IRS Closes Audit of $217M of Bonds Issued by Grant County, Wash.

The Internal Revenue Service has closed its audit of $217.3 million of electric system revenue and refunding bonds sold in 2001 by the Grant County, Wash., Public Utility District No. 2 without making any changes to their tax-exempt status.

The closing of the examination was disclosed by the district yesterday in a material event notice submitted to the nationally recognized municipal securities information repositories.

The IRS letter announcing closure of the audit had been expected, Rita Bjork, the district's public information officer, said in June. According to the material event notice, the district received the closing letter on Feb. 27. The letter stated: "The IRS has closed its examination of the bonds with no change to the position that interest earnings on the bonds is excludable from gross income."

The examination was opened by a Seattle IRS agent in June 2005, who alleged that the district's use of bond proceeds to finance a fiber optic network constituted an expenditure of governmental bond proceeds to benefit private businesses and individuals, and may have violated the federal tax code. The agent also told the district that he planned to request technical advice on the matter from the IRS' office of chief counsel.

In May 2006, Gregg H. Jones, the lawyer at Fulbright & Jaworski LLP in Houston who represented the district at one point, and the district argued that the fiber optic network, which is used to sell Internet, telephone, and point-to-point connectivity services to residents and businesses, is not a private use of bond proceeds because it serves a public purpose and is consistent with the general public use exception contained in federal rules.

The bonds, which were used to finance several capital projects, including the fiber optic network, were underwritten by the former Saloman Smith Barney, now Citi, and UBS PaineWebber Inc., now UBS Securities LLC. K&L Preston Gates Ellis LLP in Seattle was bond counsel.

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