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IRS Offers New VCAP For Bonds

MAR 20, 2012 7:18pm ET
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WASHINGTON — The Internal Revenue Service on Tuesday unveiled a voluntary closing agreement program for certain tax-exempt student loan bond issuers, giving them until July 31 to apply for relief under the settlement program.

The program would apply to issuers that violated tax rules by reallocating student loans to bonds other than the ones used to finance them.

Under federal tax rules, the yields on student loans cannot be more than 2% above the yields of the bonds that were used to make the loans. The IRS has been concerned issuers have been tying higher-yielding student loans to higher-yielding student loan bonds to ensure they stay under the 2% limit and are not forced to make yield-reduction payments to the federal government.

Last November, in what appeared to be the first publicly disclosed settlement in this area, the Pennsylvania Higher Education Assistance Agency paid $12.3 million to settle tax-law violations and protect the tax-exempt status of roughly $250 million student loan bonds.

In its four-page announcement, the IRS detailed the terms of the new voluntary closing agreement program.

“The new terms are just terms,” said Vince Sampson, president of the Education Finance Council. “Now that there are concrete terms, issuers can begin the process of assessing whether they want to participate or not. The issuers will start the process to take a look at it and those processes may vary.”

Issuers must request a settlement by July 31 with respect to all of their outstanding qualified student loan bond issues for which it reallocated student loans to other bonds.

First, the IRS said, the issuer will agree that, as of the date of the closing agreement, it will discontinue the practice of reallocating student loans from one bond issue to another.

Also, the issuer will agree to pay a settlement amount equal to 40% of the taxpayer exposure on each issue of bonds, based on the issuer’s existing records and according to a formula.

Several bond lawyers who did not want to be identified raised concerns that the formula for VCAP may be too cost prohibitive and could ultimately sink some student loan issuers. While the new VCAP program resembles the settlement used with PHEAA, it may not be a model for other student-loan issuers, sources said. “The question is, will this formula be too expensive for many of the student loan issuers that would like to participate in this settlement program,” one lawyer said.

Under the terms of the new VCAP program, the issuer would not be able to deduct or otherwise offset the settlement amount. The amount also would not be refundable.

The issuer’s bonds would remain tax-exempt and the settlement amount would eliminate any liability under the tax code for failing to make yield-reduction payments or rebate arbitrage. The IRS would reserve the right to audit the bonds in the future with respect to any tax matter not addressed under the settlement.

Typically, within 60 days of the receipt of a complete VCAP request, the IRS will process it and send a closing agreement to the issuer for its execution, the agency said in the release.

 

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