WASHINGTON — As part of its initiative to gauge compliance with arbitrage requirements, the Internal Revenue Service is auditing $43.45 million of Series 2006 general obligation refunding bonds that were issued by the St. Vrain Valley, Colo., School District in April 2006 to advance refund its Series 1997 bonds.

The audit was disclosed in an event notice the issuer filed with the Municipal Securities Rulemaking Board’s EMMA system on Tuesday.

The bond proceeds were primarily used to refund $43.89 million of the school district’s Series 1997 GO building bonds.

The school district deposited a portion of the bond proceeds with an escrow bank and invested them in federal securities, according to bond documents.

The St. Vrain Valley School District, which consists of four counties, said it was notified about the audit from the IRS in a Feb. 7 letter.

“The IRS routinely examines debt issuances to determine compliance with federal tax requirements,” the agency said in the letter.

The bonds were selected for examination as part of a project by the IRS “to measure compliance with arbitrage requirements,” the letter said.

Federal tax law generally bars issuers of refunding bonds from earning arbitrage. The yield of the securities escrowed must be yield-restricted so that it is below the bond yield. 

The district said it is cooperating with the IRS in its examination of the bonds.

George K. Baum & Co. was the lead underwriter for the refunding. Sherman & Howard LLC was bond counsel and special counsel, according to bond documents.

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