The city of Corpus Christi, Texas, has succeeded in defending the tax-exempt status of $97.9 million of Texas Utility System junior revenue improvement bonds after the Internal Revenue Service’s preliminary determination that its 2013 issuance may be retroactively taxable.
Just over $13 million of that debt remains outstanding. The IRS' Final Determination Letter, dated March 3 and subsequently disclosed on EMMA, informed the city that the agency would “close the audit with no change to the tax advantaged status of the [obligations].”
“The City has vigorously defended its position that it has complied with the U.S. income tax laws,” Corpus Christi's EMMA disclosure said. “In response, the Service provided the city with a Final Determination Letter dated March 3, 2022, which states in part that ‘the [obligations] were determined to be qualified as a result of reasonable expectations at the time of issuance.’”
The resolution came following the September 2020 notice that the IRS would be looking into the city’s obligations and November 2021 preliminary determination letter that the bonds may be retroactively taxable, given the city didn’t spend the money it received within the three-year timeframe required by the tax code.
“We had reasonable expectations when we issued the bonds that they would be spent within the three years,” said Heather Hurlbert, director of finance and business analysis for the city of Corpus Christi.
Proceeds from the sale of the bonds were intended to be spent on “acquiring, purchasing, constructing, improving, repairing, extending, equipping and renovating the city’s combined utility system,” the official statement said, referring to its combined water, wastewater and gas utility system, as well as the costs of issuance.
A few factors helped delay the projects. The city looked into doing a centralized wastewater treatment facility instead of the six separate plants it has now, which delayed the project for years as it had to conduct a study and a feasibility report. That, coupled with the needs of a new stormwater facility, which relied on aspects of the wastewater facility, in addition to construction on the city’s main hospital facility caused further delays, Hurlbert said.
The IRS then suggested the city change the status of the bonds to hedge bonds, which it didn’t agree with.
“We didn't agree with that, just because there was not an advantage for us issuing and holding, and we actually suffered a negative arbitrage as a result of it,” Hurlbert said.
