IRS auditing Puerto Rico school construction bonds

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WASHINGTON -- The Puerto Rico Public Buildings Authority says the Internal Revenue Service is auditing $877.9 million in school bonds it issued in 2011.

The audit includes $121.5 million in Series 2011 T direct-pay qualified zone academy bonds and four Series 2011 R taxable of school construction bonds that totaled $ 756.4 million.

The Puerto Rico Fiscal Agency and Financial Advisory Authority filed an event notice on the Municipal Securities Rulemaking Board's EMMA website Friday on behalf of the Public Buildings Authority.

The EMMA filing said the IRS notified the agency in a letter dated Feb. 7 “that it is examining certain Forms 8038-CP related to the related to Series R Bonds and the Series T Bonds.”

The Buildings Authority said it “intends to respond to all correspondence from the IRS and intends to continue to cooperate with the IRS in connection with the examinations.”

“The audits have just begun,” Kristin Franceschi, an attorney for the Public Buildings Authority who is a partner at DLA Piper in Baltimore, said Monday. “At this juncture, it is too early in the process to make any comments.”

The federal tax issue that is at stake involves the federal payments for the direct-pay subsidy, which is not one of the publicly stated IRS audit priorities for the current fiscal year.

The IRS Tax Exempt Bonds office has said its auditors plan to focus on excessive cost of issuance for private activity bonds, defeasance, and public safety or jail bonds. The office expects to close 500 audits in the current fiscal year, up slightly from 480 in the 2018 fiscal year that ended Sept. 30.

The 2011 Official Statement for the issuance said all interest payments for the bonds are exempt from commonwealth income, municipal license and property taxes.

“Under most circumstances, interest from the bonds will be exempt from United States federal income taxation to (i) individuals who are bona fide residents of Puerto Rico during the entire taxable year in which such interest is received and (ii) Puerto Rico corporations,” the OS said. “The bonds are not otherwise exempt from United States federal income taxation.”

The qualified school construction bonds were issued pursuant to a provision of the 2009 American Recovery and Reinvestment Act enacted during the Obama administration.

The authority planned to use the money for constructing and renovating 100 schools according to the official statement.

Although the issuance of qualified zone academy bonds is no longer authorized by Congress, the federal government continues to make subsidy payments on outstanding bonds.

Tom Sanzillo, director of finance for The Institute for Energy Economics and Financial Analysis, indicated he welcomed the IRS audit.

“The IRS decision to review the Public Buildings Authority bonds will bring the commonwealth and the people of Puerto Rico one step closer to a new day, hopefully one without the kind of destructive political interference and bond market practices that has brought the economy to its knees,” Sanzillo said in a statement.

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Direct-pay bonds The Recovery Act School bonds Puerto Rico Public Buildings Authority Washington DC Puerto Rico
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