Tax-Exempt Bond Voluntary Closing Agreement Program Announced

On February 28, the IRS announced a program to provide certain issuers that purchase and hold their own tax-exempt bonds relief from debt extinguishment (Announcement 2011-19).

In 2008, during the financial crisis, the IRS issued two notices providing relief from liquidity constraints in the tax-exempt bond market. The notices allowed state and local governments to purchase and hold their own tax-exempt bonds for temporary holding periods without resulting in a retirement of the purchased tax-exempt bonds. The permitted holding period ended December 31, 2010.

Some issuers who purchased their own tax-exempt bonds were unable to resell those bonds before the Dec. 31, 2010, deadline. Therefore, the IRS is initiating a voluntary closing agreement program (VCAP) under which it will consider requests for voluntary closing agreements from issuers of extinguished bonds.

Under a closing agreement, extinguished bonds would be treated as remaining outstanding until the earliest of (1) 180 days after the closing agreement is executed by the IRS and issuer; (2) the date the bonds are sold to a third party, (3) the date the bonds are currently refunded, or (4) the date the bonds are canceled on the issuer’s books.

To qualify for a closing agreement, the issuer must adopt a resolution of its intent to resell or currently refund the extinguished bonds as tax-exempt bonds within the relevant closing agreement period, meet other conditions, and pay a fee.

The VCAP will accept requests through December 31, 2012.