WASHINGTON - In what appears to be a first-of-its-kind action, the Rockdale County, Ga., Development Authority has reached a closing agreement with the Internal Revenue Service under its tax-exempt bond mediation program to maintain the tax-exempt status of $77 million of solid-waste disposal revenue bonds issued in 1993.
The authority disclosed the settlement, which was reached in September, in a material event notice filed last night with the nationally recognized municipal securities information repositories. The notice did not disclose the details of the settlement, and lawyers involved with the transaction declined to comment.
The IRS mediation program, which was established in 2003, has been rarely used, according to market sources. However, the confusion surrounding the IRS' assessment of the solid-waste bonds appeared to drive the audit to the mediator's table, as the issuer disputed the agency's claim that it had paid for the waste paper.
In 2003, the IRS sent a proposed adverse-determination letter to Visy Paper Inc., a subsidiary of Pratt Industries Inc., the company that sought public finance from the county to construct a paper mill that would turn waste paper into 100% recycled cardboard.
The IRS claimed that the bonds should not be considered tax-exempt because the paper used by the facility was not solid waste, according to a 1999 technical advice memorandum. The TAM said that material recycled in a bond-financed facility is not solid waste if it has a value on the date the bonds were issued. Visy Paper had made a payment to wastepaper suppliers in exchange for the waste, the IRS said. The agency also questioned whether the facility was for recycling or manufacturing.
But bond lawyers have argued that such material should be classified as solid waste because the amount paid by a waste recycling facility is for the cost of transportation and handling, not the value of the material. Visy Paper argued that the amount it paid to the waste supplier did not even cover the transportation and handling costs and that the supplier provided the materials at a loss because it presented a more inexpensive option than paying a landfill to take it.
Visy Paper appealed the IRS' proposed determination letter, eventually leading the parties to consult a mediator on April 26, 2007.
Under the system established by the TEB, an officer from the IRS' Office of Appeals, generally from the same appeals office or geographic area handling the case, serves as the mediator. He or she must have no previous involvement in the case and must disclose their status as an IRS employee to the parties. Visy Paper opted to include a private co-mediator, a tax attorney, at its own expense.
Bradley S. Waterman, the tax controversy attorney representing the Georgia issuer before the IRS, said in a statement yesterday that, while pleased with the mediation proceedings in this case, he believes it is an option that issuers should rarely, if ever, consider.
"Although the post-appeals mediation procedure worked very well in the Rockdale-Visy case, and was quite illuminating, it should be regarded as an extraordinary procedure that is neither necessary nor appropriate in most cases," he said. "Appeals' mission is to settle cases based on the hazards of litigation. There shouldn't be many cases in which the views of the appeals officer and the issuer, with respect to the hazards, are so far apart that mediation is warranted."
The TEB office established its mediation program as a pilot in 2003, and has extended it several times over the year, most recently in 2007. IRS officials declined to comment on the agreement.
The Visy recycling facility is among a number of such facilities that the IRS has investigated in recent years to determine if they are inappropriately using tax-exempt solid waste disposal revenue bonds.
Paul, Hastings, Janofsky & Walker LLP in Atlanta was bond counsel for the deal. Laurence Peters & Co. in Boston served as counsel for Visy Paper and Pratt, and Credit Suisse First Boston was the underwriter. q
