D.C. school wins P3 tax case on appeal

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WASHINGTON — The James F. Oyster Elementary School in the District of Columbia won a novel P3 tax case on appeal, according to an event notice filed Monday with the Municipal Securities Rulemaking Board.

“On March 1, 2019, the District of Columbia received a letter from the Internal Revenue Service Appeals Office (IRS Appeals Office) informing the district that the proposed adverse determination, dated January 19, 2017… had been withdrawn,” the notice said.

Edwin Oswald, a tax partner at Orrick in Washington, D.C., who represented the District of Columbia in the case, said he has no comment on the outcome but indicated it did not involve the statute of limitations.

The $11 million in tax exempt bonds that financed the construction of the K through 6 school are being paid off by the owner of the apartment building developed on part of the 1.67-acre site.

The $11 million in 35-year payment in lieu of taxes (PILOT) revenue bonds issued in 1999 were used to finance the demolition of a school building and build a new 47,000 square foot school for 350 students on the edge of D.C.’s popular Adams Morgan neighborhood.

The 1999 official statement said developer Henry Adams agreed to make monthly payments on the PILOT bonds in exchange for the right to build a 211-unit apartment building with a rooftop terrace and below grade parking garage on part of the site that was sold as part of the deal.

The IRS began an audit in February 2016 of the remaining $8.73 million in bonds that were still outstanding, according to a public event notice the District of Columbia filed in April of that year.

Shortly before that announcement, Mark Scott, former head of the IRS Tax Exempt Bond office who has a private practice focused on representing whistleblowers, tweeted that the Oyster School P3 "is a tax scam … that cost district residents millions in tax dollars."

At that time, Scott told The Bond Buyer that the transaction was a "PPP disaster" and asked whether this is the kind of project Mayor Muriel Bowser's new P3 office wanted to support.

Bowser created an Office of Public-Private Partnerships in November 2015 "to build collaborations between private sector businesses and [the district government] to support large-scale projects such as infrastructure development and enhancements."

Scott said at the time that he was examining the Oyster School P3 on behalf of an unnamed client under the whistleblower program by claiming the bonds should be taxable private-activity bonds. Scott claims the district made an indirect private loan to the developer, LCOR New Oyster School LLC (LCOR).

The recent decision by the IRS Office of Appeals cannot be appealed by Scott, he acknowledged in an interview Tuesday.

But it hasn’t changed his view of the deal. “This was not only an abusive public-private partnership financing, but it ended up costing D.C. taxpayers substantially more than promised,” Scott said Tuesday. “D.C.'s new P3 office did not take my advice, but hopefully it won't repeat this sort of mistake.”

The new event notice does not indicate whether there was a financial settlement of the case or the IRS Office of Appeals disagreed with the audit findings that the bonds are taxable, Scott noted.

Scott said he intends to file a Freedom of Information Act request that will include the IRS Office of Appeals decision.

“I’ll know eventually what happened,” Scott said. He said the D.C. Court of Appeals recently ruled in his client's favor in another FOIA request involving the Oyster School P3 in which a lower district court had issued a summary judgment in favor of the IRS.

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Public-private partnership Public finance Tax-exempt bonds Tax audits IRS Washington DC