The Internal Revenue Service has opened an audit of $3 million of bonds issued by an authority in Little Rock almost four years after it entered into a closing agreement with the agency that preserved the bonds’ tax-exempt status.

In another case, the IRS has issued a proposed adverse determination that the interest earnings from $3.535 million of bonds issued by an authority in Ohio are taxable, but the authority is discussing the possibility of resolving the issue with the IRS to preserve the bonds’ tax-exempt status.

These events were separately disclosed Tuesday via material event notices filed by the issuers on the Municipal Securities Rulemaking Board’s EMMA system.

The first case involves the Little Rock Residential Housing and Public Facilities Board, which issued $3 million of tax-exempt enterprise zone revenue bonds in June 2004.

The authority lent the proceeds to HLR LLC, a limited-liability company in Arkansas, to help finance the acquisition and renovation of a 263-bed Hilton hotel three miles west of the city’s business district.

Sources say the hotel project was completed and currently is in operation.

However, according to bond documents and material event notices, the borrower, HLR failed to comply with the tax law requirement for enterprise zone bonds that at least 35% of the employees at the bond-financed facility be residents of an empowerment zone or enterprise community, which are distressed areas.

The IRS entered into a closing agreement with the issuer and the borrower on April 25, 2008, to preserve the tax-exempt status of the bonds, under which the borrower agreed to redeem the bonds no later than Aug. 1, 2008.

Bond documents show that the bonds remain outstanding, almost two and a half years later.

On Jan. 11, the IRS notified the issuer it was opening an audit, warning the interest paid on the bonds after the date they were to have been redeemed may not be tax-exempt because of possible violations of provisions in sections 103 on tax-exempt bonds and 141-151 of the Internal Revenue Code.

However, section 7121 of the Internal Revenue Code states, in part, that closing agreements “shall be final and conclusive … except upon a showing of fraud or malfeasance or misrepresentation of a material fact” and “shall not be reopened.”

M. Jane Dickey, with the Rose Law Firm, is representing the issuer. Bradley S. Waterman is representing the borrower.

The bonds were underwritten by Crews & Associates Inc. Mitchell, Williams, Selig, Gates & Woodward PLLC was bond counsel. Underwriter’s counsel was Jack, Lyon & Jones PA.

In the other case, the Toledo-Lucas County Port Authority issued $3.535 million of revenue bonds in November 2005 and lent the proceeds to Truckland Ohio Holdings Inc., which used them to construct and equip a 52,500-square-foot manufacturing facility.

Alumi-Bunk of Ohio Inc., planned to use the facility to manufacture sleeper cabs for class 7 tractors, according to bond documents and event notices.

Alumi-Bunk and the manufacturing facility no longer exist. Sources with Crew Chief Services in Woodhaven, Mich., said the company went out of business and that Crew Chief took over its services.

On Nov. 30, the IRS issued a proposed adverse determination that the interest earnings from the bonds were not tax-exempt. The IRS notified the authority of its finding and said it could appeal the determination to the IRS’ Office of Appeals, which would “take a fresh look” at the case.

In its material event notice, the authority stated that though it “continues to believe that all requirements relating to the excludability of interest paid to holders of the bonds were satisfied, its representatives are discussing with [IRS tax-exempt bond office] personnel a possible resolution of the case.”

The authority is represented before the IRS by Waterman. The bonds were underwritten by Robert W. Baird & Co. Bricker & Eckler LLP was bond counsel and Calfee, Halter & Griswold LP was underwriter’s counsel.

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