IRS settles tax-exempt bond tax dispute involving fertilizer plant

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WASHINGTON — The Internal Revenue Service has settled an appeal involving 2013 refunding bonds for an Indiana fertilizer plant that the issuer maintained should keep the tax exemption the original bonds qualified for in 2012 as Midwestern Disaster Area Bonds.

Midwest Fertilizer Co. announced Monday it has settled with the IRS Office of Appeals an audit that originally disqualified the tax-exempt status of $1.259 billion in 2013 refunding bonds that will be used to help finance a $2.79 billion fertilizer plant in Posey County, Indiana. The settlement announcement came in a public event notice filed on the Municipal Securities Rulemaking Board’s EMMA website.

The Heartland Disaster Tax Relief Act of 2008 enacted by Congress authorized Midwestern Disaster Area Bonds to be issued only through the end of December 2012.

The 2008 law, according to the nonpartisan Congressional Research Service, “provided tax relief intended to assist with the recovery from the severe weather that affected the Midwest during the summer of 2008 and Hurricane Ike, as well as including some general disaster tax relief provisions for federally declared disasters occurring prior to January 1, 2010.”

Posey County took over as issuer after the Indiana Finance Authority dropped out and then refunded or remarketed the bonds six times between July 2013 and November 2015.

Midwest Fertilizer purchased the bonds in the fall of 2016. The company is incorporated in the United States, but is owned by multinational investors, the largest of which is Fatima Group, one of the largest conglomerates in Pakistan and a leader in the South Asian fertilizer industry, according to company documents.

The tax dispute has led to years of delay in the construction of the state-of-the-art fertilizer plant in the Mount Vernon area of southwest Indiana near the borders of Kentucky and Illinois.

“When the IRS issued the proposed notice I thought then, and I think now, that the company and the issuers complied with the relevant rules,” tax attorney Charles Henck of Ballard Spahr said in an interview. “The client is happy with the settlement and is looking forward to moving ahead with the project.”

Henck served as special tax counsel to all the parties involved in the audit and and was joined by sole practitioner Brad Waterman on the appeal.

Posey County and the Indiana Finance Authority signed a closing agreement with the IRS through the Office of Appeals on March 13.

Midwest Fertilizer chose to base the plant in Indiana because the Indiana Economic Development Corp. had offered an incentive package accepted by the company on Nov. 30, 2012, that included access to tax-exempt financing through the allocation of a portion of the state’s volume cap under the disaster bond program.

According to the company, the Indiana EDC offered it up to $2.9 million of conditional tax credits and up $400,000 training grants based on the company’s job creation estimates. It also offered the company up to $300,000 in conditional incentives from the Hoosier Business Investment tax credit. But the Indiana EDC made clear that the company would have to create jobs and invest in Indiana to receive the incentives.

The company told the state it would create more than 2,500 construction jobs and as many as 200 ongoing regulator and contract employment opportunities. It also said Indiana farmers would benefit from its fertilizer.

Just before the bonds were issued in late 2012, a representative of the U.S. Defense Department’s Joint-Improvised-Threat Defeat Agency testified during a congressional hearing that the Fatima Group had been “less than cooperative” in implementing security for its fertilizer products to prevent them from being used in explosive devices deployed against American soldiers in Afghanistan and Pakistan.

Then-Gov. Mike Pence, a day after taking office in January 2013, halted state support of the project and subsequently in mid-May of that year formally dropped all state involvement, according to bond documents.

Fatima officials, meanwhile, agreed on a range of voluntary cooperative measures to appease the federal government, including the suspension of fertilizer sales in two Pakistani provinces bordering Afghanistan and reformulating a fertilizer product that would be less susceptible to misuse as an explosive.

Les Wright, interim president and CEO of Midwest Fertilizer, said in a phone interview Monday that he couldn’t predict when construction will begin.

“Right at this moment we are literally re-engaging with project partners,” Wright said. “It’s too early today to provide milestones for going ahead with the project.”

The $2.79 billion plant is being financed with the tax-exempt bonds, which will be remarketed, along with equity financing and potentially additional debt, Wright said.

The plant will use natural gas delivered by pipeline in the production of the fertilizer, which will be shipped by rail, truck or barge along the Ohio River strictly for domestic use.

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Refunding bonds Tax-exempt bonds Natural disasters IRS Washington DC
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