Arizona County May Settle With IRS Over COPs Used for Detention Facilities

WASHINGTON - Pinal County, Ariz. disclosed that it may settle a tax dispute with the Internal Revenue Service over certificates of participation issued in 2004 to help finance detention facilities, even though it believes it complied with all tax laws and rules for the COPs.

The county disclosed that the COPs were under audit in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system last week, but said there may be a settlement of the tax issues.

About $71.62 million of COPs were issued and most of them remain outstanding. They were used to finance improvements and the expansion of adult and juvenile detention facilities as well as a sheriff's training facility, according to the event notice.

The IRS began auditing the COPs in March 2012 "in what appears from national news reports to be part of a widespread examination of tax-exempt obligations issued to finance local jail facilities," the county said in the event notice. The county has responded to several IRS information requests and is discussing with the service the COPs' compliance with federal tax requirements. At the time the event notice was posted, the IRS had not issued a "notice of proposed issue" that challenged the COPs' tax-exempt status.

In the audit of the COPs and in other examinations, the IRS has taken the position that certain arrangements for locally-owned jails to house federal detainees may result in private business use of the facilities. The private business use could endanger the tax-exempt status of obligations issued to finance the jails, the county said. The federal government is treated as a private party under the federal tax laws.

The webpage for the county's adult detention center states that the cost of the jail's expansion is being supplemented by a contract with U.S. Immigration and Customs Enforcement to house people awaiting deportation. "This contractual agreement provides essential funding to offset the cost of jail operation to Pinal County taxpayers," the county said on the webpage.

The county said it may ultimately settle with the IRS to conclude the audit and preserve the COPs' tax-exempt status. A settlement could involve the redemption and refinancing of some of the COPs on a taxable basis, as well as making a payment to the IRS.

"The county currently cannot predict the outcome of the audit or ultimate settlement terms," it said.

Payments on the COPs come from lease payments that the county's board of supervisors has to budget annually from general unobligated funds. The county has not yet identified the source of payment of any settlement costs, including any payment to the IRS and any costs of retiring or refinancing some or all of the COPs. However, county officials do not believe the costs of settling with the IRS would materially hurt the county's finances or operations, according to the event notice.

Stone & Youngberg LLC was underwriter of the COPs and Greenberg Traurig LLP was special counsel, according to the official statement for the COPs.

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