IRS wants to reclassify bonds used for detention center on Texas border

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WASHINGTON – Tax-exempt bonds issued in 2010 to finance a detention center near the Texas border with Mexico are under audit by the Internal Revenue Service for reclassification as taxable private activity bonds.

The Kinney County Public Facility Corp. issued the $9.23 million in project revenue bonds to finance the acquisition and construction of the warehouse style building with 384 beds for adults.

The detention center is just outside the county seat of Brackettville which, in turn, is about 45 miles from Del Rio, a Texas border community along the Rio Grande River.

The detention center is used by the U.S. Marshals Service to house prisoners, according to the website of the Geo Group Inc., the for-profit prison company that has a contract with Kinney County to operate the facility.

Kinney County Public Facility Corp. filed a public notice of the IRS audit Monday on the Municipal Securities Rulemaking Board’s EMMA database.

The county said it “intends to retain qualified tax counsel to respond to the IRS notification" and that it does not know “at this time what the outcome of the IRS exam will be.”

Kinney County had a 2010 population of 3,274 and listed the U.S. Border Patrol as its largest employer with 141 employees followed by the Bracketville Independent School District with 114 and the Kenney County Detention Center with 98.

The 2010 official statement for the bond issue said the county initially would pay its private contractor $35.50 per bed per night to manage the detention center.

Other detention centers and prisons operating near the U.S.-Mexico border have undergone similar IRS audits the last couple of years in which issuers have agreed to convert their bonds from tax-exempt to taxable.

Two cases last year involved the Otero County, New Mexico Jail Project and the Baker Correctional Development Corp. in Florida.

The Otero County settlement involved $62.3 million in revenue bonds sold in 2007.

The Baker County Correctional Development settlements involved $36.3 million in outstanding first mortgage revenue bonds that were part of the $45 million sold in 2008.

Unlike state and local governments which are categorized as governments, the federal government is considered to be a private party under the federal tax code.

That means that prisons or detention facilities that are used for federal prisoners or detainees are considered to be under a private use.

The tax code classifies a bond as a private activity bond if more than 10% of the proceeds are used for private use and more than 10% of debt service payments are from private parties or secured by private parties. PABs are tax exempt only if they fall into one of several categories, none of which include jails or correctional facilities.

Kinney County Attorney Todd Durden did not immediately respond to a request for comment nor did J. Nicholson Meindl, a senior attorney for Hunton & Williams in Dallas who served as bond counsel.

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Private activity bonds Tax-exempt bonds Government bonds Government finance IRS Washington DC Texas Florida New Mexico