IRS preliminarily finds conduit bonds in Alabama taxable

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WASHINGTON – The Internal Revenue Service has preliminarily determined that $5.57 million of tax-exempt first mortgage revenue bonds issued in 2015 for acquisition and renovation of an assisted living facility in Montgomery, Ala. may be taxable retroactive to the date of issuance.

The IRS sent the issuer, the Medical Clinic Board of the City of Montgomery – 1976 East, a Notice of Proposed Issue on Jan. 31, according to an event notice posted by the issuer on Thursday.

The bond counsel for the board, Scott Pierce of Capell Howard, said Friday that the board expects to turn over title for the facility, known as Oxton Senior Living, in the next few weeks as part of a larger foreclosure sale that also involves a second facility, which is also in Montgomery, and a third one in Opelika, Ala.

The assisted living facility was operated by Dwayne Edwards, who was charged with fraud by the U.S. Securities and Exchange Commission early last year after improperly commingling funds from nine different conduit municipal bond offerings totaling nearly $62 million as well as the revenues of the facilities financed by the offerings. The SEC sued him in a federal district court.

The bond proceeds were supposed to be used to finance assisted living or memory care facilities in Georgia and Alabama.

The charges have a connection to a prior SEC case against Christopher Brogdon, who also commingled investor funds in senior living projects and used the money for personal expenses and other business ventures. Brogdon was ordered to repay $86 million to investors.

The Medical Clinic Board of Montgomery acted purely as a conduit entity in the issuance of the bonds that are under audit, according to Pierce.

The board consists of “three volunteer, uncompensated directors, and is an independent public corporation, separate from the City of Montgomery, and for which the city is not in any way responsible,” Pierce said in a statement.

“The board does not charge a fee for issuing bonds for conduit borrowers and has no other source of funds to pay anyone to respond to the IRS inquires,” the statement said.

The board’s intention was “to facilitate the operation of projects providing medical care to residents of Montgomery and to enhance local investment and employment opportunities,” the statement continued.

The facility involved in the IRS audit had been closed in June 2013 because of deficiencies found in a state inspection in its operation as a residence for people suffering from Alzheimer’s disease.

Edwards purchased the facility in 2015 with a plan to operate it as an assisted living facility, which is not as highly regulated.

The SEC lawsuit said eight of the offerings involved purchases made by Edwards of facilities from Brogdon. The commission said that Edwards did not have a prior relationship with Brogdon but sought out Brogdon to purchase some of his facilities and considered him a "big-time operator" in the industry.

Four of the purchases from Brogdon used "substantially the same financing team that Brogdon himself had used for many years," according to the SEC. Edwards had also referred to Brogdon as "brilliant" while working with him, according to the SEC.

Last June, Edwards agreed to be barred from the municipal securities market, except for buying and selling munis for his personal account, and to pay an undetermined amount of fines and ill-gotten gains.

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Tax-exempt bonds Taxable bonds Enforcement Tax-related court cases IRS SEC Washington DC Alabama Georgia