The Vermont Student Loan Assistance Corp., which has been in discussions with the Internal Revenue Service to settle a tax law dispute over $165 million of auction-rate securities it sold in 1998, disclosed that the IRS is expanding its audit to include more of the issuer’s ARS.
The loan agency said the information it provided the IRS in settlement talks led to the expansion of the audit, which was initiated in 2009. The ARS were sold to finance the origination or purchase of student loans.
“The VSAC believes it received the letters [from the IRS] as a result of information VSAC provided for purposes of reaching a settlement” on the 1998 ARS, the issuer said in an event notice posted on the Municipal Securities Rulemaking Board’s EMMA system. The notice was dated July 14 but did not appear on EMMA until this week.
“VSAC believes that it is in compliance with the tax covenants required to maintain the tax exemption” on the bonds in question, the issuer said, adding that it will “vigorously contest” any further assertions that the bonds are not tax-exempt, while continuing to try to resolve the dispute.
The initial audit was based on the IRS’ concerns about the VSAC’s methodology for tracking student loans acquired with the ARS proceeds and about the consolidation of the loan-rebate fee paid to the U.S. Department of Education.
All Federal Family Education Loan lenders are required to pay the fee to the Education Department whenever student loans are consolidated.
The IRS has previously taken the position that student loans should not be reallocated to different bond issues and that consolidation loan-rebate fees should not be considered as qualified expenses for rebate purposes.
During the settlement talks, the IRS told the VSAC that it would no longer contest the consolidation loan rebate fee, according to the issuer.
Kutak Rock LLP was bond counsel on the 1998 ARS deal. Painewebber Inc., now UBS Securities LLC, and Lehman Brothers, now Barclays Capital, were underwriters.
Government Finance Associates Inc. was financial adviser. All but $10 million of the bonds were insured by Ambac Assurance Corp., whose parent company recently filed for bankruptcy.
Officials with the Education Finance Council, which represents VSAC among other student loan issuers, declined to comment on the Vermont case yesterday.
The IRS is scrutinizing other student loan issuers over some of the same issues.
In May 2008, the agency began auditing $150 million of student loan revenue bonds issued in 2002 by the Pennsylvania Higher Education Assistance Agency. Last November, the PHEAA said the IRS was asking for additional information.
The IRS also asked the agency to describe the “callability” of each series of bonds outstanding and provide documents to verify timely compliance with Treasury Department regulations relating to “allocations of co-mingled funds.”
