The Internal Revenue Service has issued preliminary determinations that two series of El Paso County, Texas refunding bonds are taxable retroactively to the date of issuance.
The county disclosed on EMMA those preliminary findings as well as a proposed adverse determination on the tax-exempt status of a third issue previously under a preliminary determination. The issuances are general obligation refunding bonds from 2017 and 2015, as well as certificates of obligation issued by the county in 2012.
The IRS letters communicated that in each case, the cause of the preliminary or proposed adverse findings was “alleged noncompliance with requirements of Section 149(g) of the Internal Revenue Code, which prescribes certain expectations for the timely expenditure of tax-exempt bond proceeds. The 2017 and 2015 bond disclosures also state as a reason alleged noncompliance with Treas. Reg. § 1.148-10(c), which prescribes certain limitations on the gross proceeds generated with advanced refunding bonds.”
Andrew Harrer/Bloomberg
The 2012 certificates totaled $99 million, the 2015 refunding bonds $15.2 million, and the 2017 refunding bonds $50.3 million. The county’s disclosure notices do not estimate how much it might cost the county to make up the difference between the tax-exempt issuances and the higher amount it would have paid if the debt were determined to be taxable.
None of the IRS findings are final determinations, according to the county’s disclosure notices.
A preliminary finding means IRS enforcement is sharing its preliminary view that there is a problem. Issuers have the opportunity to try to convince enforcement otherwise.
A proposed adverse determination occurs when the issuer fails to persuade enforcement that there is not a tax problem. A proposed adverse determination triggers the issuer’s right to submit the matter to the IRS Office of Appeals.
Tax-exempt bond audits nearly always settle before a final determination, with the issuer entering into a closing agreement and paying the IRS to settle the matter.
The proceeds of the 2012 certificates were to be spent on a lengthy list of various capital projects, according to the official statement. Among them: the design and construction of the Tornillo-Guadalupe Land Port of Entry bridge connecting with Mexico and the related road and other facilities including land acquisition.
The 2015 and 2017 bonds were to be used to advance refund a portion of the 2012 certificates, according to those official statements.
The county’s bond counsel is the Dallas firm of McCall, Parkhurst & Horton. Reached by phone, an attorney said the firm would provide a written statement next week.