WASHINGTON — The Conroe Industrial Development Corporation in Texas has requested a settlement under the Internal Revenue Service's voluntary closing agreement program to resolve a tax violation relating to bonds it issued in 2008 and 2012.
The corporation disclosed the VCAP request in an event notice posted Thursday on the Municipal Securities Rulemaking Board's EMMA system.
The CIDC, a development corporation created by the city of Conroe, Texas, is located near Houston. Under one of the corporation's programs, it acquires and develops land to be used for industrial and manufacturing purposes. The corporation constructs public infrastructure such as roads and utilities on the land and then sells the partially developed land to industrial users who build manufacturing facilities and other buildings, according to Conroe City attorney Marcus Winberry.
The corporation issued $15 million of sales tax revenue bonds in 2008. The proceeds were used to acquire and develop property in an industrial park. In 2012, the CIDC issued $25.39 million of bonds to refund the outstanding 2008 bonds and expand the industrial park, according to documents posted on EMMA and Winberry.
The CIDC determined that, because of the sale of the properties, the proceeds of the 2008 and 2012 bonds were used in the trade or business of a private party. Also the corporation's receipt of proceeds from the sale of the properties may result in more than 10% of the debt service on the two bond issues being indirectly secured by a private interest in the properties or payments relating to them, the corporation said in the event notice.
Under federal tax law, bonds are private activity bonds if more than 10% of the proceeds are used by a private party and more than 10% of the proceeds are secured by an interest in property used in private business or by payments concerning the property.
The bonds may meet the private payment test even though the 2008 bonds and the 2012 bonds are secured by and paid from sales and use tax revenues, the CIDC said.
"When sale proceeds from a financed project exceed a threshold established under IRS regulations, the tax advantaged status of the bonds can be jeopardized unless the bonds are either redeemed or the excess sales proceeds are promptly devoted to an alternative qualified use," Winberry said. "Late last year during an internal post bond issuance review, the CIDC determined that land sales to private users had exceeded the maximum threshold without appropriate remediation."
The CIDC hopes to resolve the tax issue with its bonds in order to preserve the bonds' favorable tax status. The issuer has sufficient funds to pay its estimated settlement amount, but does not know if the IRS will accept that amount. The corporation cannot say what the outcome of its VCAP request will be, the event notice cautioned.
The 2008 bonds have all either matured or been redeemed. They were privately placed, the event notice said.
The 2012 bonds were underwritten by Coastal Securities, Inc., Wells Fargo Securities and Southwest Securities, Inc. Winstead PC was bond counsel, according to the official statement for the bonds.
