BRADENTON, Fla. - Miami-Dade County will consider hiring special counsel to explore whether there is a tax issue with revenue bonds sold in 1996 to make cruise terminal improvements at Port Miami.
The issue will come up Wednesday before a county finance committee, which will consider bringing Squire Sanders LLP on board as special tax counsel.
About $21 million of the original $29.3 million of revenue bonds are outstanding through 2027.
Squire Sanders was conducting due diligence as bond counsel on an upcoming refunding of the 1996 bonds when the firm discovered that a contract with Carnival Cruise Lines in 1998 could affect their status as governmental bonds, according to county documents.
At the time the bonds were sold, Carnival was using terminals improved with the bonds but had no obligation to pay the county other than dock and wharf fees so the debt was sold as governmental bonds.
“The [1998] contract obligates Carnival to make a payment to the county if the number of Carnival passengers falls below a certain level in exchange for a reduced wharfage and dockage fee,” according to a memorandum by deputy mayor Edward Marquez, who also is finance director. “In effect, it is possible that one could interpret the terminal agreement such that Carnival may be deemed to be guaranteeing a minimum amount of wharfage and dockage fees.”
Though Carnival has never made a payment to the county, the cruise line’s payment guarantee and use of the cruise terminals “may result in a reclassification of the Series 1996 bonds from governmental bonds to private activity bonds,” Marquez wrote.
The Internal Revenue Service recognizes that a change in circumstances could occur subsequent to the issuance of bonds, and has established a procedure for a governmental entity to “make its case as to why there should be no change in the federal income tax treatment of interest on previously issued bonds,” Marquez said, referring to the IRS’ voluntary closing agreement program, or VCAP.
“It is recommended that the county initiate the voluntary process with the IRS as soon as possible to mitigate any liability the county may incur,” he said. “Additionally, the IRS may look favorably upon the fact that the county acted voluntarily shortly after it was discovered that there may be an issue with the Series 1996 bonds.”
Marquez also said that the county could proceed with refunding the seaport bonds “since the matter is being addressed with the IRS.”
If the IRS concludes that the 1996 bonds are private-activity bonds, he said the county’s exposure based on similar cases could range between $200,000 and $1 million in back interest, and as much as 10% in penalties.
The IRS fee, if there is any, and payment to Squire Sanders as special tax counsel would come from savings associated with the refunding bonds, according to Marquez. If the bonds are not refunded, all fees would be paid from seaport revenues.
The refunding, which could occur in the first quarter of next year, currently expects gross savings of $4.5 million over the remaining life of the bonds, or $3 million in present value savings, county documents said.
