IRS INITIALLY DETERMINES TEXAS ISSUER’S BONDS ARE TAXABLE DUE TO USE BY THE FEDERAL GOVERNMENT
On December 30, 2013, the Burnet County, Texas, Public Facility Corporation (“Burnet County”) received a letter from the Internal Revenue Service (“IRS”) that its $35.38 million bonds issued in 2008 have been preliminary found to be taxable. In its disclosure notice letter dated January 2, 2014, Burnet County indicated that its bonds were found to be taxable because “the federal use of the facility results in a private business use.” The president of the corporation spoke with The Bond Buyer this past summer and told The Bond Buyer that the Burnet County Jail financed with the bonds was built to hold county prisoners but had some extra space to allow for a larger population in the future. To utilize the extra space federal inmates were housed at the jail for less than 100 days.
IRS FINDS NEW HAMPSHIRE BONDS TO BE TAXABLE AFTER ISSUER WITHDRAWS ITS VOLUNTARY CLOSING AGREEMENT PROGRAM (“VCAP”) FILING
The IRS issued a proposed adverse determination on December 18, 2013, finding that $720 million of student-loan bonds issued by the New Hampshire Health and Education Facilities Authority are taxable. The bonds were issued for a conduit borrower, the New Hampshire Higher Education Loan Corporation, which used the sales proceeds of the bonds to purchase student loans. According to The Bond Buyer, the majority of the bonds were redeemed before 2012.
The IRS’ audit of the bonds began after the issuer withdrew its special voluntary closing agreement for the bonds. The IRS preliminarily determined that the bonds were taxable arbitrage bonds because of a student-loan specific tax-violation commonly referred to as “loan-swapping.”
MS&H AND POST-ISSUANCE TAX COMPLIANCE
The two findings above illustrate that post-issuance tax compliance continues to be a priority of the IRS. McKennon Shelton & Henn LLP encourages its clients to be vigilant in ensuring that they are expending and investing bond-financed proceeds in a qualified manner, using bond-financed projects for a qualified use and have written procedures for post-issuance tax compliance. As the saying goes, an ounce of prevention is worth a pound of cure and post-issuance tax compliance is no exception.
At McKennon Shelton & Henn LLP we believe that issuers and borrowers should not be forced to go it “on their own” after their tax-exempt bonds have been issued. That is why we offer a full spectrum of post-issuance tax compliance services to our clients. Upon request, we assist our clients with all their continuing compliance needs, including planning and reviewing to prevent tax violations and, if necessary, rectifying and remediating if a tax violation has occurred. We are available to assist our clients with allocations, investments, “leftover” funds, management contracts, change in use of projects, financing alternative projects, IRS filings, including VCAP filings, and annual post-issuance compliance reviews.