The IRS has released Announcement 2012-14, which permits issuers of student loan bonds that involved loan-swapping to request by July 31, 2012 a closing agreement involving a potentially substantial settlement payment to the IRS in order to preserve the tax-exempt status of such bonds.

Certain issuers of student loan bonds reallocated loans originally funded by a particular bond issue to another bond issue when calculating compliance with arbitrage restrictions on the spread between the yield on bond-financed loans and the applicable bond yield. The IRS has determined that such reallocations by an issuer among its own portfolios did not constitute actual sales or dispositions of the swapped loans and therefore were ineffective for tax law purposes. The reallocations therefore will be disregarded. If an issuer cannot satisfy its burden of proof in any audit that the bonds involved are not taxable arbitrage bonds if such reallocations are ignored, the applicable bonds are at risk of being declared taxable.

Various issuers of bonds that have been audited and/or that are at risk of taxability due to the IRS’s position on loan-swapping have filed material event notices on EMMA regarding the applicable taxability risk. The Announcement outlines the terms of closing agreements available to issuers of such bonds that have not yet been audited by the IRS. It does not apply to bonds for which an audit is already underway. Presumably such bonds may receive harsher treatment than that available under the Announcement.