New Hampshire Issuer Withdraws from VCAP

WASHINGTON – The New Hampshire Health and Education Facilities Authority appears to be the first student loan issuer to withdraw from the Internal Revenue Service’s voluntary closing agreement program to settle a tax law dispute over some of the $135.4 million of adjustable-rate education loan revenue bonds it issued in 2011.

The VCAP withdrawal was disclosed in an event notice the authority filed on the Municipal Securities Rulemaking Board’s EMMA system on July 1. The New Hampshire Higher Education Loan Corp., which used the bond proceeds for student loans as the conduit borrower, was referred to as the corporation in the notice. 

“The corporation believed, and continues to believe, that it’s accounting methodology for tracking student loans, which generally was used in the student loan industry, complied with all requirements of the Internal Revenue Code of 1986, and the Treasury regulations,” said Bradley Waterman, a tax controversy lawyer representing the authority.

The corporation was willing to settle with the IRS’ Tax-Exempt Bond Office in order to avoid further controversy, and ultimately the IRS asked the issuer to submit the request, Waterman said.

“TEB insisted that the authority admit in the closing agreement that the corporation ran afoul of the requirements,” Waterman said. “The corporation does not agree that it ran afoul of the requirements. TEB’s unwillingness to accept the corporation’s position and its requirement that the corporation admit that it acted improperly were unacceptable.” It was at this point that the corporation asked the authority to withdraw from the VCAP on June 27, according to the event notice.

The authority and the corporation expect the IRS to initiate an examination of the bonds after the request to enter into the VCAP is withdrawn.

The NHHEFA filed a VCAP application with the IRS on July 30, 2012, one day before the IRS deadline for issuers under the student loan VCAP program. In that notice, the corporation said that it believes that its exposure does not exceed the amount calculated by the TEB under the VCAP.

The corporation said it reserved and accrued sufficient funds for any potential settlement as of Sept. 30, 2012. In the July 1 notice, the corporation said it will continue to reserve the amount in question, which was approximately equal to the amount the IRS demanded and the amount the corporation had reserved.

Based upon the EMMA notice and the statement from Waterman, it appears that the dispute between the IRS and the authority was related to other things. When an issuer withdraws from a VCAP, it will likely go to the IRS’ Office of Appeals seeking a better deal.

The IRS unveiled the student loan bond VCAP program in March 2012. It was modeled after the Pennsylvania Higher Education Assistance Agency paid a $12.3 million settlement for tax law violations in connection with $250 million of student loan bonds, the first settlement in this area.

When the VCAP program was initially announced in 2012, several bond lawyers raised concerns that the formula for VCAP may be too cost prohibitive and could ultimately sink some student loan issuers. 

“The formula was always prohibitive,” said Vince Sampson, president of the Education Finance Council. “I also get the sense that was the going-in position for the Service, meaning that was their opening offer. Issuers and the Service have negotiated for over a year.”

While Sampson couldn’t comment on any specific settlement, he said the negotiations between the IRS and the issuers are still ongoing. He said members have told him that the activity and communication from the Service has been very sporadic. It’s unclear if the recent turnover in the TEB office has had anything to do with the negotiations, Sampson said. In recent months Cliff Gannett, director of TEB from 2005 through 2011, and Bob Henn, acting director of TEB, both retired. No one has been named director of TEB.

Under federal tax rules, the yields on student loans can’t be more than 2% above the yields of the bonds that were used to make the loans. The VCAP program was applied to issuers who violated tax rules by reallocating student loans to bonds other than the ones used to finance them.

Issuers were trying to avoid having to make yield-reduction payments to the federal government, according to the IRS. Approximately 15 student loan bond issuers submitted requests to enter into the VCAP program, IRS officials have said. It is unclear exactly how many VCAP requests have been processed with the IRS under the program.

RBC Capital Markets was the underwriter. Kutak Rock LLP was bond counsel on the NHHEFA deal, according to bond documents.




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