IRS Preliminarily Concludes Texas Issuer's Jail Bonds Are Taxable

jail-fotolia.jpg

WASHINGTON — The Internal Revenue Service has preliminarily concluded that $35.38 million of bonds issued in 2008 by the Burnet County, Tex. Public Facility Corp. to finance a jail are taxable.

The IRS' finding was disclosed in an event notice posted on the Municipal Securities Rulemaking Boards' EMMA system on Monday, after the service sent the corporation a letter on Dec. 30. The issuer said it intends to request a reconsideration of the IRS' preliminary conclusion.

The IRS believes the corporation's bonds are taxable because "the federal use of the facility results in a private business use," the event notice said.

Under federal tax law and rules that apply to private activity bonds, the federal government is considered to be a private entity. Bonds are PABs if more than 10% of the proceeds are used by private parties and more than 10% of the debt service is paid by private parties. PABs are only tax-exempt if they fall within certain "qualified" categories, which don't include jails.

In addition, in some audits of jail bonds, the IRS has had concerns about management contracts with private parties.

Bill Neve, president of the corporation, told The Bond Buyer in August that the Burnet County Jail, which is located northwest of Austin, was built to hold county prisoners but had some extra space so it wouldn't have to be expanded in the next 20 years or so. Many of the federal inmates were housed at the jail for less than 100 days, he said.

The IRS began auditing the Burnet County bonds in December 2011, and the issuer has responded to a series of information document requests made over the past couple of years, according to the event notice.

A letter from the IRS in April asked the issuer to provide documents and other information about the bonds after suggesting they may have violated tax rules.

Hunton & Williams LLP was bond counsel, and Herbert J. Sims & Co., Inc. and Municipal Capital Markets Group, Inc. served as underwriters.

For reprint and licensing requests for this article, click here.
Tax Texas
MORE FROM BOND BUYER