WASHINGTON — The Internal Revenue Service is auditing $51 million of auction-rate securities that were issued in a conduit deal in 2005 by the Orange County, Fla., Health Facilities Authority to current-refund bonds and finance a hospital project.
But the ARS were retired on May 1, 2008, so that the IRS would only have until April 15, 2012, to complete its audit because of a three-year statute of limitations on tax matters. The year 2012 would be three years after 2009, when bondholders filed tax returns for 2008 referencing the bonds.
The authority disclosed the audit in an event notice filed with the Municipal Securities Rulemaking Board’s EMMA system and said it has no reason to believe the audit is anything other than routine. The IRS informed the agency of the audit in a Dec. 20 letter.
In the 2005 transaction, the authority loaned the proceeds to the Orlando Regional Healthcare System. About $34.1 million of the proceeds were used to current refund 1993 bonds that were previously advance refunded, according to bond documents. Another $15.1 million of the bond proceeds were to be used to help finance an expansion project at the Arnold Palmer Hospital for Women and Children in Orlando. In addition, $4 million was to be placed in a debt-service reserve fund and $2.1 million was for issuance costs.
The 2005 deal is part of a whole series of transactions that date back to the 1980s and involve at least two past crossover refundings, a type of advance refunding in which the revenue stream originally pledged to secure the refunded bonds continues to be used to pay debt service on the refunded bonds until they mature or are called. At that time the pledged revenues “cross over” to pay debt service on the refunding bonds and escrowed securities are used to pay the refunded bonds.
During the period when both the refunded and the refunding bonds are outstanding, debt service on the refunding bonds is paid from interest earnings on the invested proceeds of the refunding bonds.
Bradley S. Waterman is representing the authority before the IRS.
