WASHINGTON — The Internal Revenue Service is auditing $110.4 million of communication system revenue bonds that were issued in 2007 by Lafayette, La., to finance startup costs of the city-owned utility that sells television, Internet and telephone services to residents.

Separately, the IRS is auditing $52 million of sales tax revenue bonds that were issued by the Cleveland County, Okla., Justice Authority in 2009 to finance the construction of a new detention center.

In the audit in Louisiana, which involves Lafayette Utilities System (LUS) Fiber, Lorrie Toups, Lafayette Consolidated Government’s chief financial officer, said the city was notified about the IRS’ examination several weeks ago.

The city has not disclosed the IRS audit on the Municipal Securities Rulemaking Board’s online EMMA system. Issuers are not required to disclose such information.

The city has until Oct. 18 to submit the requested documents to the IRS, but has asked for an extension to ensure it has all of the appropriate information.

“We are providing the IRS everything they have asked for and complying with the IRS’ request,” said Bruce Serchuk, partner at Nixon Peabody, who is representing LUS Fiber. Serchuk said the audit is random.

Toups said the IRS is interested in several issues: if LUS Fiber earned more on the bonds than they paid and if the city expended at least 85% of the bond proceeds within the first three years after launching the startup. 

“We don’t expect any issues,” Toups said.

Bond proceeds were to be used to help construct a fiber network on every street in the city, making the it accessible to each home and business, according to the bond documents.

But the bond proceeds were not supposed to fund 100% of the costs of the fiber network. Additional costs were expected to be funded by Communications System loans and revenues, the bond documents said. Initial construction of the fiber network was estimated to cost approximately $38.6 million.

As of February, LUS Fiber was cash-positive for the first time, which meant the company had enough money coming in to pay all of its operating costs, as well as to pay principal and interest on its outstanding bonds, said LUS Fiber director Terry Huval.

He estimates the company will have about $22 million in gross revenue this year. Huval would not disclose how many residents are current LUS Fiber customers.

Lafayette residents first voted to approve the LUS Fiber project in 2005. After several hurdles, including a state Supreme Court ruling in 2007 that allowed LUS Fiber to expand state-of-the-art fiber optics to homes and businesses, the company served its first customer in 2009.

Merrill Lynch & Co., now Bank of America Merrill Lynch, and Morgan Keegan & Co., now a subsidiary of Raymond James Financial Inc., served as co-underwriters. Foley & Judell LLP were bond counsel and Nixon Peabody LLP was underwriter’s counsel.

The Cleveland County Justice Authority also did not disclose the IRS audit of its $52 million of sales tax revenue bonds on EMMA.

That audit, in which an IRS agent visited county officials in Norman to conduct interviews and examine bond documents, appears to revolve around the size of the bond issue and how the proceeds were spent.

In December 2008, voters in Cleveland County approved a one-fourth of 1% sales tax for the next 20 years to pay for the construction, operation and maintenance of the F. DeWayne Beggs Detention Center, which opened this in January of this year. It has an inmate capacity of more than 540.

Brad Waterman, a tax controversy bond lawyer, is representing authority, in the audit. He could not be reached for comment.

The initial estimate for constructing the detention facility was approximately $43 million, bond documents said. However, the final cost of the facility came in around $36 million, sources said.

“We believe the size of the bond issue is entirely appropriate,” said Carol Dillingham, assistant district attorney for Cleveland County. “We don’t see any problem with the cost of the construction bid.”

One source said the IRS audit was a routine examination and that the economic downturn appeared to have played a role in construction costs, allowing the authority to secure bids at reduced rates.

D.A. Davidson & Co. was underwriter of the bonds, according to the official statement for the bonds. Governmental Finance of Oklahoma, Inc. was financial advisor. The Floyd Law Firm, P.C. was bond counsel and Hilborne & Weidman was underwriter’s counsel.

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