Mobile, Ala., Settles Tax Dispute with IRS

WASHINGTON – The city of Mobile, Ala., has agreed to pay an undisclosed sum of money to the Internal Revenue Service to maintain the tax-exempt status of $63.4 million of general obligation refunding and improvement warrants it issued in 2006.

According to a notice posted on the Municipal Securities Rulemaking Board's EMMA website on Wednesday, Mobile made a "modest" payment to the IRS under a closing agreement negotiated through the agency's Office of Appeals.

"The payment was based on a potential error which the city self-identified, not TEB's position," the city said in the notice.

Though the exact settlement amount was not disclosed, the city said it was "approximately one-half of one percent" of the amount requested by IRS' Office of Tax Exempt Bonds to resolve the tax dispute.

Brad Waterman, the city's special tax counsel who appears on the EMMA notice, declined to comment on the matter.

It is not clear why the IRS claimed the warrants were taxable.

The city issued the warrants in July 2006 to finance capital improvements and to current and advance refund previously issued warrants, according to their official statement.

Of the $63.4 million, roughly $26 million of proceeds were deposited into an improvements account for drainage and other city repairs, while roughly $38 million was deposited into an escrow trust agreement to be invested in U.S. Treasury obligations. According to the official statement, the Treasuries would then be used to refund previously issued warrants.

The warrants were refunded and redeemed on March 2 of this year.

The IRS Office of Tax-Exempt Bonds first notified Mobile it would be auditing the 2006 warrants in August 2013. In January 2014, TEB issued an Information Document Request asserting the warrants were taxable, but the city disagreed. Negotiations between the two parties stalled and ended in August 2014 without a resolution.

The IRS then announced it would audit warrants that Mobile issued in 1998, 2001 and 2008, but later said it would not move forward with them.  Some had seen the additional audits as retaliatory action.

In September 2015, TEB issued a Notice of Proposed Issue maintaining the warrants were taxable. The following month, Waterman requested a conference with TEB and formally maintained that the city did not agree with TEB's position.

However, in November 2015, roughly a month before the city and TEB were scheduled to meet, TEB told the city that it had closed its audit and determined that the bonds were taxable. The issuer had until Dec. 7, 2015 to request a review by the IRS' Office of Appeals. The city requested an extension of the response deadline for the protest, a request that was rejected by TEB. Mobile, which argued that TEB should not have issued the proposed adverse determination until it was clear that settlement negotiations had failed, then cancelled the scheduled conference between the two parties.

Mobile filed a protest and a request for review by the IRS Office of Appeals on Dec. 7, 2015.

According to the EMMA notice, the city entered into the closing agreement with the IRS after the review was complete by the Office of Appeals.

"The closing agreement recites that 'the Warrant Holders are not required to include in gross income any interest on the Series 2006 Warrants' and thus confirms the tax-exempt status of the Series 2006 Warrants," according to the EMMA notice.

Raymond James & Associates, Inc. was lead underwriter for the warrants and Hand Arendall LLC served as bond counsel. Both have offices in Mobile.

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