WASHINGTON — Roughly $23 million of tax-exempt senior lien revenue bonds issued in 2003 to finance a jail may be taxable private activity bonds, an Internal Revenue Service agent has told the West Texas Detention Facility Corp.
The agent’s position was disclosed in an event notice posted by the corporation, which was the issuer, on the Municipal Securities Rulemaking’s EMMA website.
“The agent bases her position on the asserted private business use of the detention facility financed with proceeds of the bonds by the operator of the facility and by federal agencies whose detainees have been incarcerated therein,” the corporation said in the event notice.
The jail bond deal is the latest of dozens under audit where the IRS has suggested that significant amounts of federal inmates paid for by the federal government and management contracts with private parties make the bonds taxable private-activity bonds.
Tax-exempt bonds are private-activity bonds if more than 10% of the proceeds are for private use and more than 10% of the payments for debt service are from private parties. Under federal tax laws and rules, the federal government is considered a nongovernmental or private entity. PABs are only tax-exempt if they are issued for a “qualified” purpose, and a jail is not one of these.
The corporation said the IRS agent sent it a “notice of proposed issue,” not a proposed adverse determination or a final determination. It said it must respond to the IRS’ notice by Oct. 24, and that its counsel is preparing a response.
The corporation — a nonprofit instrumentality of Hudspeth County, Tex. — issued $23.48 million of senior lien project revenue bonds in 2003, but only $18.345 million are still outstanding. The bond proceeds were used to finance the acquisition of real estate in Hudspeth County and the construction, furnishing and equipping of the West Texas detention facility, according to bond documents.
Steve Afeman, chief operating officer of Emerald Correctional Management, which manages the jail, said that he believes the jail is currently housing federal inmates, and that El Paso County inmates were housed there earlier this month. The jail is listed as a U.S. Immigration and Customs Enforcement detention facility on ICE’s website.
A lawyer for the corporation declined to elaborate on the event notice. Hudspeth County has leased the jail from the corporation and makes payments to it. The payments are used to secure the bonds.
Herbert J. Sims & Co. and Municipal Capital Markets Group were the underwriters on the bond sale. The now defunct Jenkens & Gilchrist served as bond counsel.