8.3.7 Changes in Use of Bond-Financed Property
Over the term of a bond issue, facts and circumstances can change and the issuer may desire to use bond financed property in a manner inconsistent with its reasonable expectations on the date of issuance. In order to preserve the tax exempt status of the bonds in these circumstances, any tax violations, such as the sale of bond financed property or use of such property in a manner causing excessive private business use, must be quickly identified and remedied (this also applies to an obligated borrower for a private activity bond). If an issuer or obligated borrower engages in an activity causing bond financed property to be used in a manner that violates the applicable use limitations, one or more “self help” remedial actions may be considered. Possible remedial actions include defeasing the non qualified portion of the outstanding bonds or using the amounts realized from the sale of the bond financed property for another qualifying use.131 Failure to identify non compliance early enough to qualify for self help remedial actions, or matters in which self help is not available, may be addressed with the IRS under its Tax Exempt Bonds Voluntary Closing Agreement Program (VCAP).
VCAP offers issuers who voluntarily come forward an opportunity to resolve a violation that cannot be rectified under self help programs through a “closing agreement” in which the IRS agrees to not declare interest on the bonds to be taxable and the issuer agrees to make a payment to the IRS and take other required actions. Closing agreement terms and amounts may vary according to the degree of violation as well as the facts and circumstances surrounding the violation, but an issuer submitting a VCAP request can expect to settle the case on terms that are no less favorable, and generally on terms that are more favorable, than the settlement terms that would be expected had the violation been discovered as a result of an IRS audit.
VCAP is available to issuers of tax advantaged bonds who have discovered a violation of the federal tax requirements applicable to their bonds. VCAP is not available for bonds under examination or bonds for which the tax advantaged status is at issue in a federal court or before the IRS Office of Appeals. VCAP is generally not available, absent extraordinary circumstances, if the violation can be resolved under existing remedial action provisions.
Remedial actions and the VCAP process are complex and an issuer should therefore engage tax counsel to assist it in considering remediation alternatives and, if advisable, to guide the issuer through the VCAP process.