WASHINGTON — The Internal Revenue Service has closed a targeted audit of Philadelphia's series 2010A water and wastewater revenue refunding bonds without making any changes to the bonds' tax-exempt status.
The city, which issued $396.46 million of the 2010A bonds, received a "no change" letter from the IRS on Dec. 23 and disclosed it on Monday in an event notice posted on the Municipal Securities Rulemaking Board's EMMA website.
The IRS began auditing the bonds in October. The examination was targeted, with the IRS saying in an Information Document Request at the time that the bonds were being audited based on a concern that they might fail one or more of the bond-related provisions of the federal tax code.
The city received the "no change" letter based on its response to the IDR and discussions between the IRS and the city's bond counsel, Greenberg Traurig LLP, according to the event notice posted Monday.
Michael Lehr, regional operating shareholder at Greenberg Traurig, said that he had three or four conversations with the IRS agent handling the audit while the examination was taking place. The agent thought that the targeting of the bond issue was related to the fact that the bonds closed in April of 2010 and the first debt service payment was only about two months later, Lehr said. Issuers often make the first debt service payment about 6 months after bonds are issued.
The 2010A bonds were issued to refund bonds issued in 2003 and fund a payment to terminate a swap associated with those bonds, according to an offering document.
The city explained to the IRS that the bonds were issued in April 2010 because the bonds that were being refunded had a mandatory tender in that month. However, the bonds being refunded had a June 15 debt service payment date, and the city wanted to maintain its water and wastewater debt service payment dates, Lehr said.
"We're very gratified that the IRS heard the city's position and agreed with the city's position," he said.
The audit lasted only about two-and-a-half months, while a typical audit can last about 6-to-12 months, Lehr said.
Philadelphia Treasurer Nancy Winkler said she appreciated that the IRS completed the audit in a short amount of time.
"I was very pleased that they did it so quickly," she said, noting that the prompt resolution is "very favorable for bondholders."
Philadelphia currently has no bond issues under audit, Winkler said.
A syndicate led by Morgan Stanley underwrote the bonds. Gonzalez Gaggio & Harlan LLP was co-bond counsel on the deal along with Greenberg Traurig.