WASHINGTON – The Internal Revenue Service has informed Otero County, N. M., that $62.31 million of jail project revenue bonds it issued in 2007 may be taxable because of tax law violations.
County officials disclosed the audit and a "Notice of Proposed Issue" from the IRS in an event notice filed with the Municipal Securities Rulemaking Board. The event notice was dated Dec. 7.
In a Notice of Proposed Issue, the IRS identifies areas of noncompliance with the tax laws.
The county, an area of about 6,627 miles located in the south central part of New Mexico near El Paso, said it is cooperating with the IRS and has provided the agency with all of the information for which it has asked.
"However, there can be no assurance as to the ultimate outcome," the county said in the event notice.
The county said it is exploring the option of refunding the bonds before maturity. A bond ordinance allows for the optional redemption of the bonds on or after Oct. 1, 2016, it added.
"The bond ordinance also provides for the conversion of the interest rate on the bonds to a taxable rate in the event of a Determination of Taxability," the county wrote in the event notice. "The issuer is also currently considering conversion of the interest rate on the bonds."
The event notice does not identify the IRS' concerns.
But the official statement for the 2007 bonds shows they were issued to finance a 1,096 bed processing facility for U.S. Immigration and Customs Enforcement (ICE). The county had made an unsolicited proposal to provide detention space for ICE.
The IRS has been auditing dozens of jail bond issues and finding them taxable, particularly in the southwest, where facilities were used to house detainees of ICE or the U.S. Marshals Service under issuers' contracts with those federal agencies.
Under federal tax laws and rules, the federal government is considered to be a private party. A facility processing ICE or USMS detainees would mean the bonds were taxable.
Bonds are private activity bonds if more than 10% of the proceeds are for private use and more than 10% of the debt service payments are from private parties. PABs are only tax-exempt if they are used to finance certain kinds of "qualified" projects such as airports, water, sewage and other specified facilities. Jails and correction or detention facilities are not eligible for tax-exempt PAB financing.
Bond documents on EMMA show the county also issued $25.71 million of jail project revenue bonds in 2002 to finance a 500-bed multi-classification correction facility in Chaparral, N.M., which was to be used in part by USMS detainees.
In addition, it issued $21.56 million of jail project revenue bonds in 2004 to finance a 695-bed expansion to an existing 550-bed facility for prisoners of the USMS and other governmental entities.
The county sought to fully refund both the 2002 bonds in May 2013 and the 2004 bonds in May 2014, which may indicate past attempts to remedy tax issues with the IRS that were not disclosed.
All of the bond issues were underwritten by Herbert J. Sims & Co. and Municipal Capital Markets Group, Inc. Bond counsel was Sutin, Thayer & Browne for the 2002 bonds, Brownstein Hyatt & Farber for the 2004 bonds and Brownstein Hyatt Farber Schreck for the 2007 bonds. Underwriter's counsel was Dorsey & Whitney for all three issues.