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

The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsA Covered Violation should be one which can be clearly described so that it is possiblefor an issuer or conduit borrower readily to determine that its circumstances are withinthe description. It is intended that Covered Violations be ones which can be describedin a manner which is clear enough that the Compliance Certificate described below canstate facts which make clear that the transaction in question is a Covered Violation.Thus, a Covered Violation should not be one which allows for significant variation inmaterial facts. While Covered Violations will frequently involve so-called “foot faults,”there is no reason why more significant violations could not satisfy this requirement aswell.A Covered Violation should be one as to which the conditions for a closing agreementcan be readily determined. To the extent that a “closing agreement amount” will berequired to be paid, it should be a readily calculable amount which the IRS concludes isappropriate in the ordinary case. There could be instances in which it is appropriatethat no payment be made.To the extent that conditions are to be imposed which ensure future compliance, theyshould be ones that can be clearly articulated and readily implemented. Suchconditions might include operational changes as well as redemption or defeasance of allor a portion of outstanding bonds.The ACT has included as an appendix to this report an illustrative list of tax lawviolations of the sort which might constitute Covered Violations. The ACT recommendsthat the IRS choose a limited number from among those listed, and/or others which itidentifies based upon experience under the existing VCAP program, to serve as theinitial identified Covered Violations. The ACT recommends that the initial list be revisedand expanded by the IRS as it gains experience administering the SCAP program andin response to ongoing industry comment.The Compliance CertificateA Compliance Certificate ordinarily would be submitted by an issuer of tax-exemptbonds. In the case of an issue of conduit bonds, a Compliance Certificate would besubmitted jointly by the issuer and the conduit borrower. In the case of CoveredViolations under Code Section 150(b), it would be appropriate to allow a ComplianceCertificate to be submitted directly by the conduit borrower, with notice to the issuer.A Compliance Certificate first should identify the bond issue and the particular CoveredViolation which is to be remediated. A copy of Form 8038 or Form 8038-G should beattached. Second, it should state sufficient facts to establish that the circumstances aresquarely within the terms of the IRS’s published description of that Covered Violation.Third, it should affirm that the parties to the bond issue which resulted in the CoveredViolation made a good faith effort to comply with federal tax law. Fourth, it shouldinclude a covenant to implement requirements for future action, if any, included in theADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 6