WASHINGTON – The Internal Revenue Service has dropped its audit of Alaska student loan bonds after concluding there were no tax violations warranting any change to the tax-exempt status of the bonds.
The Alaska Student Loan Corp. disclosed the IRS action in an event notice posted Monday on the Municipal Securities Rulemaking Board's EMMA site.
Market participants are paying close attention to the IRS' student loan bond audits, which have focused on whether loans are being reallocated or swapped to different bond issues. The outcomes of the audits have varied widely.
The first publicly announced audit involved the Pennsylvania Higher Education Assistance Agency, which announced it paid $12.3 million to settle a tax dispute over loan swapping with the IRS in November 2011. The payment was in exchange for protecting the tax-exempt status of roughly $250 million of student loan bonds.
Under federal tax rules, the yields on student loans can't be more than 2% above the yields on the bonds used to finance the loans. The IRS became concerned that issuers were tying high-yielding student loans to higher-yielding student loan bonds to ensure they stayed under that 2% limit and were not forced to make yield reduction payments to the IRS.
The IRS offered a special voluntary closing agreement program for student loan bond issuers in 2012, which was open from later in March through July 31 of that year. Under the program, issuers were to pay settlement amounts equal to 40% of taxpayer exposure on each issue of bonds, based on the issuer's records and a formula. Issuers also would have to agree to discontinue the practice of reallocating student loans to other bonds.
Some student loan bond issuers entered the VCAP and others did not.
The New Hampshire Health and Education Facilities Authority represents the other side of the spectrum. It entered the VCAP, but then withdrew from the program and decided to fight the IRS. Last October, the IRS withdrew determinations of taxability for nine of the eleven authority bond issues. The authority has appealed to the IRS Office of Appeals the tax-exempt bond office's proposed adverse determinations of taxability for the other two bond issues.
In this case, the IRS challenged the tax-exempt status of about $529 million of Alaska Student Loan Corp. student loan bonds in 2013. An event notice filed at the time, said the IRS proposed the issuer pay an unspecified amount to settle a dispute over its method of accounting and recycling revenues to finance student loans. The dispute focused on bonds, including auction rate securities and refunding bonds that were issued from 2003 through 2012.
The corporation rejected the IRS' proposed finding and said it would challenge it.
On Monday, Charlene Morrison, chief financial officer of the Alaska Student Loan Corp., said there was never any settlement with the IRS. The IRS closed the audit with no change to the tax-exempt status of the bonds, she said.
"We've been working with them for about the last three years," she added.
The event notice shows that the corporation has been or will be redeeming, defeasing or retiring for sixteen series of bonds issued from 2002 through 2012.
These actions were not requested by the IRS, Morrison said. Instead, the corporation had the cash on hand to defease the bonds and chose to do so, she said.
Ballard Spahr, the same law firm that worked on the Pennsylvania authority audit, also represented the Alaska Student Loan Corp. The firm's lawyers either would not comment or could not be reached for comment.
