The IRS announced a simplified process for issuers of qualified 501(c)(3) bonds to request a closing agreement in situations in which the borrower of the proceeds of the bonds received prospective reinstatements after its tax-exempt status was automatically revoked under Section 6033(j)(1).
Interest on qualified 501(c)(3) bonds is tax-exempt if certain criteria are met, notably: 1) all of the property financed from the proceeds of the bonds is owned by a tax-exempt organization or state or local government entity; and 2) the property must be used almost exclusively by the state or local government entity or tax-exempt organization in its related trade or business operations. If, at any point during which the bonds are outstanding, the organization for which the bonds were issued fails to qualify as a 501(c)(3) organization, the interest on the bonds may no longer qualify as tax-exempt.
Under Section 6033(j), an organization’s 501(c)(3) status will be revoked if the organization fails to file an annual return or notice for three consecutive years. Section 6033(j)(3) provides that, in certain situations, if the organization can demonstrate reasonable cause for its failure to file, the organization’s 501(c)(3) status will be retroactively reinstated to the revocation date. However, as described in Rev. Proc. 2014-11, the effective date for the reinstatement of the organization’s 501(c)(3) status may, in certain situations, be later than the revocation date (prospective reinstatement).
In situations where the borrower of the bond proceeds received a prospective reinstatement, the bond issuer must meet the following requirements to apply for a closing agreement:
- The organization that is the beneficiary of the bonds must have obtained a prospective reinstatement of its tax-exempt status.
- The tax-exempt status of the organization that is the beneficiary of the bonds must not have been previously revoked.
- The closing agreement request must be submitted within 12 months of the date of the reinstatement letter.
- The bonds cannot be under examination by the IRS.