TEB Appeals Rev. Proc.

TEB Appeals Rev. Proc.

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Rev. Proc. 2006-40

ADMINISTRATIVE APPEAL OF PROPOSED ADVERSE DETERMINATION OF

TAX-EXEMPT STATUS OF BOND ISSUE

TABLE OF CONTENTS

SECTION 1. PURPOSE

SECTION 2. BACKGROUND

SECTION 3.

.01

.02

.03

.04

.05

.06

.07

SCOPE

In general

Appeals procedures

Issuers as taxpayers

Bondholders as taxpayers

Conduit borrowers as taxpayers

Technical advice

Alternative dispute resolution programs

SECTION 4.

.01

.02

.03

.04

.05

.06

.07

.08

INITIATING THE APPEAL PROCESS

In general

Availability of appeal request to issuer

Requesting an appeal

Required information and signature

Response to an appeal request

Failure to make appeal request

Transfer of case file

Jurisdiction over tax matters

SECTION 5.

.01

.02

.03

.04

.05

RESOLVING AN APPEAL ISSUE(S)

In general

Other participants in the appeals process

New information provided

If agreement is reached

If agreement is not reached

SECTION 6. EFFECT OF FINAL ADVERSE DETERMINATION

SECTION 7. NO USER FEE

SECTION 8. EFFECT ON OTHER DOCUMENTS

SECTION 9. EFFECTIVE DATE

TEB Appeals Rev. Proc.

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SECTION 1. PURPOSE

This revenue procedure provides procedures for an issuer of tax-exempt bonds to

request an administrative appeal to the Office of Appeals (Appeals) within the Internal

Revenue Service (Service) from a proposed adverse determination by the Service’s

Office of Tax Exempt Bonds (TEB) of the Tax Exempt & Government Entities Division

(TE/GE) to the effect that an issue of bonds fails to qualify for the exclusion of the

interest on the bonds from the gross income of the owners under section 103 of the

Internal Revenue Code (the Code) and related provisions of the Income Tax Regulations

(the Regulations) (Proposed Adverse Determination). This revenue procedure also

provides procedures for an issuer of tax-exempt bonds to request such an administrative

appeal from a denial by TEB of a claim for recovery of an asserted overpayment of

arbitrage rebate under section 148 of the Code (Arbitrage Rebate Claim Denial).

SECTION 2. BACKGROUND

Prior to the enactment of the Internal Revenue Service Restructuring and Reform

Act of 1998, P.L. 105-206, 112 Stat. 685 (1998 IRS Restructuring Act), procedures did

not exist for an issuer to appeal a Proposed Adverse Determination by the Service that the

interest on an issue of bonds failed to qualify for the exclusion from the gross income of

the owners of those bonds under section 103 of the Code. Section 3105 of RRA 98

directs the Service to modify its administrative procedures to allow issuers an expeditious

appeal of a proposed adverse determination by the Service to Appeals with respect to a

bond issue before the Service proceeded to tax bondholders. As a result, Rev. Proc. 9935, 1999-2 C.B. 501, was published to set forth procedures for issuers to appeal a

proposed adverse determination by an Employee Plans/Exempt Organizations Key

District under the Service’s prior organizational structure. Subsequently, the Service

updated its organizational structure and created TEB as a separate examination division

for tax-exempt bond matters within its updated organizational structure. This revenue

procedure modifies and supersedes Rev. Proc. 99-35 to take into account the Service’s

updated organizational structure and to apply the revised appeal procedures to a Proposed

Adverse Determination or an Arbitrage Rebate Claim Denial.

SECTION 3. SCOPE

.01

In general. An appeal of a Proposed Adverse Determination by TEB is

initiated by the issuer as described in section 4 of this revenue procedure. Any issue

raised by TEB in a Proposed Adverse Determination that would cause interest on a bond

issue to fail to qualify for the exclusion from gross income under section 103 of the Code

or any Arbitrage Rebate Claim Denial that involves a denial by TEB of a claim for

recovery of arbitrage rebate payments under section 148 of the Code with respect to a

bond issue is appropriate for consideration by Appeals.

TEB Appeals Rev. Proc.

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.02

Appeals procedures. Established appeals procedures, including those

governing submissions and taxpayer conferences, apply to appeals regarding bond issues.

See section 601.106 et seq. of the Regulations.

.03

Issuers as taxpayers. In order to expeditiously conduct an examination

(including any related administrative appeal) of a tax-exempt bond issue, an issuer is

generally treated as the taxpayer on behalf of any unidentified beneficial owners of the

bonds comprising the issue under examination. See section 5.02 of this revenue

procedure regarding other parties that may participate in an Appeals proceeding.

.04

Bondholders as taxpayers. TEB must concurrently treat all identified

owners of the bonds as taxpayers for all aspects of an examination, including taxpayer

communications and the assessment of tax on past interest paid on that bond issue. The

appeal rights of a bondholder are independent and separate from the appeal rights of an

issuer described under this revenue procedure.

.05

Conduit borrowers as taxpayers. In appropriate circumstances, Appeals

may consider issues relating to those raised in a Proposed Adverse Determination with

respect to a bond issue which affect the tax liability (other than any potential penalties) of

the borrower of bond proceeds of a conduit financing issue concurrently with the issuer’s

appeal. Appeals will only consider an issue relating to the borrower’s tax liability if the

borrower is under examination with respect to the issue, the resolution of that issue is

affected by the determination of whether the interest on an issue of bonds is excludable

from gross income under section 103 (e.g. issues under sections 150(b) or 168(g) of the

Code), and the borrower agrees to resolve the issue concurrently with the issuer’s appeal

under this revenue procedure. See section 5.02 of this revenue procedure for Appeals

procedures governing the participation of parties other than the issuer.

.06

Technical advice. Revenue Procedure 2006-2, 2006-1 I.R.B. 89 explains,

in part, when and how the Division Counsel/Associate Chief Counsel (Tax Exempt &

Government Entities) issues technical advice memoranda to TEB and Appeals. In

accordance with section 7.02 of Rev. Proc. 2006-2, or subsequent revenue procedure, an

issuer may submit a request to TEB or Appeals that a tax matter be referred for technical

advice in accordance with the procedures contained therein while the bond issue is under

the jurisdiction of TEB or Appeals respectively.

.07

Alternative dispute resolution programs. TEB and Appeals offer certain

alternative dispute resolution and fast track settlement programs pertaining to the

examination of bond issues. These programs, described by revenue procedure,

announcement or other published guidance, permit senior Appeals officers to mediate or

otherwise assist in the resolution of matters identified during the course of an

examination prior to the issuance of a Proposed Adverse Determination. See Revenue

Procedure 99-28, 1999-2 C.B. 109 and Announcement 2003-36, 2003-1 C.B. 1093.

SECTION 4. INITIATING THE APPEAL PROCESS

TEB Appeals Rev. Proc.

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.01

In general. Sections 4.02 through 4.06 of this revenue procedure describe

the circumstances and procedures under which an issuer may appeal a Proposed Adverse

Determination or an Arbitrage Rebate Claim Denial.

.02

Availability of appeal request to issuer. An issuer is eligible to request an

appeal under this revenue procedure upon the receipt from TEB of either a Proposed

Adverse Determination or an Arbitrage Rebate Claim Denial. Except as provided in

section 3.07 of this revenue procedure, the appeal rights under this revenue procedure are

not available to an issuer prior to the receipt of either such a Proposed Adverse

Determination or an Arbitrage Rebate Claim Denial.

.03

Requesting an appeal. The issuer’s appeal request must be submitted in

writing to TEB within 30 days of the date of TEB’s Proposed Adverse Determination or

Arbitrage Rebate Claim Denial. The appeal request must include the information listed

in section 4.04 of this revenue procedure. TEB may extend the 30-day submission

requirement following a written request by the issuer justifying such extension.

.04

Required information and signature. The appeal request must include a

detailed written response to TEB’s Proposed Adverse Determination or Arbitrage Rebate

Claim Denial, including a full and complete explanation of the issuer’s position regarding

the issue(s) in dispute. The appeal request must include a declaration in the following

form: “Under penalties of perjury, I declare that I have examined this request for an

appeal, including accompanying documents, and that, to the best of my knowledge and

belief, the facts presented are true, correct, and complete.” The issuer or the issuer’s

authorized representative must sign an appeal request. An issuer may designate an

authorized representative by submitting a duly executed Form 2848, Power of Attorney

and Declaration of Representative, when making an appeal request under this revenue

procedure.

.05

Response to an appeal request. Upon receipt of an appeal request, TEB

will review the request to determine whether it meets the requirements of this revenue

procedure. If the request does not meet the requirements of this revenue procedure, TEB

will notify the issuer of the request’s deficiencies. If the request meets the requirements

of this revenue procedure and does not contain any new information or analysis of the

taxpayer’s position, TEB will transfer the case file to Appeals in the manner described in

section 4.07 of this revenue procedure. If the request meets the requirements of this

revenue procedure but the request contains new information or analysis of the taxpayer’s

position, TEB will notify the issuer that the new information submitted in the request

may change the case’s outcome and requires further discussions prior to transferring the

case file to Appeals in the manner described in section 4.07 of this revenue procedure.

.06

Failure to make appeal request. If the issuer does not submit a written

appeal request within the time period set forth in section 4.03 (including any filing

extension granted by TEB) and in the manner described in section 4.04 of this revenue

procedure, TEB’s Proposed Adverse Determination or Arbitrage Rebate Claim Denial

shall become final.

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.07

Transfer of case file. Upon receipt of an appeal request, TEB Field

Operations (TEB FO) will send the case file to TEB Compliance & Program

Management (TEB CPM) for review and transfer to Appeals. To facilitate the appeals

process, TEB CPM will expeditiously review the case file to ensure that the factual and

legal matters therein support the issues raised by TEB FO in the Proposed Adverse

Determination or Arbitrage Rebate Claim Denial. Once the review process is complete,

TEB CPM will close the case at the examination level and transfer the case file to

Appeals. The file should include copies of the following:

1. the technical advice memorandum, if any;

2. all information received by TEB from the issuer regarding the bond issue;

3. all work papers related to TEB’s examination of the bond issue;

4. TEB’s written Proposed Adverse Determination or Arbitrage Rebate Claim

Denial;

5. the issuer’s written protest; and

6. TEB’s response to positions stated by the issuer in its protest.

.08

Jurisdiction over tax matters. Once TEB CPM sends the case file to

Appeals, jurisdiction over the issues raised in the Proposed Adverse Determination or

Arbitrage Rebate Claim Denial will transfer from TEB to Appeals. Except as provided in

section 3.05 of this revenue procedure, TEB will retain jurisdiction over all tax matters

related to the bond issue which are not specifically raised as an issue in the Proposed

Adverse Determination (e.g. section 6700 penalties) or Arbitrage Rebate Claim Denial.

SECTION 5. RESOLVING AN APPEAL ISSUE(S)

.01

In general. In accordance with the directive in the 1998 IRS Restructuring

Act, an appeal by an issuer under this revenue procedure will be assigned to a senior

Appeals officer specializing in tax-exempt bonds. Appeals will consider the case a

priority assignment and will resolve the case as expeditiously as possible.

.02

Other participants in the appeals process. The issuer may authorize any

person (e.g. a borrower) to inspect or receive confidential information during the Appeals

process by submitting a duly executed Form 8821, Taxpayer Information Authorization,

to the Appeals officer.

.03

New information provided. If the issuer provides additional information

not previously given to TEB, Appeals may forward such information to TEB CPM for

comment or return jurisdiction over the case to TEB if it determines that the significance

of any new information warrants further case development by TEB FO.

.04

If agreement is reached. If Appeals and the issuer agree that no action is

necessary with respect to the issues raised in a Proposed Adverse Determination or an

Arbitrage Rebate Claim Denial, Appeals will provide written notification to the issuer

that the Proposed Adverse Determination or Arbitrage Rebate Claim Denial has been

TEB Appeals Rev. Proc.

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withdrawn. If Appeals and the issuer reach an agreement with respect to the bond issue,

Appeals will generally prepare a closing agreement using the model closing agreement

provided in Exhibit 4.81.1-9 of the Internal Revenue Manual. Under either scenario,

Appeals will provide TEB CPM with copies of the Appeals case memorandum and the

executed closing agreement (if any), close the case at the appeal level, and send the case

file to the Ogden Submission Processing Center.

.05

If agreement is not reached. If Appeals and the issuer cannot reach an

agreement, Appeals will provide written notification to the issuer that TEB’s Proposed

Adverse Determination or Arbitrage Rebate Claim Denial has become final. Appeals

will send the case file (including a copy of the Appeals case memorandum) to TEB CPM

and close the case at the appeal level.

SECTION 6. EFFECT OF FINAL ADVERSE DETERMINATION

A Proposed Adverse Determination becomes final if there is no timely appeal

under section 4 or if Appeals and the issuer cannot reach agreement with respect to an

appeal under section 5.05. Once a Proposed Adverse Determination becomes final with

respect to a bond issue, the interest on those bonds will no longer be treated as excludable

from gross income under section 103 of the Code and TEB may initiate procedures to

impose tax on the bondholders with respect to the interest on the bonds. Once a Proposed

Adverse Determination becomes final with respect to a bond issue, TEB generally will

not re-open settlement negotiations with an issuer regarding matters identified in the

examination of the bond issue.

SECTION 7. NO USER FEE

There is no user fee for either requesting an appeal or executing a closing

agreement pursuant to this revenue procedure.

SECTION 8. EFFECT ON OTHER DOCUMENTS

Revenue Procedure 99-35, 1992-2 C.B. 501, is modified and superseded.

SECTION 9. EFFECTIVE DATE

These procedures are generally effective on September 27, 2006, the date this

revenue procedure is released to the public, with respect to Proposed Adverse

Determinations or Arbitrage Rebate Claim Denials for bond issues for which a closing

agreement has not been executed.

SECTION 10. REQUEST FOR COMMENTS

The Service requests comments to be taken into consideration as the Service

develops alternative dispute resolution programs to expeditiously resolve tax matters

relating to tax-exempt bond issues during the examination and administrative appeal

TEB Appeals Rev. Proc.

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process. In particular, the Service is seeking comments on how TEB and Appeals may

utilize mediation or other formal fast-track settlement programs. Comments should refer

to Rev. Proc. 2006-40, and should be submitted to:

Internal Revenue Service

SE:T:GE:TEB

1111 Constitution Ave., NW, PE-583

Washington, DC 20224

DRAFTING INFORMATION

The principal authors of this revenue procedure are Steven A. Chamberlin of Tax

Exempt Bonds, Compliance & Program Management (Tax Exempt & Government

Entities) and David E. White of the Office of Assistant Chief Counsel (Exempt

Organizations/Employment Tax/Government Entities). For further information regarding

this revenue procedure contact Mr. Chamberlin on (636) 940-6466 (not a toll-free call).