Old Town, Me., has received a proposed adverse determination letter from the Internal Revenue Service stating that the agency believes interest earned on $22.3 million of Series 2004 solid-waste disposal revenue bonds is taxable, according to a municipal disclosure.
The bonds were sold in conjunction with a Georgia-Pacific Corp. project and appear to be the latest in a series of GP deals under IRS scrutiny for violations of tax code rules for debt used to finance solid-waste disposal facilities.
Current, much-debated regulations allow municipal issuers to finance solid-waste processing facilities with tax-exempt debt if the facilities are to process material with no market value at the time bonds are issued and in the place it is processed.
The IRS has said it is principally concerned with whether any price has been paid for the materials being processed - regardless of the costs incurred by the purchaser in collecting or processing that material - because paying for it could mean the material is not "useless, unused, unwanted, or discarded," as is required by tax code rules.
The Old Town bonds were sold in 2004 to enable conduit borrower Georgia-Pacific to finance "the construction and installation of a 16-megawatt biomass generating facility designed to enhance the efficiency and cost-effectiveness of the company's existing tissue and pulp mill" in the city, according to bond offering documents.
The deal was underwritten by then-UBS Financial Services Inc. King & Spalding LLP of Atlanta was bond counsel and Preti, Flaherty, Beliveau, Pachios & Haley LLP of Augusta, Me., was underwriter's counsel.
Old Town announced that a proposed adverse determination had been made on Sept. 8 and that it is appealing that determination, but the city and Georgia-Pacific did not provide any additional details on the IRS' findings.
"We filed because we've since received information that the bonds may be remarketed in the future," GP spokesman James Malone said Friday. "We wanted to make sure that any future bondholder was aware of that the proposed adverse status is out there."
IRS officials declined to discuss the case Friday, but have said in the past that the agency is actively pursuing solid-waste cases, with potential consequences including both a rescinding of bonds' tax-exempt status and a disallowance of the conduit borrower's interest deduction under Section 150(b) of the code.
They have also said they would no longer be willing to settle for an amount equal to the bonds' tax exposure, and that they would be working with the IRS' large and mid-sized business division to make adjustments to conduit borrowers' corporate returns.
More than a dozen tax-exempt bond deals for Georgia-Pacific projects have been audited in the past several years. Last November, the company was challenging the IRS' intent to tax bondholders of several Oregon issues that were the subject of a proposed adverse determination last fall. GP had said it was appealing the case, but its status is unclear.
