WASHINGTON — The Internal Revenue Service has determined that tax-exempt industrial development bonds issued by the city of Minneapolis in 2006 for a printing-facility project are taxable.
The city received the "Proposed Adverse Determination" on Sept. 21 and disclosed it in an event notice posted on the Municipal Securities Rulemaking Board's EMMA System three days later in the "Other Event-Based Disclosures" category, rather than in "Communication From the [IRS]" or "Adverse Tax Opinion or Event Affecting Tax-exempt Status" categories.
The IRS determination follows a "Notice of Proposed Issue" -- a preliminary finding that the bonds were taxable -- the agency issued in April. In that notice, the IRS argued that the bonds are taxable because the tenants exceeded the capital expenditure limits for IDBs, according to the event notice.
Under federal tax law, tax-exempt IDBs can only be issued for a manufacturer if its capital expenditures are not more than $10 million during the six-year period beginning three years before the date of the new issue and ending three years after that date. For bonds issued after Dec. 31, 2006 the capital expenditure limitation was increased to $20 million.
The city issued $5.39 million of tax-exempt IDBs along with $3.01 million of taxable bonds in June 2006. The two series of bonds were issued to finance the construction of an addition to a printing facility and the acquisition of printing equipment. Proceeds also were also used to refund bonds issued in 1997. The city leased the real estate portion of the project to EDBAR Family Limited Partnership and the equipment portion to Ambassador Press. EDBAR subleased the building to Ambassador, according to the official statement for the bonds.
Some of the bonds have matured since they were issued.
Ed Engle, president and chief executive officer of Ambassador, said that the company bought additional equipment after the bonds proceeds were spent that caused the company to exceed the capital expenditure limit. The city and the tenants had reached a tentative settlement with the IRS, but agency ended up rejecting it several weeks ago, he added.
The city and the tenants of the project intend to appeal the IRS' finding, according to the event notice. Mark Scott, an attorney representing Ambassador and a former director of the IRS tax-exempt bond office, said that small-issue manufacturing bonds have been a category of bonds that has been heavily audited over the years. He declined to elaborate on the audit and the IRS' findings.
The bonds are payable from rent payments from the tenants. They are secured by reserves from Minneapolis' Common Bond Fund Program and by a limited pledge to levy a tax at the rate up to 0.5% of the city's tax capacity. Revenues from the tax levy are used to fund deficiencies in the reserves, the event notice stated.
Piper Jaffray and RBC Capital Markets were underwriters of the bonds and Gray, Plant, Mooty, Mooty & Bennett was bond counsel, according to the official statement.
