IRS Creates New Closing Agreement Program For Exempt Bonds.

Notice 2001-60

SECTION 1. PURPOSE

[1] This Notice provides information about a voluntary closing agreement program for tax-exempt bonds ("TEB VCAP"). In particular, the Notice sets forth procedures whereby issuers of tax-exempt bonds can resolve violations of the Internal Revenue Code through closing agreements with the Internal Revenue Service. The Tax Exempt Bonds Outreach, Planning and Review ("TEB OPR") function of Tax Exempt and Government Entities (TE/GE) is developing new outreach and education initiatives to insure compliance by issuers of tax-exempt bonds with applicable provisions of the Code. TEB VCAP is part of the TEB OPR outreach and education initiatives and provides appropriate remedies when issuers voluntarily come forward and express a desire to resolve violations of the Code. TEB VCAP is intended to encourage issuers and conduit borrowers to exercise due diligence in complying with the Code and to provide a vehicle to correct violations of the Code. It is the continuing policy of the Internal Revenue Service to attempt to resolve violations of the Code without taxing bondholders. TEB VCAP reflects this policy.

[2] The Service anticipates that more detailed procedures about the program will be provided as the program is refined and comments are received. For example, standardized closing agreement terms and amounts may be specified for particular violations. Accordingly, this Notice requests comments on TEB VCAP as well as comments on how the Service can expand its efforts to encourage compliance with the Code.

SECTION 2. BACKGROUND

[3] Gross income does not include interest on any state or local bond that meets the requirements of section 103 and related provisions of the Code. Under certain circumstances, an issuer may take remedial action under provisions such as sections 1.141-12, 1.142-2, 1.144-2, 1.145-2, and 1.147-2 of the Income Tax Regulations in order to cure a violation of the Code and to prevent interest on a bond from becoming includible in gross income.

[4] The Service has previously provided formal tax-exempt bond closing agreement programs such as the program described in Rev. Proc. 97-15, 1997-1 C.B. 635. Violations of section 103 and related provisions of the Code that cannot be remediated under existing remedial action provisions or other tax-exempt bond closing agreement programs contained in regulations or other published guidance may be resolved by entering into a closing agreement under TEB VCAP.

[5] Section 7121 of the Code and the regulations thereunder authorize the Commissioner to enter into written closing agreements with any person in connection with the tax liability of such person (or of the person or estate for whom he acts). Section 301.7121-1 of the Income Tax Regulations provides, in part, that a closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of such an agreement.

SECTION 3. SCOPE OF TEB VCAP

[6] Under TEB VCAP, an issuer or its authorized representative may request a closing agreement with respect to violations of section 103 and related provisions of the Code. TEB VCAP is not available when:

     (a) Absent extraordinary circumstances, the violation can be

     (a) Information Required in Requests. An issuer or its

[7] Closing agreements under TEB VCAP will generally follow the model closing agreement in IRM 7.6.2. Specific closing agreement terms will depend on the facts and circumstances of the case, including the degree of diligence exercised by the issuer and any conduit borrower. Any standardized closing agreement terms that are developed for TEB VCAP will be set forth in the Internal Revenue Manual and/or other published guidance.

SECTION 6. EFFECT OF CLOSING AGREEMENT EXECUTED UNDER TEB VCAP

[8] The closing agreement will protect bondholders from including in their gross income any interest on the bonds during a period specified in the agreement for any violation described in the agreement. A closing agreement executed under section 7121 of the Code shall be final and conclusive except that 1) the matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of a material fact, 2) it is subject to the sections of the Code that expressly provide that effect be given to their provisions (including any stated exception for section 7122 of the Code) notwithstanding any other law or rule of law, and 3) it is subject to any law, enacted after the date of the agreement, that applies to a tax period ending after the date of the agreement covered by the agreement.

SECTION 7. REQUESTS FOR COMMENTS

[9] We anticipate that TEB VCAP will be expanded and refined over time based on experience and public comment. The Service welcomes comments regarding the format and operation of TEB VCAP. The Service requests comments on the existing remedial action provisions and existing closing agreement programs and procedures contained in regulations and other published guidance. The Service welcomes suggestions with regard to the general framework of closing agreement terms including whether standardized closing agreement terms and amounts should be specified for particular violations. The Service also requests comments regarding whether any of the provisions of the model closing agreement set forth in IRM 7.6.2 should be changed.

[10] Comments should be submitted in writing within six months from the date this Notice appears in the Internal Revenue Bulletin. Comments should be sent to the following address:

     Internal Revenue Service

SECTION 8. EFFECTIVE DATEy

[12] TEB VCAP is effective immediately.

SECTION 9. DRAFTING INFORMATION

[13] The principal author of this Notice is Cliff Gannett of Tax Exempt Bonds Outreach, Planning and Review of the Office of the Director, Tax Exempt Bonds, Tax Exempt/Government Entities. For further information regarding this Notice, contact Mr. Gannett at (202) 283-2999 (not a toll-free call).