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

The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsSTATUTORY AND OTHER CHANGES The ACT’s principal mission is to recommend changes which the Tax Exempt andGovernment Entities division can implement to improve its operations. To the extentthat changes recommended in various ACT reports have required action by or assent orcooperation from the Department of the Treasury or the Office of Chief Counsel, theACT has encouraged TEGE to seek it. The ACT generally has not made legislativerecommendations.In the course of this project, the tax-exempt bond members of the ACT have becomeaware of concerns by Treasury and by Chief Counsel that certain changes which couldfacilitate tax law compliance might be beyond what could be achieved by administrativeaction. The proposed SCAP, like the existing VCAP, depends upon an admission ofviolation of the tax law and a voluntary agreement under which IRS agrees that,notwithstanding the violation, the bonds will not be declared taxable. A more efficientsolution to certain problems would be to provide for alternative ways for a bond issuer tovoluntarily bring the bond issue in question into compliance by taking certain specifiedremedial actions.An example of this sort of solution and the limitations on its implementation can be seenin the “yield reduction payment” (YRP) provisions of Treasury Regulations, § 1.148-5(c).Treasury and IRS recently have proposed a limited expansion of the YRP provisions toallow their use to achieve compliance with applicable yield restrictions when Treasuryhas suspended sale of its State and Local Government Series securities (SLGS) and inconnection with the integration of certain interest rate swaps under rules governing“qualified hedges”. See Proposed Regulations, § 1.148-5(c)(3)(viii) and (c)(3)(ix).While these were situations which would have been appropriate for treatment as SCAPCovered Violations, they are far more efficiently resolved simply by allowing theproposed yield reduction payments, which avoid rather than excuse non-compliancewith statutory yield restrictions. However, since YRPs are a non-statutory vehicle,created by regulation, Treasury and IRS have been unwilling, without statutoryauthorization, to extend their use to the entire range of yield restriction violations.The ACT encourages the IRS to identify situations in which alternative modes ofcompliance, including self-implementing remedial actions, might be helpful, and to seekto have authorizing legislation proposed by the Treasury.In addition, as the Tax Exempt Bond branch of TEGE administers SCAP, it should bealert to identify those Covered Violations which appear to be based upon commonmisunderstandings of the law. Where such misunderstandings are identified, thatinformation should be communicated to the Office of Chief Counsel with therecommendation that regulations or other formal guidance be issued to provideclarification.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 12