At least 11 tax-exempt solid-waste bond deals done for conduit borrower Georgia-Pacific Corp. have received adverse determinations that interest earned on the debt is taxable, according to a municipal disclosure.
Several local issuers filed identical notices Wednesday with the nationally recognized municipal securities information repositories and updated the status of several previously disclosed audits. The notices indicate that Georgia-Pacific's battle with the Internal Revenue Service over the tax status of more than $400 million of bonds is still being fought.
Georgia-Pacific spokesman James Malone said yesterday the corporation wanted to announce a proposed adverse determination on $80.9 million of solid-waste disposal revenue bonds sold by Effingham County Development Authority in Georgia.
"We wanted to make sure that we updated the status of pending audits," Malone said, adding that he did not have specific information about the status of any other potentially ongoing audits beyond the 11 mentioned in Wednesday's filing. Georgia-Pacific disclosed last October that the IRS was examining five additional deals.
"We disagree with position the IRS has taken on each of the bond issues," Malone said. "We're prepared to appeal and go farther, to litigate the issue, if we need to."
The federal tax code allows issuers to sell tax-exempt bonds for the financing of facilities that process materials with no market value at the place they are processed and at the time bonds are issued. Atlanta-based Georgia-Pacific is one of many market participants at odds with the IRS over its interpretation of those rules.
Charles Anderson, field operations manager of the IRS' tax-exempt bond office, said yesterday he could not comment on the Georgia-Pacific cases specifically.
"In general, we've made a decision that, very often, when we have a conduit borrower involved in multiple deals, we'll probably do some sort of sweep. We're going to try to find out [about] all deals they did," he said. "We haven't necessarily had the manpower to do that before, [but] we're trying to do a better job. We could probably do 50 solid-waste audits a year for five or six years and still not exhaust all the deals that are going to have problems. There's a lot out there."
Anderson and other TEB officials are also working closely with the IRS' large and midsize business division to disallow interest deductions for conduit borrowers in some cases.
Section 150(b) of the federal tax code authorizes the IRS to block a conduit borrower's deduction for interest paid on a bond issue. LMSB normally performs audits of corporations, and TEB officials stated repeatedly last year that together the divisions were toughening their stance on solid-waste deals.
The IRS may also open Section 6700 investigations of attorneys who issued unqualified opinions that solid-waste bonds were tax-exempt, according to Anderson.
"One of the things we've noticed is that some firms who gave the opinion started out on audits representing the issuer. While the audits were going on and while we were issuing adverse letters, they were still giving opinions and not conducting due diligence as to whether or not the waste really had value," he said yesterday.
"In those situations we are very close to making some decisions in terms of opening 6700 exams because clearly the attorneys giving the opinions should have known that we were raising same issue; [they] were dealing with the same conduit borrower and never did the diligence to say, 'Does this stuff really have value?' "
Anderson would not confirm or deny which firms were being considered for penalties. King & Spalding LLP was bond counsel on nearly all the Georgia-Pacific deals known to be under audit, and Chapman & Cutler LLP and Squire, Sanders & Dempsey LLP were underwriter's counsel on several. Foley & Judell was bond counsel on a few Georgia-Pacific deals as well. Representatives at all four firms either could not be reached or declined to comment late yesterday.
Market sources familiar with solid waste financings and IRS audits in the area say it is unlikely that the IRS will go as far as to assess Section 6700 penalties, because such enforcement actions have historically been reserved for attorneys who knowingly manipulated transactions or acted with reckless abandon.
"You can rest assured that in no instance" was that the case in solid-waste deals, one market participant said. "If they are considering [6700], frankly I'd be shocked. That would be a huge departure from where they're been." (c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved. http://www.bondbuyer.com http://www.sourcemedia.com
