WASHINGTON — The Internal Revenue Service is auditing $21 million of variable-rate general obligation bonds that were issued in 2005 by the Spring Grove Area School District in Pennsylvania to finance school projects, but were redeemed in 2009.
The school district disclosed the audit in a material-event notice posted with the Municipal Securities Rulemaking Board’s EMMA system on Wednesday. The IRS had informed the district of the audit in a Feb. 28 letter that was accompanied by a request for detailed information and documents.
“While the IRS letter appears to be a random audit and does not specify any particular concerns or violations, if the school district is found by the IRS to have violated the tax laws in connection with the 2005 bonds, the 2005 bonds could be declared taxable and a tax liability could be assessed against the holders of all of some portion of the 2005 bonds,” the district said in the event notice.
The variable-rate bonds were to have been privately placed, according to a placement memorandum filed with EMMA. Their interest rates were to be reset on a weekly basis.
The former broker-dealer Arthurs, LeStrange & Co. was both the placement agent and the remarketing agent. Stock and Leader in York, Pa., was bond counsel.
Dexia Credit Local provided a standby bond-purchase agreement and Financial Security Assurance Inc. — which was acquired by Assured Guaranty Ltd. in 2009 and renamed Assured Guaranty Municipal Corp. — provided insurance.
The school district had entered into a floating-to-fixed rate forward starting swap in connection with the bonds before they were issued, according to the placement memorandum.
The district had other swaps outstanding during that decade, according to school officials, but it terminated them, according to a district official. The 2005 bonds were current refunded in 2009, he said. In such a transaction, refunding bonds are issued and the proceeds are used to redeem previously issued bonds within 90 days.