Section 6103. This would allow — 0618 Publ 4344 (PDF)

information sharing agreements under IRC Section 6103(d)(1), which would be most

beneficial to both parties in the effort to ensure compliance with the tax laws of both

governments. The ITG Subgroup also supports the recommendation of the Department

of the Treasury to treat Indian Tribal Governments as states for information sharing

110 Legislative History of the Deficit Reduction Act of 1984, P.L. 98-369, at 1218 (1984). 111 Legislative History of the Deficit Reduction Act of 1984, P.L. 98-369, at 1218 (1984).

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INDIAN TRIBAL GOVERNMENT

purposes. ¹¹² The ITG Subgroup requests that the IRS formally provide its support to the

Department of Treasury to move this legislative action forward at the first opportunity.

The ITG Subgroup recommends the IRS treat a tribal government entity

administering identified social programs to determine eligibility and the correct amount

of benefits under the program as a local agency, and provide information sharing as

required by IRC Section 6103(l)(7). This IRS determination would not require an

amendment of the IRC, but can be an administrative determination by the IRS.

112 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals, https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2010.pdf, Facilitate Tax Compliance with Local Jurisdictions at p. 102.

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ADVISORY COMMITTEE ON

TAX EXEMPT AND GOVERNMENT ENTITIES

(ACT)

Tax-Exempt Bond Subgroup

Recommendations to Encourage Self-Compliance by Issuers of Tax-Advantaged

Obligations

Bill Johnson, Project Leader

David Danenfelzer

June 7, 2018

TAX EXEMPT BONDS

RECOMMENDATIONS TO ENCOURAGE SELF-COMPLIANCE BY ISSUERS OF

TAX-ADVANTAGED OBLIGATIONS

I. EXECUTIVE SUMMARY ................................................................................... 67

II. BACKGROUND ................................................................................................. 68

III. RECOMMENDATIONS ..................................................................................... 79

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I. EXECUTIVE SUMMARY

The topic of increasing compliance and self-reporting by issuers/conduit borrowers

(Issuers) of tax-advantaged obligations ¹¹³ has surfaced as an issue many times over the

past twenty years. The general theme of each of these proposals, from both the

National Association of Bond Lawyers (NABL), the Tax-Exempt Financing Committee of

the American Bar Association Tax Section, and several ACT Tax-Exempt Bond

Subgroups (TEB Subgroup) has been to create a structure that incorporates subjective

factors, defines a penalty structure and is not overly burdensome to Issuers or the IRS.

The current TEB Subgroup’s project is to provide a conceptual framework for revisions

to the current IRS TEB Voluntary Compliance Agreement process and the TEB

Streamlined Voluntary Compliance Agreement process (jointly referred to as TEB

VCAP) that provides:

An easily determinable payment amount to resolve violation (Resolution Amount) that is acceptable from both the Issuer’s and the IRS’s standpoint;
Closure on a violation;
Minimal cost to the Issuer; and
Frees up the IRS to deal with unusual situations.

As a result of Indian Tribal Governments and Tax-Exempt Bonds shrinking workforce

and increasing workload, the volume of small and infrequent Issuers, and a decline in

the individual and corporate tax rates, the fear of an examination of a particular issue

(and the resulting potential liability and penalties) may not be enough to ensure Issuer

post issuance compliance. The IRS needs to encourage self-policing by Issuers to self

correct and self-report violations. To entice Issuers to implement compliance programs

and correct violations, the current TEB VCAP program needs to be revised to provide

sufficient incentives to encourage Issuers to participate. The correction options must be

113 Treas. Reg. Section 1.150-1(b).

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TAX EXEMPT BONDS

simple, cost-effective and encourage self-compliance by providing an economic

incentive for Issuers to actively monitor and correct violations.

II. BACKGROUND

Tax-Advantaged Obligation Compliance

In general, Issuers of tax-advantaged obligations do not pay tax. Holders of tax-exempt

obligations generally do not pay tax on interest income from the obligations pursuant to

IRC Section 103. Holders of certain types of bonds receive tax credits ¹¹⁴ pursuant to

IRC Sections 54A and 54AA. However, Issuers must remit any profit realized from

borrowing at tax-exempt rates and investing unspent proceeds at taxable rates, known

as arbitrage.

The Treasury has defined tax-advantaged obligation requirements in three major areas:

Spending the tax-advantaged obligation’s proceeds on the stated purpose of the issue (document retention).
Having to remit any profit on the investment of unspent tax-advantaged proceeds (rebate and yield restriction – referred to as rebate).
Limiting the private use of assets financed with certain tax-advantaged bond proceeds to permitted threshold amounts (acceptable private business use).

The Internal Revenue Manual (IRM) defines “Voluntary Compliance” to include post

issuance diligence and resolving noncompliance on a timely basis. This general

information for Issuers of tax-advantaged obligations includes:

General post issuance compliance responsibilities
Self-correction of violations
Voluntary Closing Agreement Program (TEB VCAP)

114 In some cases, rather than provide a tax credit to the obligation holder, an Issuer can elect to receive a direct subsidy from the U.S. Treasury and interest on the obligation is taxable to the holder.

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Issuers are required to monitor each of these areas for compliance. If the Issuer

discovers a violation within a prescribed time period, they may self-correct these

violations through what are referred to as remedial actions. If these remedial actions are

not initiated and reported within a prescribed time period, the Issuer can correct the

violation through the self-reporting TEB VCAP.

The IRS uses audits to test and encourage compliance in the tax-advantaged obligation

area.

Evolution of TEB VCAP

In May 1997, the IRS announced a formal tax-exempt bond closing agreement

program. ¹¹⁵ Violations of IRC Section 103 and related provisions that could not be

remedied under then-existing remedial action provisions or other tax-exempt bond

closing agreement programs contained in regulations or other published guidance could

be resolved by entering into a closing agreement under the TEB VCAP. Notice 2001-60

provided additional information on the scope and procedures for requesting a closing

agreement under the TEB VCAP. Notice 2008-31 modified and superseded Notice

2001-60 by incorporating tax credit bonds into the TEB VCAP and by referring to IRM

7.2.3 for specific information required for TEB VCAP submissions.

In June 2000, NABL appointed a special task force – The Task Force on Alternative

Dispute Resolution (Task Force). The Task Force issued its suggestions for

improvement in the enforcement programs in September 2004. That report outlined five

basic principles for reform:

As a general rule, the Issuer, not the bond holder, should pay any required penalty when a mistake or violation occurs.
The program should cover all violations.

115 Rev. Proc. 97-15, 1997-1 C.B 635.

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The program should specify the maximum penalty for as many classes or types of violations as possible so that the Issuers will be encouraged to voluntarily report noncompliance.
The remedy or penalty for noncompliance should properly reflect the nature and extent of the violation.
No single approach, such as calculation of the tax liability to the bondholders, if the bonds were declared taxable (Taxpayer Exposure) under the then existing guidelines, can provide a penalty that is appropriate for all violations.

The procedures for correcting a failure to pay rebate are long standing and are defined

in Treas. Reg. Sections 1.148-3(h)(1), 1.148-3(h)(2) and 1.148-3(h)(3).

Treas. Reg. Section 1.148-3(h)(1) provides that the failure to pay the correct rebate amount when required will cause the bonds of an issue to be arbitrage bonds (taxable) unless the Commissioner determines that the failure was not caused by willful neglect and the Issuer promptly pays a penalty. If the issue consists solely of governmental or qualified 501(c)(3) bonds, the penalty equals 50 percent of the rebate due, plus interest. Otherwise the penalty is equal to 100 percent of the rebate due, plus interest.
- Treas. Reg. Section 1.148-3(h)(2) provides that interest on the unpaid rebate amount accrues at the underpayment rate under IRC Section 6621 beginning on the date the correct rebate amount is due and ending on the date 10 days before it is paid.
- Treas. Reg. Section 1.148-3(h)(3) provides that the penalty is automatically waived if the rebate amount that the Issuer failed to pay is paid within 180 days after the discovery of the failure, unless the Commissioner determines that the failure was due to willful neglect, or the issue is under examination by the Commissioner at any time during the period beginning on the date the failure first occurred and ending 90 days after the receipt of the rebate amount.

In July 2005, Rev. Proc. 2005-40 was issued to provide procedures for correcting a

failure to pay rebate, for establishing the lack of willful neglect and concerning requests

for an extension of time to pay or a waiver of the penalty. Rev. Proc. 2005-40 set out

eight factors to be used to determine if the failure to timely pay the correct rebate

amount was due to willful neglect. It stated that the IRS would consider:

The unpaid rebate amount;
The sophistication of the Issuer;

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The length of the delay;
The steps taken to comply, including the steps taken after the discovery of the failure to pay;
The steps taken to prevent recurrence;
The nature of the failure;
Any history of timely or late payments by the Issuers; and
Any other relevant information.