Soon after a New Hampshire authority became the first issuer to withdraw from the Internal Revenue Service’s voluntary closing agreement program for student loan bonds, the IRS initiated an audit of $135.4 million of adjustable rate education loan revenue bonds it issued in 2011.
“The tax-exempt bond office advised the authority with respect to each bond issue that ‘your debt issuance was selected for examination because of information we developed internally that causes a concern that the debt issuance may fail one or more provisions of Sections 103, 141- 150 of the Internal Revenue Code,” the New Hampshire Health and Education Facilities Authority said in an event notice it filed with the Municipal Securities Rulemaking Board on Aug. 5.
The New Hampshire Higher Education Loan Corp., used the bond proceeds for student loans as the conduit borrower and was referred to as the corporation in the notice.
The authority said that TEB did not elaborate further with respect to the examination.
“The authority and the corporation believe that TEB’s concern relates to the methodology used by the corporation to track student loans,” the event notice said. “The corporation continues to believe its methodology complied with all requirements of the Internal Revenue Code of 1986.”
The authority withdrew its request for a VCAP closing agreement with the IRS on June 27. Nearly one year earlier, the authority had submitted a request to the IRS for a closing agreement. Ultimately, the authority and the TEB were unable to negotiate an agreement.
The IRS has been targeting student loan bonds due to its concern that issuers are tying higher yielding student loans to higher yielding bonds, other than the ones used to finance them, to avoid violating yield restriction requirements. Under federal tax rules, the yields on student loans can’t be more than 2% above the yields of the bonds that were used to make the loans.
Last year the IRS announced the VCAP program for student loan bond issuers. An IRS official recently told The Bond Buyer that TEB has successfully worked through most all of the VCAP cases.
Approximately 15 issuers submitted requests to enter into the VCAP program.
It’s unclear if more issuers will also withdraw from the program. When the program was initially announced, some market participants charged that the formula for determining VCAP was too cost prohibitive and could ultimately sink student loan issuers.
The corporation previously reserved an amount of money that it believed was sufficient to fund a settlement with TEB, the authority said in the notice. TEB apparently asked for an amount that was approximately equal to the amount the corporation had reserved.
“The corporation does not believe that its exposure in the examination will exceed the amount which it previously reserved,” the notice said.
Bradley Waterman, a tax controversy lawyer representing the authority, could not be reached for comment.