The Westmoreland County, Pa., Municipal Authority publicly announced late Wednesday that it has reached a closing agreement with the Internal Revenue Service to retain the tax-exempt status of about $20 million of zero-coupon advance refunding bonds that were issued in 1995.

The agreement, which the authority disclosed in a material event notice sent to the nationally recognized municipal securities information repositories, was reached on June 17 after the authority was unsuccessful in appealing an IRS proposed determination that the bonds were taxable.

The notice released by the authority said it appealed the preliminary determination, but an attorney working with the authority said yesterday it was an error and should have said it appealed the proposed determination.

The details of the agreement were not disclosed but in several other audited zero-coupon deals, the IRS had found evidence of yield-burning where bond proceeds were invested in over-valued investment escrows or subject to under-valued forward float contracts, which issuers use to cover gaps between the time Treasuries mature and when they need funds to pay debt service.

The bonds were sold to refund a portion of the authority's Series 1993C revenue bonds and to finance capital projects, according to the official statement for the 1995 transaction.

The $1.45 million of Series B bonds were typical "current interest" bonds, but interest on the Series A "capital appreciation" bonds, which totaled $20.1 million, was to accrue from the issue date in July 1995 and to be paid only at the maturity, according to the OS.

The IRS issued its preliminary determination that the $21.6 million of Series 1995A and B municipal service revenue bonds were taxable in 2003.

The authority appealed the IRS' initial determination with the IRS Office of Appeals, which denied the appeal in October, apparently setting the stage for closing agreement negotiations.

Eckert Seamans Cherin & Mellott LLC of Pittsburgh was bond counsel on the deal and RRZ Public Markets Inc., now part of JPMorgan, was underwriter. Mellon Bank NA was trustee and escrow agent.

RRZ settled yield-burning allegations with the IRS in a 2000 global settlement, but IRS officials said in 2006 that they were still examining several forward-float cases not covered by those settlements.

The IRS then pursued a Section 6700 examination of RRZ banker Nicholas Falgione3d, who is now with JPMorgan. It is not clear whether that examination is still ongoing. Falgione yesterday said he could not comment on the matter. A spokesman for the firm did not return requests for comments as of press time.

Falgione legally challenged the IRS summons in the 6700 case, contending that the all tax matters had been covered by the 2000 yield-burning settlement. The U.S. District Court for the Western District of Pennsylvania refused to quash the summons, but said it did not have the authority to determine whether the Section 6700 exam or the bond audit was covered in the settlement. Court documents show the case was closed on Sept. 29, 2005.

Ken Burkley, the Westmoreland County authority's attorney, said yesterday: "We're glad we could work this thing out with the IRS and reach the agreement that we did." IRS officials could not be reached for comment.

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