WASHINGTON — The Internal Revenue Service is auditing $49.04 million of revenue bonds issued by IAH Public Facility Corp. in Polk County, Texas, in 2004 and 2006 for an adult detention facility.
The issuer, a nonprofit corporation and instrumentality of the county, disclosed the audit in an event notice posted on the Municipal Securities Rulemaking Boards' EMMA system.
The IRS began the audit in March 2012 and has sent a series of five letters since then and March of this year asking for various bond-related documents and information, according to the notice.
"The issuer has cooperated and will continue to cooperate with the IRS in its examination and has provided the IRS with copies of the requested documents and with additional information regarding the bonds," IAH Public Facility said in the notice. "It is unknown at this time what the outcome of the IRS examination will be."
This is one of several audits of bond-financed correctional facilities the IRS is conducting. In some cases, the IRS is contending the bonds are not tax-exempt and are instead taxable private activity bonds.
Bonds are PABs if more than 10% of the proceeds are used by private parties or more than 10% of the debt service is paid by private parties. For PABs to be tax-exempt they must fall within one of several qualified categories like exempt facilities or mortgage bonds, but none of those categories include correctional facilities.
The IRS' concern in these cases is that the facility may house a significant portion of federal inmates, which are considered private not governmental individuals, and that the owner of the facility may have signed a management contract with a private party.
In this case, IAH Public Facility Corp. issued $24.22 million of bonds in November 2004 to acquire property and build and equip a 526-bed "multi-classification secure detention center," according to financial documents. The issuer planned to lease the project to the county, with the rental payments to be used to pay debt service. The lease agreement contained an option to purchase the facility. The county had an operation and management agreement with Civigenics-Texas, Inc., now Community Education Centers, a private for-profit prison company based in New Jersey.
The issuer sold an additional $24.82 million of bonds in December 2006 to expand the detention center by as many as 500 beds.
The detention center, rated as the top Immigration and Customs Enforcement facility in the Nation, houses inmates from ICE and the U.S. Marshals Service, as well as the Polk County Sheriff's office, Herb Bristow, a lawyer with Haley & Olson, who represented the issuer and the county in the bond financings, told the East Texas News in 2009.