WASHINGTON – The Internal Revenue Service told Woodland Hills School District in Allegheny County, Pa. that bonds it issued in 2005 and advance refunded in 2013 may violate tax requirements and be taxable.
In an event notice posted on the Municipal Securities Rulemaking Board's EMMA website, the school district said it received a Notice of Proposed Issue (Form 5701) from the IRS on Nov. 19. The NOPI covers $24.59 million of $30.846 million of Series D general obligation bonds issued in 2005 and $25.515 million of $31.65 million of GO refunding bonds issued in 2013 -- the amounts that remain outstanding from the bond issues.
The two-sentence event notice, which also lists the Cusips under audit, does not identify the IRS' concerns with the bonds. But in a teleconference on the tax-exempt bond office's examination process in 2012, IRS officials said that a NOPI is issued when an IRS examiner has found potential violations of tax requirements and the issuer does not agree with the examiner's findings.
NOPIs typically contain a written summary of potential issues, including the facts, the law, and the examiner's position, according to documents the IRS provided for the teleconference.
The taxpayer or issuer has 30 days to respond to the NOPI, according to the IRS.
The event notice said, "The issuer is currently discussing its options with respect to the notice with its counsel."
In some recent advance refunding cases, the IRS has charged state or local governments issued more advance refunding bonds than necessary, thereby causing an over-issuance of bonds, but it is not clear if that is the case here.
The Woodland Hills School District issued the $30.845 million of Series D GO bonds in 2005 to finance the construction of a new East Junior High School and to improve the school district's athletic facilities. The yields on the bonds ranged from 3.1% to 4.27%, depending on the maturity dates.
According to the OS, the bonds that matured on Sept. 1, 2010 through Sept. 2020 were sold at an original issue premium of almost $1.822 million. The "uses of funds" included that amount, plus almost $32.421 million of project funds, $246,935 in issuance costs and almost $20,967 of accrued interest.
PNC Capital Markets, Inc. in Pittsburgh was the managing underwriter, J.P. Morgan Trust Co. was the paying agent and sinking fund depository, and Thorp Reed & Armstrong, also in Pittsburgh, was the bond counsel, according to the official statement. FSA insured the bonds, which were rated AAA by Standard & Poor's.
At the time the $31.165 of GO refunding bonds were issued in 2013, $28.70 million of the Series D 2005 bonds remained outstanding, according to the official statement. There was almost $1. 039 million of net original issue premium, according to the "sources of funds" in the OS. The "uses of funds" shows almost $31.955 was deposited into an escrow account to refund the Series D funds and $248,610 was used for issuance costs.
The 2013 bonds were insured by Build America Mutual Assurance Co. and were AA rated by Standard & Poor's. PNC was managing underwriter, The Bank of New York Mellon Trust Co. was paying agent and sinking fund depository, and Clark Hill/Thorp Reed was bond counsel.
Neither attorneys at Clark Hill/Thorp Reed, which appears to be representing the school district, or school district officials, could not be reached for comment.