IRS Auditing $150M of Maryland Bonds Issued for Hospitals

The Internal Revenue Service is auditing $149.7 million of revenue bonds issued in 2005 by the Maryland Health and Higher Educational Facilities Authority.

The authority disclosed the IRS examination in a notice filed Tuesday with the nationally recognized municipal securities information repositories.

It's not clear whether the bonds were selected as part of any specific IRS initiative, but the authority said the letter notifying them of the audit stated that "the IRS routinely examines municipal debt issuances to determine compliance with federal tax requirements."

The bonds were issued at the request of the private, nonprofit University of Maryland Medical System to advance refund two series of bonds issued in 2000, according to bond documents.

The proceeds were loaned to UMMS and four other area hospitals: James Lawrence Kernan Hospital Inc., Baltimore Washington Medical Center Inc., Mt. Washington Pediatric Hospital Inc., and University Speciality Hospital Inc. The borrowers are responsible for making debt service payments.

As part of the transaction, the hospitals entered into an interest rate swap agreement with Bank of America NA and JPMorgan Chase Bank NA. IRS officials said in December that the tax-exempt bond office had identified roughly 100 cases - most of them swaps - for examination as part of an initiative looking into qualified hedges, but the notice did not state whether this particular swap is one of them.

Although the bonds were originally issued as auction-rate securities insured by Ambac Assurance Corp., the UMMS filed a material event notice on April 4, 2008, stating its intention to convert to a different interest rate mode. The bonds were converted to fixed rate on June 25, 2008, according to a separate notice filed on June 5 of that year.

McKennon Shelton & Henn LLP served as bond counsel on the 2005 transaction, while Gallagher Evelius & Jones LLP was counsel to the borrowers. McGuireWoods LLP was counsel to the underwriters. Banc of America Securities LLC and JPMorgan were the underwriters.

For reprint and licensing requests for this article, click here.
Healthcare industry Tax
MORE FROM BOND BUYER