WASHINGTON — The Internal Revenue Service is auditing $12.73 million of certificates of participation that were issued by Cañon City, Colo., in 2008 to provide financing for improvements to its water treatment facility.

The audit was disclosed by Cañon City in a notice filed with the Municipal Securities Rulemaking Board’s EMMA website.

“At this time, we have no reason to believe that your bond issue fails to comply with any of the applicable federal tax requirements,” the IRS said in a May 9 letter sent to the city’s finance department.

The IRS said it was only requesting general information and asked city officials to fill out and send back its Form 4564, Information Document Request.

Cañon City is located in Fremont County, about 45 miles southwest of Colorado Springs.

In a COP financing, an investor purchases a share of the lease revenues of a facility or program.

In this case, the city leased the water treatment facility to the Finance Authority, a Colorado nonprofit that was formed in February 2003 to facilitate public improvements to city facilities.

The authority’s lease payments are used to repay the bonds, which were insured by Assured Guaranty.

The proceeds from the sale of the certificates were used to finance improvements, such as the installation of new storage tanks and pipes, as well as to pay for the insurance policy and costs of issuance, according to a city official and bond documents.

Piper Jaffray & Co. was the underwriter and Sherman & Howard LLC was special counsel for the transaction.

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