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 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
The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsIRS announcement as to the particular Covered Violation. Fifth, it should include, orstate that it incorporates by reference, specific required provisions as set out in the IRSpublication governing SCAP, such as the reservation of rights by the IRS to reopen anSCAP agreement based upon its conclusion that the applicant had misrepresented oromitted material facts. Sixth, a Compliance Certificate should state that its submissionconstitutes an offer to enter into a closing agreement to be governed by Section 7121 ofthe Internal Revenue Code. Finally, it should be accompanied by a check for the“closing agreement amount,” if any, applicable to the particular Covered Violation.A Compliance Certificate should not discuss special facts which distinguish thetransaction in question in order to justify variations in the future actions specified by theIRS for remediation of the particular Covered Violation or a reduction in the specifiedclosing agreement amount. Such variations would be appropriate for consideration asto a traditional VCAP request, and the IRS publication governing SCAP should makeclear that inclusion of a particular violation on the list of Covered Violations does notpreclude submission of a traditional VCAP request instead, if the applicant believes thatparticular facts justify a closing agreement with different terms.Effective DateThe document establishing SCAP should require the IRS to give written notice to theapplicant of its acceptance or rejection of the “offer” made by the applicant’s signedCompliance Certificate within a specified, relatively short, period of time after itssubmission. An SCAP agreement would be effective upon the mailing of suchacceptance.The ACT had extensive discussions as to whether to recommend that acceptance bythe IRS be deemed to occur automatically upon the passage of a specified, relativelyshort, period of time after submission of a Compliance Certificate, unless the IRS gavenotice of its rejection of the offer. This “self-executing” feature arose from the ACT’sconcern that delays in operation of the existing VCAP program have greatly limited itsusefulness, both to the IRS and to the bond community.This feature met with resistance from senior personnel in TEB on policy grounds andfrom representatives of the Chief Counsel’s office, based in significant part on concernas to whether an agreement without physical signature might fail to qualify as a closingagreement under Section 7121 of the Code. TEB has indicated that, because of thenature of the Covered Violations and the streamlined features of the SCAP program, itordinarily should be possible for the IRS to respond to Compliance Certificatesubmissions within three to four weeks. (In instances in which, especially as to olderbond issues, an IRS internal account may not exist or be readily identified for theparticular bond issue, an additional delay of perhaps two weeks might occur).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 7
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