Texas Issuer May Pay IRS to Settle Dispute Over Jail Bonds

WASHINGTON — Zapata County, Texas, may pay a settlement or refund bonds after an audit of $9.97 million of its debt by the Internal Revenue Service.

The county disclosed the information on the Municipal Securities Rulemaking Board's EMMA system on Aug. 15, saying it was working to resolve the tax law dispute, about six months after the IRS disclosed the audit. The potential settlement amount was not disclosed.

The audit was initially to determine "compliance with federal tax requirements," the notice said. The bonds in question are limited tax refunding bonds issued in 2005 and were used to advance refund certain outstanding obligations of the county, according to bond documents.

Specifically, they were used to advance refund debt that was used to finance the acquisition and construction of a 192-bed secure adult jail facility in Zapata County, Texas.

The Bond Buyer reported last week that the IRS is auditing dozens of tax-exempt bond financed jails on border states suggesting they may be taxable private-activity bonds. Many of the jails were built by state and local governments financed with tax-exempt bonds or certificates of participation, primarily to hold state and local inmates.

Federal tax laws say that private-activity bonds are tax-exempt if more than 10% of the proceeds are for private use and more than 10% of the payments for debt service are from private parties. However, PABs are not tax-exempt unless they are issued for "qualified" purposes and a jail is not considered to be a qualified purpose.

Escamilla & Poneck, Inc., was bond counsel and Winstead Sechrest & Minick P.C. was underwriter, bond documents said.

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