On Wednesday, Ports America Chesapeake, LLC provided notice that it had reached a settlement with issuer Maryland Economic Development Corporation and the Internal Revenue Service over a $41 million bond sale executed in 2010.
According to the notice, "the IRS found that it had a basis to conclude that interest on the Series 2019A Bonds could be includable in the gross income of the owners because PAC did not meet the 95% threshold for use of the bond proceeds on the 2019A Project within three years of the date of issuance."
The dispute centers on Section 142(a)(2) of the IRS tax code, a provision that classifies docks and wharves as "exempt facilities."
The provision allows state and local governments to issue tax-exempt private activity bonds to finance the construction or acquisition of maritime port facilities, provided the property is owned by a governmental unit.
The property in question is the Seagirt Marine Terminal in Baltimore, Maryland.
"Although there is reference to not spending the proceeds within three years of the date of issue – this may be more about not having enough eligible expenditures to meet the 95% test, said Ed Oswald, partner at Orrick, Herrington & Sutcliffe's Washington D.C. office.
"It's not clear to me how the failure to spend came about. Perhaps the amount of bond eligible expenditures was mistakenly overstated."
The unspent portion is approximately $5.795 million.
The IRS "has not formally asserted any claims against the issuer or PAC or sought to tax interest on the Series 2019A bonds."
Instead, the IRS agreed to enter into a "closing agreement" with MEDCO requiring PAC to pay a resolution amount of just over $518,000 to the U.S. Treasury.
"The resolution amount is negotiated between the IRS and the issuer, and each case is somewhat unique in that regard," said Oswald.
PAC is also responsible for establishing "a fully funded irrevocable defeasance escrow to redeem and retire on the first available redemption date $3.73 million in aggregate principal amount of the Series 2019A Bonds stated to mature on June 1, 2049."
"The IRS has agreed in the closing agreement that the Series 2019A Bondholders shall not be required to include interest paid on the Series 2019A Bonds in the bondholders' gross income because of the aforementioned issues."
The Seagirt Marine Terminal is operated by Ports America Chesapeake under a 50-year public-private partnership signed in 2010 with the Maryland Port Authority.
Under the agreement, Ports America constructed a 50-foot-deep container berth and funded four state-of-the-art super Post-Panamax cranes. The new berth and cranes became operational in 2013.
The state of Maryland is emerging as a leader in the use of public private partnerships. In April, Gov. Wes Moore announced the creation of the The Maryland Center for Public Private Partnerships office to "deploy innovative financing solutions to deliver and enhance infrastructure" while expanding the state's revenue base.
