IRS Provides Conditional Voluntary Closing Agreements For Certain Municipal Bond Issuers

Ann. 2011-19, 2011-11 IRB

In an Announcement, IRS has provided conditions under which certain municipal bond issuers that have purchased their own bonds under temporary rules may enter into a voluntary closing agreement with respect to the extinguishment of such bonds. The closing agreement will provide that the bonds will be treated as remaining outstanding for tax purposes for a maximum 180-day period beginning on the later of Jan. 1, 2011, or the date the issuer purchases its own bonds.

Background. During the recent financial crisis, Notice 2008-41, 2008-15 IRB 742, as modified by Notice 2008-88, 2008-42 IRB 933, provided relief to state and local governmental bond issuers from liquidity constraints in the tax-exempt bond market by temporarily allowing them to purchase and hold their own tax-exempt bonds without resulting in a retirement of the bonds solely for the purposes of Code Sec. 103 and Code Sec. 141 – Code Sec. 150. The permitted holding period ended on Dec. 31, 2010.

For various reasons beyond their control, some issuers that previously purchased their own tax-exempt bonds pursuant to those Notices were unable to resell the bonds by Dec. 31, 2010. In addition, other issuers may currently need to purchase and hold their own tax-exempt bonds due to certain current market challenges.

Tax-exempt bonds voluntary closing agreement program (TEB VCAP). Pursuant to the TEB VCAP program in Notice 2008-31, 2008-11 IRB 592, IRS will consider requests from issuers of extinguished bonds for a voluntary closing agreement.

The closing agreement will provide that the extinguished bonds are treated as remaining outstanding for tax purposes during the period beginning on the later of Jan. 1, 2011 or the date the issuer purchases its own bonds, and ending on the earlier of (1) 180 days after the closing agreement is executed by IRS and the issuer (or an earlier date as requested by the issuer), (2) the date that the bonds are resold to a third party, (3) the date that the bonds are currently refunded for purposes of Code Sec. 103 and Code Sec. 141 – Code Sec. 150, or (4) the date that the bonds are cancelled on the issuer's books and records.

The closing agreements are subject to a number of conditions:

... the authorizing body of the issuer must submit its adopted resolution of its intent to resell or currently refund the extinguished bonds as tax-exempt bonds within the relevant period, based on the opinion of its financial advisor or other expert that the resale or refunding of the bonds is likely to be successful within such period;

... the issuer must represent that the bonds to be resold or currently refunded (i) are outstanding, (ii) constitute legal, valid, and binding obligations of the issuer under applicable State law, and (iii) qualify as tax-exempt obligations of the issuer under Code Sec. 103; and

... the issuer must pay a fee equal to the par value of the outstanding bonds to be held by the issuer multiplied by.29% for each month from the later of Jan. 1, 2011 or the date of purchase of the extinguished bonds, and continuing through the closing date.

The TEB VCAP request must be submitted by Dec. 31, 2012. A complete request will generally be processed and a closing agreement will be sent to the issuer for its execution within 45 days of the receipt of the complete submission. An issuer must submit the payment due under the closing agreement before returning the executed closing agreement to IRS.

References: For when tax-exempt bonds are treated as reissued or retired, see FTC 2d/FIN ¶J-3002.1; for TEB VCAP, see FTC 2d/FIN ¶T-9565.