CHICAGO—The Internal Revenue Service is examining almost $40.63 million of variable rate student loan bonds and notes issued by the Oklahoma Student Loan Authority in 2002.

The audit was disclosed in an event notice filed on the Municipal Securities Rulemaking Board’s EMMA system Tuesday by the authority, which said the IRS had asked it for information and documents. 

The IRS has been concerned that student loan bond issuers did not properly allocate bond proceeds to student loans. Under federal tax rules, the yields on student loans cannot be more than 2% above the yields of the bonds that were used to make the loans. The IRS contends some issuers tied higher-yielding student loans to higher-yielding student loan bonds to ensure they stayed under the 2% limit and were not forced to make yield-reduction payments to the federal government.

The IRS had set a July 31 deadline for student loan bond issuers to enter into a special voluntary closing agreement program to settle such tax disputes.

Approximately 15 issuers submitted requests to enter into the VCAP prior to the deadline, according to Steve Chamberlin, manager of compliance and program management for the IRS’ tax-exempt bond office.

The authority said it did not submit a settlement request to the IRS under the VCAP for student loan bonds.

The IRS has asked the authority to provide the requested documents by Nov. 5.

In its letter to the authority asking for the information, the IRS said it has no reason at this time to believe that the authority’s issuance fails to comply with federal tax requirements.

The Series 2002 bonds were issued on Jan. 31, 2002 and were retired in full on Oct. 6, 2010, according to the authority.

The redemption of principal of the Series 2002 bonds occurred from various payments of term-out installments of bank bonds from recoveries of principal on pledged student loans, the authority said in the event notice. The redemption of principal also occurred from refinancing eligible collateral student loans by a taxable note issued to the Straight-A Conduit Commercial Paper Asset Backed Program to redeem bank bonds. In addition, the authority refunded the remaining $29.75 million of Series 2002 bonds which were held as bank bonds.

The former William R. Hough & Co. was underwriter on the transaction. Kutak Rock LLP was bond counsel.

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