The Internal Revenue Service has decided not to alter the tax-exempt status of $57.5 million of bonds issued in 2003 by the Illinois Health Facilities Authority, now the Illinois Finance Authority, after completing an audit that focused on two former board members who pleaded guilty to defrauding Rosalind Franklin University and orchestrating kickback schemes, the issuer disclosed last week.
The Massachusetts Educational Financing Authority also disclosed last week that the IRS has begun an audit of $119.2 million of revenue bonds sold in 1997 as part of its initiative to examine student loan bonds. Both announcements were made in material event notices filed with the Municipal Securities Rulemaking Board's electronic EMMA system.
The Illinois agency received a letter dated Feb. 1 from the IRS announcing the audit was ending with no change to the bonds' tax-exempt status, according to its notice. The audit began Jan. 9, 2009, and was disclosed in May by the IFA, which replaced the IHFA in 2004. In the conduit transaction, the university borrowed the proceeds to finance the construction of student housing on campus, as well as to refund $30 million of bonds sold in 2001 to finance an addition.
The original notice announcing the audit said the IRS "appears to have been focused on issues arising out of the conduct of certain individuals who were not employees of [the university] who have been prosecuted by the Department of Justice for their actions, which victimized the university."
The notice did not name names, but former university board members Stuart Levine and Jacob Kiferbaum both pleaded guilty in 2006 after being indicted on a number of federal charges the previous year, including attempts to defraud the university through a kickback scheme.
The indictments said Kiferbaum's construction firm overcharged by millions of dollars for two projects and some of those funds were routed through Levine.
The two agreed to cooperate with investigators over other corruption charges as part of their plea agreements. Kiferbaum also agreed to pay the university $7 million in restitution, the amount of his firm's net profits from the two projects.
Although the two men are no longer associated with the university, tax-controversy experts said if the IRS determined the bonds did not comply with the tax code, the school may have had to make a payment to the agency to protect the bonds' exempt status.
The Illinois bonds under audit were underwritten by Bear, Stearns & Co., now part of JPMorgan. Jones Day was bond counsel.
The Massachusetts agency said the IRS tabbed its bonds as part of its announced initiative to "assess compliance trends in the qualified student-loan bond area. MEFA said it has submitted information to the IRS about the bonds." Its notice said it "does not currently expect this examination to adversely affect the tax status of the bonds or to have a material adverse effect on the security for the bonds."
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC served as bond counsel on the deal, according to bond documents. The issue was underwritten by Smith Barney Inc., now Citi; PaineWebber Inc., now part of UBS; Fleet Securities Inc., and BayBank NA.
