Baptist Health South Florida Obligated Group has agreed to pay $597,751 to settle Internal Revenue Service alleged tax rule violations and preserve the tax-exempt status of $800 million of hospital revenue bonds issued in 2007.

The settlement, or closing agreement as the IRS calls it, was disclosed on the website of the issuer, the City of South Miami Health Facilities Authority.

Baptist Health was the borrower in the conduit deal and used the bond proceeds to finance the construction and renovation of hospital facilities as well as to refund bonds previously issued in 1993, 1995, 1998, 2003 and 2004, according to the official statement.

At that time Baptist Health controlled six nonprofit hospitals and other nonprofit and for-profit corporations that supported the delivery of health care services. The obligated group, or borrower of the 2007 bond proceeds, consisted of Baptist Health, the BHSF hospitals, and Baptist Outpatient Services.

IRS began auditing the bonds in November 28, 2011, saying it was a routine examination.

The settlement agreement said the bonds "fail to meet the requirements of section 103 of the [Internal Revenue] Code because a portion of [them] have overburdened the tax-exempt market under the provisions of Treasury regulations 1.148-10(a)(4) and are arbitrage bonds since the special yield restrictions of section 1.148-10(b)(1)(i) have been exceeded."

Under the tax rules, bonds are considered to overburden the tax-exempt market, if the issuer issues more bonds, or issues the bonds earlier, than needed to finance a governmental purpose or project. Tax-exempt bonds also can overburden the market if they "remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental purpose" or project.

A bond issue that overburdens the tax-exempt market is subject to special yield restriction requirements under which the yield on the investments of proceeds cannot be higher than the bond yield and each investment is treated as a separate class with a yield that cannot be blended with other investment yields.

Baptist Health declined to elaborate on what the IRS' specific concerns were with the bonds.

But it provided The Bond Buyer with this statement: "A business decision was made by Baptist Health to enter into a settlement agreement with the Internal Revenue Service regarding a routine examination of the $800,000,000 City of South Miami Health Facilities Authority (Florida) Hospital Revenue Bonds, Series 2007 ("2007 Bonds"). Although, we believe there were no violations of any laws or regulations associated with the 2007 Bonds, the benefits of entering into a settlement outweigh the internal and external costs associated with continuing to pursue a non-financial resolution. This choice allows Baptist Health to better use its resources for delivering on its core mission of improving the health and well-being of individuals in the communities we serve.

Baptist Health also said it "has a long-standing commitment to the community. In fiscal year 2012, the organization provided $279 million in community benefits, including more charity care as a percentage of total patient revenue than any other hospital or hospital group in Miami-Dade County."

Jones Day represented Baptist Health in the tax dispute with the IRS and also served as bond counsel for the April 2007 transaction. The bonds were underwritten by Merrill Lynch & Co.

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