum (TAM) to the respective Field Group Manager; and

    10. Approving the initiation of examinations under IRC 6700.

4.81.1.32.4  (01-01-2003)
OPR Responsibility

  1. OPR is responsible for:

    1. Reviewing cases being forwarded to Appeals for technical and procedural accuracy and forwarding to Appeals if complete and correct; or discussing with the Manager, FO, and returning to group if incomplete or inaccurate;

    2. Reviewing proposed adverse letters;

    3. Reviewing TA request for technical accuracy;

    4. Forwarding TA request to Counsel if complete and correct or discussing with the Manager, FO, and returning to group if incomplete or inaccurate;

    5. Receiving TA Ruling from Counsel and requesting reconsideration if appropriate or forwarding case to the Manager, FO, if reconsideration is not being requested;

    6. Reviewing certain claims for recovery of arbitrage payments, Form 8038-R, for technical accuracy;

    7. Reviewing other cases that the Manager, FO, in his/her discretion, determines should be reviewed;

    8. Conducting data/trend analysis on selected closed examination cases (one of every twenty five "no change" cases, one of every fifteen "agreed" cases) and every project initiative case, as needed, to evaluate the results of the initiative; and

    9. Closing cases on AIMS and forwarding to Ogden S.C.

  2. OPR is responsible for AIMS Coordination:

    1. Receiving returns and opening cases on AIMS; and

    2. Closing cases on AIMS and forwarding to Ogden Service Center.

  3. OPR is responsible for conducting a review on closed examination cases subject to mandatory review.

4.81.1.33  (01-01-2003)
TEB Case File Assembly

  1. Case folder must be identified with the organization/issuer's name, TIN, examination year, and MFT on the folder tab. (Use a "status " label from the labels attached to the Form 5546 for this purpose.)

  2. Form 3198, Special Handling Notice must be stapled to the outside front of all case folders and identify the organization/issuer's name, Year(s)/Period Ended, Special Handling instructions (notation of, if application, Project Initiative Case, Appeals Case, 6700 Penalty Case, Referral Case, Original Return is enclosed in Case File).

  3. Place on inside of case folder left side stapled or clipped in order listed (top down):

    1. Original Return with Service Center Charge Out Slip (if applicable).

    2. Computer disk used for examination (place in an envelope or plastic disk sleeve and staple to folder); and

    3. Informant's Allegation (if applicable) in a large pink confidential envelope with Form 6441 attached to the front with, if applicable, Form 211 (application for Reward for Original Information), Form 838 (Confidential Report on Claims for Reward), and Form 3949 (Criminal Investigation Information Item), etc.

  4. Place on inside of case folder, not fastened, in order listed (top down):

    1. Closing letter or Closing Agreement (whichever is applicable);

    2. Original letter or Closing Agreement to organization or taxpayer;

      Note:

      This will be pulled by group manager prior to mailing case file to OPR for closing.

    3. Power of Attorney(POA) letter (if applicable) with copy of closing letter or Closing Agreement; and

    4. Stapled together as a package: Form 5599 TE/GE Examined Closing Record, copy of examined return; stapled to front of return an AMDISA Print and Form 3244-A Payment Posting Voucher - Examination (if applicable), turned over Form 8821 Tax Information Authorization; folded and stapled to front of Form 8821 Form 2848 Power of Attorney and Declaration of Representative.

  5. Staple, Clip or ACCO on right side, fasten together in order listed:

    Note:

    Files with more than fifty (50) pages of workpapers must be ACCO fastened.

    1. File copy of closing letter or signed Closing Agreement (with a copy of the transmittal letter and activity record) to the organization or taxpayer;

    2. File copy of POA letter (if applicable);

    3. Agent's Report of Examination (Forms 8038-T and/or 8038-R);

    4. Form 5464 (Case Chronology);

    5. TEB modified Forms 5772 (EP/EO Workpapers Summary) and 5773 (EP/EO Workpaper Summary Continuation Sheet). Forms 5772 and 5773 have been modified to apply to TEB examinations;

    6. Form 12175 Third Party Contact Report Form;

    7. Form 12180 Third Party Contact Authorization Form;

    8. Workpapers, attachments to workpapers, and exhibits;

    9. Correspondence and IDR's to or from organization or taxpayer, POA, or third party;

    10. Prior examination reports (if applicable);

    11. Miscellaneous documents (Collateral Reports, Special Agent's Reports, etc.); and

    12. Current transcripts and miscellaneous AIMS

4.81.1.34  (01-01-2003)
TEB Case File Assembly Procedures - Return File

  1. If the agent has an original return, the agent must prepare a "Return File" that includes the original return with copies of Forms 2848, 8851, and 12180 stapled to back.

Exhibit 4.81.1-1  (01-01-2003)
Referral Record

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Exhibit 4.81.1-2  (01-01-2003)
Referral Tracking Sheet

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Exhibit 4.81.1-3  (01-01-2003)
Examination Notification Contact Letter

  FIRST LETTER
Issuer Person to Contact
  Badge No:
  Contact Address:
  Telephone Number:
  Date:
RE: [Insert name of bond issue]
Dear Sir or Madam:
We have selected the debt issuance named above for examination.
The IRS routinely examines municipal debt issuances to determine compliance with Federal tax requirements.
Please review the enclosed Information Document Request and mail all requested documents to the address noted above. Other items may be requested as the examination proceeds.
If you desire to appoint a representative to act on your behalf, a power of attorney must be filed with the Service in order for the Service to discuss or provide your representative with confidential information. A Form 2848, Power of Attorney and Declaration of Representative, or any other properly written power of attorney or authorization may be used for this purpose. Copies of Form 2848 may be obtained from any Internal Revenue Service Office.
During the examination, the Internal Revenue Service may need to contact various third parties including, but not limited to, underwriters, financial advisors, bond counsel and various counsel to third parties, investment banks, conduit borrowers, trustees, credit enhancers, insurers, program administrators and any other parties having a transactional relationship to the bonds being examined. These contacts may be necessary to complete our determination of the status of the bonds under section 103 of the Internal Revenue Code.
We are providing this notice to you in accordance with section 7602(c)(1) of the Internal Revenue Code. You are not required to take any action on account of this notice.
Thank you for your cooperation in this matter. Please feel free to call or write if you have any questions or concerns about this matter or are unable to promptly respond to the Information Document Request.
  Sincerely,

Exhibit 4.81.1-4  (01-01-2003)
Examination Notification Contact Letter

  SECOND LETTER
Issuer Person to Contact:
  Badge No.:
  Contact Address:
  Telephone Number
  Date
RE: [Insert name of bond issue]
Dear Sir or Madam:
We have selected the debt issuance named above for examination.
The IRS routinely examines municipal debt issuances to determine compliance with Federal tax requirements. Your debt issuance was selected for examination as part of a project initiative involving [specify type of bond, for example "single family mortgage bonds" ]. The primary purpose of this examination will be to ascertain the compliance of your debt issuance with the Federal tax requirements applicable to [specify type of bond]. At this time, we have no reason to believe that your debt issuance fails to comply with any of the applicable tax requirements. As always, we reserve the right to expand this examination to any aspect of your debt issuance.
Please review the enclosed Information Document Request and mail all requested documents to the address noted above. Other items may be requested as the examination proceeds.
If you desire to appoint a representative to act on your behalf, a power of attorney must be filed with the Service in order for the Service to discuss or provide your representative with confidential information. A Form 2848, Power of Attorney and Declaration of Representative, or any other properly written power of attorney or authorization may be used for this purpose. Copies of Form 2848 may be obtained from any Internal Revenue Service Office.
During the examination, the Internal Revenue Service may need to contact various third parties including, but not limited to, underwriters, financial advisors, bond counsel and various counsel to third parties, investment banks, conduit borrowers, trustees, credit enhancers, insurers, program administrators and any other parties having a transactional relationship to the bonds being examined. These contacts may be necessary to complete our determination of the status of the bonds under section 103 of the Internal Revenue Code.
We are providing this notice to you in accordance with section 7602(c)(1 ) of the Internal Revenue Code. You are not required to take any action on account of this notice.
Thank you for your cooperation in this matter. Please feel free to call or write if you have any questions or concerns about this matter or are unable to promptly respond to the Information Document Request.
  Sincerely,

Exhibit 4.81.1-5  (01-01-2003)
Examination Notification Contact Letter

  THIRD LETTER
Issuer Person to Contact:
  Badge No.:
  Contact Address:
  Contact Telephone Number:
  Date:
RE: [Insert name of bond issue]
Dear Sir or Madam:
We have selected the debt issuance named above for examination.
The IRS routinely examines municipal debt issuances to determine compliance with Federal tax requirements. We have received information that raises concerns regarding possible noncompliance with Federal tax requirements applicable to debt issuances issued to finance [insert type of transaction, for example, "long-term municipal gas purchases" ]. The primary focus of this examination will be to determine the compliance of your debt issuance with these requirements. At this time, we have no reason to believe that your issuance fails to comply with applicable Federal tax requirements. However, we reserve the right to expand this examination to any aspect of your debt issuance.
Please review the enclosed Information Document Request and mail all requested documents to the address noted above. Other items may be requested as the examination proceeds.
If you desire to appoint a representative to act on your behalf, a power of attorney must be filed with the Service in order for the Service to discuss or provide your representative with confidential information. A Form 2848, Power of Attorney and Declaration of Representative, or any other properly written power of attorney or authorization may be used for this purpose. Copies of Form 2848 may be obtained from any Internal Revenue Service Office.
During the examination, the Internal Revenue Service may need to contact various third parties including, but not limited to, underwriters, financial advisors, bond counsel and various counsel to third parties, investment banks, conduit borrowers, trustees, credit enhancers, insurers, program administrators and any other parties having a transactional relationship to the bonds being examined. These contacts may be necessary to complete our determination of the status of the bonds under section 103 of the Internal Revenue Code.
We are providing this notice to you in accordance with section 7602(c)(1) of the Internal Revenue Code. You are not required to take any action on account of this notice.
Thank you for your cooperation in this matter. Please feel free to call or write if you have any questions or concerns about this matter or are unable to promptly respond to the Information Document Request.
  Sincerely,

Exhibit 4.81.1-6  (01-01-2003)
Examination Notification Contact Letter

  FOURTH LETTER
Issuer Person to Contact:
  Badge No.:
  Contact Address:
  Contact Telephone Number
  Date:
RE: [Insert name of bond issue]
We have selected the debt issuance named above for examination.
The IRS routinely examines municipal debt issuances to determine compliance with Federal tax requirements. Your debt issuance was selected for examination because of information we received from external sources or developed internally that causes a concern that the debt issuance may fail one or more provisions of sections 103, 141-150 of the Internal Revenue Code.
Please review the enclosed Information Document Request and mail all requested documents to the address noted above. Other items may be requested as the examination proceeds.
If you desire to appoint a representative to act on your behalf, a power of attorney must be filed with the Service in order for the Service to discuss or provide your representative with confidential information. A Form 2848, Power of Attorney and Declaration of Representative, or any other properly written power of attorney or authorization may be used for this purpose. Copies of Form 2848 may be obtained from any Internal Revenue Service Office.
During the examination, the Internal Revenue Service may need to contact various third parties including, but not limited to, underwriters, financial advisors, bond counsel and various counsel to third parties, investment banks, conduit borrowers, trustees, credit enhancers, insurers, program administrators and any other parties having a transactional relationship to the bonds being examined. These contacts may be necessary to complete our determination of the status of the bonds under section 103 of the Internal Revenue Code.
We are providing this notice to you in accordance with section 7602(c)(1) of the Internal Revenue Code. You are not required to take any action on account of this notice.
Thank you for your cooperation in this matter. Please feel free to call or write if you have any questions or concerns about this matter or are unable to promptly respond to the Information Document Request.
  Sincerely,

Exhibit 4.81.1-7  (01-01-2003)
Preliminary Adverse Determination

Issuer Person to Contact:
Street Address Identification Number:
City, State, Zip Telephone Number:
  Refer Reply To:
  Date:
  EIN:
Re: Preliminary Adverse Determination [Insert name of bond issue(s) from line 7 of Form 8038 and/or CUSIP number(s) and or Report Number(s)]
Dear Sir or Madam:
This is to inform you that we have made a preliminary determination that the interest paid on the Bond Issue named above is not excludable from gross income under section 103 of the Internal Revenue Code. The enclosed explanation provides a summary of the facts, law, and analysis on which our preliminary determination is based.
You may respond to this preliminary determination as follows:
1. Request an informal conference with an IRS supervisor. You may request a conference with an IRS supervisor to discuss the possibility of entering into a closing agreement or to discuss the merits of any factual or legal issues in the case. This conference may be arranged by phoning the supervisor, Insert name, at Insert phone number or by submitting your request in writing to the supervisor at (Insert address). Upon receipt of a written request, the supervisor will contact you to schedule a conference.
2. Request technical advice referral. Technical advice may be requested in accordance with Revenue Procedure 2000-2, 2000-1 I.R.B. 73, or subsequent procedures.
3. Contact the Office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal Appeals processes. The Taxpayer Advocate is not able to reverse a legally correct tax determination. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. If you want Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. See the enclosed Notice 1214, Helpful Contacts for Notice of Deficiency, for Taxpayer Advocate telephone numbers and addresses.
If we do not hear from you within 30 days from the date of this letter, we will propose a final determination that the interest paid to bondholders is not excludable from gross income under section 103 of the Internal Revenue Code. You will have the right to appeal that proposed determination to the Office of Appeals in accordance with Revenue Procedure 99-35, 1999-41 I.R.B. 501.
If you have any questions concerning this matter, please contact the person whose name and phone number are listed on this letter.
Thank you for your cooperation.
  Sincerely yours,
   
   
  (Name)
  (Title)
Enclosures  

Exhibit 4.81.1-8  (01-01-2003)
Proposed Adverse Determination

Issuer Person to Contact:
Street Address Identification Number:
City, State, ZIP Telephone Number:
  Refer Reply to:
  Date:
  EIN:
Re: Proposed Adverse Determination [Insert name of bond issue(s) from line 7 of Form 8038 and/or CUSIP number(s) and or Report Number (s)]
Dear Sir or Madam:
This is to inform you that we have concluded our examination of the Bond Issue(s) named above (the " Bonds" ). We have made a proposed determination that the interest paid to bondholders is not excludable from gross income under section 103 of the Internal Revenue Code. The enclosed explanation provides the facts, law, and analysis on which this proposed determination is based. [Insert if TAM issued by National Office- In addition, enclosed is a copy of the Technical Advice Memorandum issued by the National Office regarding the Bond Issue.]
We encourage you to immediately contact the person named above to [continue/begin] negotiations to resolve problems with the Bond Issue through a closing agreement. This may be your last opportunity to conduct settlement negotiations with this office. Upon written request, we will delay the beginning of the 30-day time period for appealing this proposed determination pending the outcome of settlement discussions.
Alternatively, you may formally respond to this proposed determination as follows:
1. Request an administrative appeal of your case to the Office of Appeals of the IRS. The Office of Appeals is separate and independent of the IRS office that made this proposed adverse determination with respect to the bonds. The administrative Appeals process is explained in Revenue Procedure 99-35, 1999-41 I.R.B. 501.
If you decide to request an Appeals review, you must submit your request in writing within 30 days of the date of this letter. Your request must include a detailed written response to this proposed adverse determination and include any further explanation of the Issuer’s position regarding the issue(s) in dispute. The request for an appeal should be sent to the following address: [Address]
2. You also have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal Appeals processes. The Taxpayer Advocate is not able to reverse a legally correct tax determination. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. If you want Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. See the enclosed Notice 1214, Helpful Contacts for Notice of Deficiency, for Taxpayer Advocate telephone numbers and addresses. If you do not respond in writing within 30 days of the date of this letter, you will forfeit your opportunity for Appeals review and our proposed determination becomes final. At such time, you should advise the appropriate paying agents to report the interest as taxable to the beneficial holders of the Bond Issue. Corrected information returns (Form 1099 (Corrected)) must also be filed with the Internal Revenue Service and issued to the bondholders as required under section 6049 of the Internal Revenue Code.
If you do not respond in writing within 30 days of the date of this letter, you will forfeit your opportunity for Appeals review and our proposed determination becomes final. At such time, you should advise the appropriate paying agents to report the interest as taxable to the beneficial holders of the Bond Issue. Corrected information returns (Form 1099 (Corrected)) must also be filed with the Internal Revenue Service and issued to the bondholders as required under section 6049 of the Internal Revenue Code.
If you have any questions concerning this matter, please contact the person whose name and phone number are shown on this letter.
Thank you for your cooperation.
  Sincerely yours,
   
  {Name}
  {Title}
Enclosures  

Exhibit 4.81.1-9  (01-01-2003)
Model Closing Agreement

Model Closing Agreement Language
Closing Agreement on Final Determination Covering Specific Matters
Under section 7121 of the Internal Revenue Code (the ( " Code" ), (the " Issuer" ) and the Commissioner of the Internal Revenue (the "Commissioner " or " IRS" ) makes this closing agreement (the "Agreement" ).
WHEREAS, the parties have determined the following facts and, made the following legal conclusions and representations:
A. This Agreement is in settlement of issues raised in an examination of the bonds (the " Bonds" ).
B. The Internal Revenue Service has made a (preliminary) determination that the Bonds fail to meet the requirements of section 103 of the Code because (short synopsis of legal conclusion).
C. The IRS has formally asserted any claims against the Issuer, or sought to tax any holders of the Bonds on interest income of the Bonds.
D. The terms of the Agreement were arrived at by negotiation between the Issuer and the IRS and may differ from the terms of settlement of other bond issues examined or to be examined by the IRS.
E. This Agreement is for the benefit of the past, present and future registered and beneficial owners of the Bonds (collectively, the " Bondholders" ).
[Insert additional premises on which the Agreement is based including violations giving rise to interest on bonds being includable in gross income under section 61.]
NOW IT IS HEREBY DETERMINED AND AGREED PURSUANT TO THIS CLOSING AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER CODE SECTION 7121 THAT FOR FEDERAL TAX PURPOSES:
1. The Issuer shall pay to the IRS upon the Issuer’s execution of this Agreement. Payments of this amount shall be made by certified check payable to the U.S. Treasury and delivered to a duly authorized representative of the IRS. Payment of this amount will not be made from proceeds of bonds described in section 103(a) of the Code.
2. The Bondholders are not required to include in their gross income any interest on the Bonds because of the violations set forth herein.
3. The Issuer will redeem all outstanding Bonds on or before (specify date). [Optional: The Bonds will not be redeemed with proceeds of bonds described in section 103(a) of the Code.]
4. The Agreement does [does not] require that the bonds be redeemed.
5. [Optional: Within 30 days after the date this Agreement is executed by the IRS, the Issuer must notify all Bondholders in writing that the Bonds will be redeemed on the next redemption date, which is (specify date).]
6. [Optional: The Conduit Borrower will not be denied, pursuant to section 150(b)(specify paragraph) of the Internal Revenue Code, a deduction for interest paid on the Bonds because of the violations set forth herein.]
7. [Optional: This Agreement will not preclude the Internal Revenue Service from pursuing a separate adjustment against the Conduit Borrower in order to deny the deduction for interest paid on the financing provided by the Bonds pursuant to section 150(b)(specify paragraph) of the Code.]
8. [Optional: The Conduit Borrower agrees that all payments made pursuant to this Agreement shall be nondeductible for federal income tax purposes and, as such, will not attempt to deduct, amortize, or recover any portion of such payment.]
9. [Optional: The Conduit Borrower is entitled to deduct the amount paid pursuant to this closing agreement on its (specify year) federal income tax return (Form (specify form)), pursuant to section 162 of the Code.]
10. [Optional: The Internal Revenue Service will not treat the (defined property) as "tax-exempt bond financed property" for purposes of section 168 of the Code from and after the date of issuance of the Bonds.]
11. This Agreement is executed with respect to a federal income tax liability of the Bondholders.
12. No income shall be recognized by any Bondholder as a result of this Agreement or any payments made pursuant to this Agreement.
13. No party shall endeavor by litigation or other means to attack the validity of this Agreement.
14. The amount paid by the issuer pursuant to this Agreement is not refundable, or subject to credit or offset under any circumstance.
15. This Agreement may not be cited or relied upon by any person or entity whatsoever as precedent in the disposition of any other case.
16. The Issuer shall execute, upon the Issuer’s execution of this Agreement, a consent meeting the requirements of section 6103(c) of the Code permitting the disclosure to the general public of information concerning the existence and subject matter of this Agreement. (Attachment I).
17. This Agreement is final and conclusive except that:
a. The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of a material fact;
b. It is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions (including any stated exception for Code section 7122) notwithstanding any other law, rule of law; and
c. If it relates to a tax period ending after the effective date of this Agreement, it is subject to any law, enacted after the Agreement date that applies to that tax period.
By signing, the above parties certify that they have read and agreed to the terms of this Agreement.
ISSUER
The__________________________________
TIN_____________________________________
By: _____________________________________
Date: ___________________________________
Title:____________________________________
COMMISSIONER OF THE INTERNAL REVENUE
By: _____________________________________
Date:____________________________________
Title: ____________________________________
(Name)

Exhibit 4.81.1-10  (01-01-2003)
Disclosure Consent

CONSENT TAX INFORMATION TO DISCLOSE
Subject to the conditions set forth in the succeeding paragraphs, we hereby authorize the Internal Revenue Service ( "IRS" ) to made public any returns and return information (as those items are defined in section 6103(b) of the Internal Revenue Code of 1986, as amended (the "Code" )) of ___________________ (the "Issuer" ) relating to the Closing Agreement (the "Agreement" ) dated ________________, between the Issuer and the Commissioner of the IRS, concerning __________________________ principal amount of ____________________Bonds (the "Bonds" ) issued on _________________.
The above described information may be disclosed by the IRS to members of Congress, the press, or the general public:
A. In the event of a default by the Issuer on any term in the Agreement; or
B. To the extent the IRS deems necessary to correct any material misstatements with respect to the Agreement in response to a public statement by the Issuer or an agent of the Issuer.
We are aware that without this authorization, the returns and return information of the Issuer are confidential and are protected by law under the Code. We also understand that this consent does not constitute a general waiver of the rights of the Issuer to Confidentiality under section 6103(a) of the code, We understand that the IRS may disclose returns and return information (as described in section 6103(b)(1) and (2) of the Code) or the terms of the Agreement pursuant to this consent if, and only if, either of the circumstances in clauses A or B occurs.
I hereby certify that I have the authority to execute this consent to disclose on behalf of the Issuer.
NAME OF ISSUER:
EMPLOYER ID. NO.
ISSUER’S ADDRESS:
NAME OF INDIVIDUAL EXECUTING CONSENT:
TITLE:
Signature:______________________________

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