WASHINGTON — The Airport Commission of the City and County of San Francisco has agreed to pay the Treasury $67,000 and retire $1.145 million of Series A variable rate revenue refunding bonds issued in 2010 to settle a tax dispute with the Internal Revenue Service without jeopardizing the tax-exempt status of bonds from several issues.
The commission disclosed the Nov. 21 settlement, which may have implications for other airport bonds, in an event notice posted on the Municipal Securities Rulemaking Board's EMMA website. The bonds covered by the settlement were issued in 2003, 2008, 2009, 2010, 2011 and 2012.
This is the second of two closing agreements the commission has reached with the IRS related to this tax dispute, which involves bond proceeds used for prohibited purposes.
Under the first settlement, which was reached in November 2013, the commission paid the Treasury $5,000 and retired $200,000 of Series C and D revenue refunding bonds to preserve the tax-exempt status of those bonds.
The commission said it discovered the tax issue and informed the IRS.
"As part of its tax diligence procedures, the commission determined in August 2012 that small portions of the proceeds of certain of its bonds were applied for purposes that present tax law compliance issues," the commission said in the notice. "In particular, a small portion of the airport's passenger terminal facilities financed from proceeds of those bonds (less than 0.1%) were used for retail locations at which wine was sold for consumption off-airport."
"Such uses of proceeds are prohibited by the Internal Revenue Code," the commission said. "If not addressed with the IRS, the failure to observe such limitation could have caused the interest on such bonds to be includable in gross income for federal income tax purposes retroactively to the date of their issuance."
Kevin Kone, the commission's capital finance director, said in a brief interview that some of the proceeds were used for very small duty-free liquor stores. These stores have generally been phased out in recent years, he said. He said he doesn't think the IRS is concerned about all duty-free stores, but these were unusual in that they were limited to alcohol.
"It is something that people should look into," he said.
Section 147(e) of the Internal Revenue Code says private-activity bonds are not tax-exempt if any of them are used for, among other things, a "store, the principal business of which is the sale of alcohol beverages for consumption off-premises."
Kone said the entire dispute was not settled under the first closing agreement because a lot of research had to be done to determine which bond issues were effected.
