Alaska Student Loan Bond Issuer Rejects Settlement Offer; Will Fight IRS

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The Alaska Student Loan Corp. is challenging the Internal Revenue Service’s decision that $529.1 million of its education loan revenue bonds are not tax-exempt.

The IRS proposed an undisclosed settlement of alleged tax law violations under which the issuer would make a payment to maintain the bonds’ tax-exempt status, but the issuer is unwilling to accept it.

“The corporation disagrees with the IRS’ assertion that it has violated any applicable provisions of the Internal Revenue Code and intends to vigorously contest” the charges, it said in an event notice filed with the Municipal Rulemaking Securities Board’s EMMA system on Tuesday.

The issuer filed the notice after receiving a letter from the IRS on July 16 that is said asserted the bonds are not in full compliance with the applicable tax-exempt provisions of the Internal Revenue Code.

The IRS said the corporation lacked compliance in connection with its method of accounting for recycling revenues to finance student loans, according to the event notice.

The IRS, in March, had begun an audit of the Alaska bonds, which were issued from 2003 through 2012 and were auction rate securities and refunding bonds used to refund certain student loan revenue bonds previously issued by the corporation. The new bonds and bonds being refunded were used to finance loans to pay for eligible borrowers’ post-secondary education costs, whether in or out of state, according to the bond documents.

The proceeds of the 2012 bonds were primarily used to refund certain obligations and loans originated under the Federal Family Education Loan program, the bond documents said.

The IRS has been targeting student loan bonds due to its concern that issuers are tying student loans to bonds others than the ones used to finance them.

Under federal tax rules, the yields on student loans cannot be more than 2% above the yields of the bonds that were used to make the loans. The IRS has been concerned issuers have been tying higher-yielding student loans to higher-yielding student loan bonds to ensure they stay under the 2% limit and are not forced to make yield-reduction payments to the federal government.

Last year the agency announced a voluntary closing agreement program for student loan bond issuers. Some issuers have settled with the IRS under that program. Others have not. Recently, the New Hampshire Health and Education Facilities Authority became the first issuer to withdraw from the IRS’ proposed settlement for its bonds under the special VCAP program. The IRS had charged tax law violations in connection with $135.4 million of bonds the authority issued in 2011.

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