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Taxation

Issuer in Texas Settles Student Loan Bond Tax Dispute

WASHINGTON — The South Texas Higher Education Authority, Inc. is the latest student loan bond issuer to enter into a voluntary closing agreement program with the Internal Revenue Service.

The authority disclosed in an event notice filed on the Municipal Securities Rulemaking Board’s EMMA system that it will make a payment to settle a tax dispute over $255.8 million of student loan revenue bonds it issued in 2007.

The authority earlier this year had proposed to pay the IRS $438,243 under a special VCAP that was established for student loan bonds. The event notice does not specify whether the authority paid that amount .

The settlement ensures the bonds maintain their tax-exempt status and that the authority does not have to make yield-reduction payments or rebate any amounts, according to the event notice. 

The IRS launched a special VCAP program for student loan bonds after the Pennsylvania Higher Education Assistance Agency paid $12.3 million to the federal government to settle a similar tax dispute over $250 million of its student loan bonds.

The program was designed for issuers who violated tax rules by reallocating student loans to bonds other than the ones used to finance them.

Under federal tax rules, the yields on student loans cannot be more than 2% above the yields of the bonds that were used to make the loans.

The IRS has been concerned that issuers have been tying higher-yielding student loans to higher-yielding student loan bonds to ensure they stay under the 2% limit and are not forced to make yield reduction payments to the federal government.

Approximately 15 issuers have entered into similar programs with the IRS, agency officials have said.

Under the VCAP program, issuers agree to pay a settlement amount equal to 40% of the taxpayers exposure on each issue of bonds based on the issuer’s existing records and according to a formula.

The also agree when the closing agreement is entered into to discontinue the practice of reallocating student loans from one bond issue to another.

The deadline for entering the VCAP program was July 31.

The Texas authority issued the Series 2007 bonds to provide funds to purchase student loans guaranteed under the Higher Education Act, refund five series of bonds outstanding under another indenture, and make a deposit into a reserve fund, according to bond documents.

They were auction rate securities.

RBC Capital Markets was underwriter. Fulbright & Jaworski LLP was bond counsel. The attorney general of Texas also provided a legal opinion, according to bond documents.

Counsel for the authority was Atlas & Hall, LLP in Allen, Tex. Underwriter’s counsel was McCall, Parkhurst & Horton LLP in San Antonio.

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