Advisory Committee on Tax Exempt and Government Entities (ACT ...

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The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsTHE PROPOSALExisting VCAPIn 2001, the IRS established a Voluntary Closing Agreement Program (VCAP), pursuantto Notice 2001-60, 2001-2 C.B. 304. It is administered by the Compliance & ProgramManagement (CPM) group, originally known as the Outreach Planning and Reviewgroup. In 2003, the IRS refined and expanded VCAP by publishing detailed proceduralguidelines in Part 7, Chapter 2, Section 3 of the Internal Revenue Manual (IRM). TheIRM states that VCAP is intended to encourage issuers and conduit borrowers toexercise due diligence in complying with the Internal Revenue Code and applicableregulations by providing a vehicle to correct violations in furtherance of the IRS’ policy oftaxing bondholders as a last resort.As described in IRM 7.2.3.1, specialists in CPM review closing agreement requests andconduct the negotiation of closing agreements with the issuer, although other partiessuch as an escrow agent or conduit borrower may participate. IRM 7.2.3.3 makes clearthat there must be an admitted “violation” of the tax law as a prerequisite to a VCAPrequest. IRM 7.2.3.6 contemplates, but does not require, payment of a “closingagreement amount” as a condition for a VCAP closing agreement. Under IRM 7.2.3.5,a VCAP request may be submitted initially on an anonymous basis to discuss a genericapproach to resolving identified tax issues.In certain instances, the IRS has identified particular tax law problems which were, orwere about to become, a focus of its examination program and has invited VCAPsubmissions, sometimes within a specified timeframe. See, for example, the programas to hospital acquisition financings, found in Announcement 2002-43, 2002-1 C.B. 792,and the more recent program as to forward float contracts, announced by press releaseon August 30, 2007, and posted on the IRS website. Such programs, coupled with athreat of audit, have been viewed by the bond community as semi-voluntary.On February 27, 2008, the IRS published Notice 2008-31, 2008-11 I.R.B. 592, whichmodifies and supersedes Notice 2001-60. The new notice essentially updates theterminology and procedural aspects of the VCAP program and expands its jurisdictionto cover tax credit bonds. Significantly, in contemplation of this ACT report, the Noticealso states that the IRS is continuing to work on more detailed procedures andanticipates specifying closing agreement terms and amounts for particular violations.The Notice solicits suggestions on this topic.Limitations of Existing VCAPThe IRS currently assigns approximately 3-4 specialists, measured on a full-timeequivalent basis, to administer the VCAP program, and the number recently had beenstill lower. In the fiscal year ended September 30, 2007, it entered into 23 closingagreements.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 4
The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsWhile the bond community has generally applauded the VCAP program, the ACT’sdiscussions with various constituency groups indicated widespread concern that theprocess was too slow to be an effective tool in many instances. Concern was alsoexpressed that the need for individualized negotiation resulted in it beingdisproportionately costly in the case of certain less significant violations. In someinstances this may have led transaction participants to construct unnecessarily complex“workarounds” to remedy violations which ought to be susceptible to morestraightforward correction, particularly in the context of arbitrage yield violations.These limitations exist in the context of a $1.7 trillion market made up of 2 millionseparate bond issues, issued by more than 50,000 state and local entities. SecuritiesIndustry and Financial Markets Association, “About Municipal Bonds,”www.investinginbonds.com. The ACT is concerned that the current VCAP program willbe increasingly unable to accommodate the perceived need in light of what is expectedto be a dramatic increase in systematic voluntary assessment of post-issuance taxcompliance. See “After the Bonds are Issued: Then What?,” Report of the <strong>Advisory</strong><strong>Committee</strong> on Tax Exempt and Government Entities, June 13, 2007.The ACT believes that this proposal, by providing a simple, rational procedure fordealing with certain recurring problems, will allow IRS personnel to be better utilized todeal with complex situations which require individualized resolution. It will alsoeliminate the criticism that results from the need to incur substantial costs in order toremediate what are perceived to be relatively insignificant “foot faults” occurring in thecontext of a complex system of federal tax rules.The “Streamlined Closing Agreement”The ACT proposes that the IRS announce a Streamlined Closing Agreement Program(SCAP) as a subset of its existing VCAP program. SCAP would provide a list ofspecified “Covered Violations” and the conditions for remedying those violations.Covered ViolationsAs a subset of the VCAP program, SCAP would require the identification of a violationof the tax law. As under the existing VCAP program, SCAP would provide for anagreement with the IRS under which the IRS would agree that it would not challenge thetax-exemption of the bonds notwithstanding such violation. These features shouldavoid SCAP being considered as providing for alternative modes of tax law compliance,which is a legislative function, or clarifications of the application of current law, which isa guidance function within the responsibility of the Treasury and the Office of ChiefCounsel. (Certain members of the bond community have expressed concern about therequirement for applicants under the VCAP program to admit to a violation and havesuggested that the IRS could identify a violation and enter into a closing agreementwithout requiring an admission by the applicant. Such concerns are applicable to SCAPas well.)ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 5
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