BRADENTON, Fla. -Miami-Dade County will pay the Internal Revenue Service to settle a tax problem with a seaport revenue bond issue.
County commissioners on Tuesday approved paying the IRS's $283,155 settlement offer for the 1996 seaport revenue bond issue, and a maximum payment up to $350,000 if the IRS increases the sum before final payment, which officials said could happen.
Resolution of the issue comes more than a year after the bonds were refunded, but the tax penalty is far less than the $1 million the county had anticipated as the worst case scenario.
The potential tax problem with the seaport bonds was uncovered in August 2012 when Squire Sanders LLP, bond counsel for the refunding, conducted due diligence. Miami-Dade entered the IRS's Voluntary Closing Agreement Program in March 2013 to negotiate a settlement.
"Any settlement will be paid with seaport revenues from the interest savings resulting from the refunding of the seaport revenue refunding bonds, Series 1995 and Series 1996," deputy mayor/finance director Ed Marquez told the County Commission in a memo Tuesday. The bonds were refunded in September 2013.
To prevent similar types of "tax events" from occurring, Marquez also said that the administration and county attorney's office are establishing a process for reviewing all leases, lease amendments, and operating agreements with private concerns before those documents are presented to the commission for approval.
"The process will determine whether tax-exempt bond proceeds were used to finance the facility(s) leased or operated by the private concern," Marquez said. "If tax-exempt bond proceeds were used to finance the facility(s), the lease or operating agreement will be modified to avoid adverse federal tax consequences."
Miami-Dade sold the $29.3 million in tax-exempt governmental bonds in 1996 to fund improvements to passenger terminals used by Carnival Cruise Lines. At the time, Carnival had no obligation to pay the county other than dock and wharf fees.
However, Squire Sanders found a 1998 contract that obligated Carnival to make a payment to the county if the number of its cruise passengers fell below a certain level in exchange for a reduced wharfage and dockage fee.
County officials said the 1998 terminal agreement could have been interpreted as Carnival guaranteeing a minimum amount of wharfage and dockage fees.
Though Carnival has never made a payment to the county, the cruise line's payment guarantee and use of the cruise terminals could have resulted in a reclassification of the Series 1996 bonds from governmental bonds to private activity bonds.
At the time Miami-Dade entered the voluntary closing program, Squire Sanders estimated that the county's liability could range from less than $200,000 to $1 million, plus up to 10% in penalties, based on a formula used in similar cases.
Marquez told commissioners in his Dec. 2 memo that bond counsel received an initial settlement offer from the IRS of more than $850,000.
"After prolonged negotiations, Squire recommends that the county accept the IRS's latest settlement offer of $283,155.10, which is approximately a third of the initial offer," Marquez said.