WASHINGTON – The Internal Revenue Service has sent a final notice to the City of Scottsdale, Ariz., Municipal Property Corp. claiming that some of the $65 million of bonds issued in 2013 to refinance the initial term of a lease for a garage are taxable.
The IRS made the claim in a "proposed adverse determination" sent to the MPC, a nonprofit that can issue bonds on behalf of the city, according to an event notice the MPC posted on the Municipal Securities Rulemaking Board's EMMA website.
"The notice asserts that the allocation of a portion of the proceeds of the bonds to refinance the initial lease term of the existing municipal Scottsdale Fashion Square Partnership Parking Garage lease agreement …. causes interest on the bonds to be taxable," the MPC said in the event notice.
"The city disagrees with the positions of the IRS and plans to exercise appeals rights," the notice said. "The city believes the bonds comply fully with all applicable federal tax law requirements for interest on the bonds to be excludable from gross income for federal tax purposes."
The IRS' proposed adverse determination follows a "notice of proposed issue" it sent to the MPC in August claiming the bonds are taxable. An earlier event notice the MPC posted in March stated that an IRS agent had warned it that the agency was planning to challenge the tax-exempt status of some of the 2013 bonds.
The city attorney and bond counsel have refused to discuss the dispute.
But according to the official statement, the $65 million of excise tax revenue and refunding bonds that the MPC issued in January 2013 were supposed to finance acquisition and construction of capital improvements to the Tony Nelssen Equestrian Center and the McDowell Mountain Golf Course, as well as to refund the initial lease term of the Scottsdale Fashion Square Partnership Garage lease agreement.
According to a city council report, published in January 2013, the city had entered into a lease agreement with the Scottsdale Fashion Square Partnership, now Scottsdale Fashion Square. Under the lease arrangement, the city would have use of the Nordstrom's Garage beginning in 1998 for 50 years. The total rent was to be $31.375 million to be paid in installments over the first 30 years of the lease, with interest accruing on the unpaid portion at the rate of 9.14% per year.
The city was authorized by the city council in December 2012 to prepay the rent. After the city gave SFS notice of its intent to exercise the prepayment option, there was a dispute as to whether the accrued interest would be included in the final payment. The parties negotiated a settlement under which the city would pay the $31 million, but give SFS two credits against development fees, each $1.25 million, one that would have to be used within five years and the other within 10 years. The city also agreed to waive the purchase option, according to the city council report.
Gust Rosenfeld, P.L.C. was bond counsel and Piper Jaffray & Co. was financial advisor.
