WASHINGTON -- The Internal Revenue Service believes that interest on $720 million of bonds issued by the New Hampshire Health and Education Facilities Authority from 1998 to 2011 should not be tax-exempt.
An audit of the bonds began this summer, soon after the authority became the first issuer to withdraw from the IRS’ voluntary closing agreement program for student-loan bonds. The conduit borrower, the New Hampshire Higher Education Loan Corp., disclosed the IRS’ claim in an event notice posted on the Municipal Securities Rulemaking Board’s EMMA system on Tuesday.
The IRS on Nov. 26 issued notices of proposed issue for a total of $720 million of bonds from 11 issues from 1998 to 2011. Most of the bonds were redeemed before last year. The IRS said in the notices that it believes the bonds “violate one or more of the requirements for interest to be excluded from gross income of the bondholders,” according to the event notice.
The IRS has been concerned that some student loan bond issuers have been engaged in so called loan-swapping, allocating student loans to bonds other than the ones used to finance them. This could make the bonds taxable arbitrage bonds.
But the corporation continues to believe that it complied with all requirements of the Internal Revenue Code and Treasury Department. The issuer likely will request an informal conference with an IRS supervisor “to discuss the merits of the factual and legal issues,” the event notice said.
In 2012, the IRS announced a VCAP for student-loan bond issuers. The New Hampshire authority submitted a request to the IRS for a closing agreement under the program, but the issuer, the conduit borrower and the IRS were ultimately unable to negotiate an agreement because the IRS wanted the authority to admit that the corporation ran afoul of requirements. The authority withdrew its request for a closing agreement on June 27.
The conduit borrower previously set aside an amount that it believed was sufficient to fund a settlement under the VCAP, and the IRS tax-exempt bond office requested an amount that was about equal to what the borrower had reserved. The borrower will continue to reserve same amount of money because it “does not believe that its exposure in the examinations exceeds the amount which it previously reserved,” it said in the event notice.
The student-loan VCAP was set up after the Pennsylvania Higher Education Assistance Agency paid a $12.3 million settlement for tax law violations in connection with $250 million of student loan bonds, the first settlement in this area. When the program was initially announced, several bond lawyers raised concerns that the formula for VCAP may be too cost prohibitive and could ultimately sink some student loan issuers.
Bradley Waterman, a tax controversy lawyer representing the authority, declined to comment.