SECTION 2. BACKGROUND

Examination procedures set forth in Announcement 95-61, 1995-33 I.R.B. 25,

Administrative Appeal of Adverse Determination of Tax-Exempt Status of Bond Issue

Notice 98–58

This notice provides a proposed revenue procedure that, when finalized, will provide the procedures for issuers to request an administrative appeal of an adverse determination by the Employee Plans/Exempt Organizations Key District (District) that interest on their debt obligations (Bond Issue) is not excludable from gross income under § 103 of the Internal Revenue Code. Beginning December 7, 1998, issuers may use the procedures set forth in the proposed revenue procedure until it is finalized. The revenue procedure also modifies the Internal Revenue Service’s existing procedures that the District must receive a technical advice memorandum from Assistant Chief Counsel (Financial Institutions & Products) that is unfavorable to the issuer prior to declaring that the interest on the Bond Issue is not excludable from gross income under § 103 of the Code, and makes other modifications to the examination process made appropriate by the Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105–206 (the Act).

Section 3105 of the Act directs the Service to modify its administrative procedures to allow issuers to appeal an adverse determination. The Act requires that the appeals be heard by senior officers of the Office of Appeals (Appeals) having experience in resolving complex cases. An issuer, having received an adverse determination following an examination of its Bond Issue, may protest the determination to Appeals before the interest on the Bond Issue is declared not excludable from gross income under § 103 of the Code. The appeal is optional and is initiated by the issuer.

Section 3465 of the Act provides that the Service shall prescribe procedures by which a taxpayer may request early referral of one or more unresolved issues to Appeals. Certain issues arising during an examination of a Bond Issue may be appropriate for early referral. For an exam

ple of how early referral operates, see Rev. Proc. 96–9, 1996–1 C.B. 575, which describes the method by which a Coordinated Examination Program taxpayer requests early referral of one or more unagreed issues from Examination to Appeals. The Service is developing new procedures for early referral and seeks comments regarding the applicability of early referral procedures to examinations of Bond Issues.

The Service welcomes comments on the proposed revenue procedure provided in this notice and on the application of the early referral program to Bond Issues. Comments should be submitted by March 7, 1999, either to: National Director of Appeals 901 D Street, S.W. Box 68 Washington, D.C. 20024 Attn: C:AP:ADR&CS, Room 236 or electronically via: http:/www.irs.ustreas.gov/prod/tax_regs/comments.html (the Service Internet site).