WASHINGTON – The Internal Revenue Service's tax-exempt bond office has told Mobile, Ala., that the general obligation refunding and improvement warrants it issued in 2006 are probably taxable.
TEB also told the city that it will not move forward with audits of 1998, 2001 and 2008 warrants it began after negotiations with the city over the 2006 warrants ended in August 2014 without a resolution.
Mobile disclosed this information in an event notice posted on the Municipal Securities Rulemaking Board's EMMA site late Thursday, saying it continues to believe all applicable requirements for the warrants were met.
The city said TEB sent it a "Notice of Proposed Issue" on Sept. 23 claiming that the Series 2006 warrants are likely taxable. Mobile said TEB's analysis of the warrants was virtually the same as it was in an Information Document Request the office sent to the city on Jan. 30, 2014. The IRS began auditing the 2006 warrants in August 2013, as part of an initiative on advance refunding bonds.
The event notice released on Thursday did not describe TEB's analysis of why the warrants should be taxable. The city said it "expects that TEB will issue a proposed adverse determination with respect to the Series 2006 warrants" if a resolution of the tax dispute can't be negotiated. If a proposed adverse determination is issued, the city said it "will respond by submitting a protest, including a request for review by the [IRS] Office of Appeals."
Bradley Waterman, the city's special tax counsel, would not comment on the dispute or event notice.
Mobile issued $63.4 million of the warrants in July 2006 to finance the costs of some capital improvements and to current and advance refund some previously issued warrants, according to the official statement for the warrants. Almost $36.50 million appear to be still outstanding, based on the maturity dates in the OS.
A little more than $26 million of the proceeds were deposited into an improvements account to be used for drainage repairs and other improvements in the city. Almost $38 million of the proceeds were to be deposited into an escrow trust agreement with Regions Bank, the trustee. The money was used to invest in U.S. Treasury obligations, which would be used to refund previously issued warrants.
The OS shows the city wanted to current refund almost $23.30 million of warrants issued in 1996 that were subject to redemption prior to maturity on Aug. 15, 2006 at a price of 102% of the principal amount plus accrued interest. It wanted to advance refund about $12.64 million of warrants issued in 2000 and subject to redemption prior to maturity on Feb. 15, 2010 at 101% of the principal amount plus accrued interest.
The event notice says that after negotiations over the taxability of the 2006 warrants ended in August 2014 without any resolution, the IRS initiated audits of warrants the city issued in 1998, 2001 and 2008.
TEB then sent separate but similar letters to the city – on Sept. 26, 2014 for the 2001 warrants and Sept 24, 2015 for the 1998 warrants – saying, "We have decided to withdraw our letter of August 8, 2014, advising you that the debt issuance … had been selected for audit."
The office sent the city a letter on Sept 25, 2015 on the 2008 warrants saying "we have recently completed our examination [and] have made a determination to close the examination with no change to the position that interest received by the beneficial owners of the bonds is excludible form gross income."
Raymond James & Associates, Inc. was lead underwriter, Hand Arendall LLC was bond counsel, Miller, Hamilton, Snider & Odom was underwriter's counsel and Galloway Smith Wettermark & Everest was a counsel for the city. All three are based in Mobile, Ala.
