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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
The Streamlined Closing Agreement For Tax-Exempt Bonds: A Cure For Common ViolationsAPPENDIX - POSSIBLE COVERED VIOLATIONS The following are violations which might constitute “Covered Violations” under theStreamlined Closing Agreement Program (SCAP) proposed by the ACT. The ACTrecommends that IRS choose a limited number of violations from this list or based uponits experience administering the existing VCAP program. The list of Covered Violationsshould be subject to expansion and modification on a flexible basis over time. Theviolations listed below are described in relatively simple terms. It is likely that theirdescription in the formal document governing a new SCAP program would besomewhat more detailed, so that bond issuers and conduit borrowers can know thattheir particular transactions qualify for SCAP treatment.1. Failure to timely reinvest refunding escrow in State and Local Government Seriessecurities (SLGS).2. Non-compliance with “mixed escrow” rules in Treasury Regulations, § 1.1489(c)(2).3. De minimis nonqualifed use of bond-financed facilities.4. Change of election as to applicable low-income test under IRC § 142(d) forexempt facility private activity bonds for “qualified residential rental projects”.5. Excess use of bond proceeds to pay issuance costs in violation of IRC § 147(g).6. Use of bond proceeds for projects not included in original TEFRA notice.7. Violation of the 120% test under IRC § 147(b).8. Change of use without ability to do remedial action, for example because ofnoncompliance with applicable time periods.9. Change of use of financed facilities resulting in interest on bonds being subject toalternative minimum tax and not qualifying for Rev. Proc. 97-15.10. Failure to make a timely identification of a hedge.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 13
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