A health care issuer and borrower in Mississippi are discussing the possibility of entering into a voluntary agreement with the Internal Revenue Service to settle tax law violations that occurred after some bond-financed equipment was sold to a private group.

The violation was described in a recent event notice filed by with the Municipal Securities Rulemaking Board’s EMMA system by an agent for the Mississippi Hospital Equipment and Facilities Authority.

The MHEFA issued $120.91 million of revenue bonds in 2007 and loaned the proceeds to the nonprofit Mississippi Baptist Health Systems Inc. to finance the renovation of the Mississippi Baptist Medical Center Inc., the construction and equipping of a six-story addition to the hospital, and the refunding of some previously issued bonds. The 2007 bonds were tax-exempt “qualified” 501(c)(3) bonds used by a nonprofit organization.

In September, Mississippi Baptist Health transferred some of the equipment that had been financed with bond proceeds to a private radiology group that was a limited liability company in exchange for an ownership interest in the company.

The borrower took the action without realizing that, under the federal tax law, for 501(c)(3) bonds to be “qualified” and tax-exempt, all property financed with the bond proceeds must owned by a nonprofit organization or governmental unit.

The MHEFA and borrower determined that the amount of proceeds spent on the equipment transferred to the radiology group represented about 5.56% of the total amount of proceeds spent for projects.

The authority and borrower, alerted to the tax law problem, have tried to remedy it by establishing a defeasance escrow to redeem $3.64 million of the bonds at their earliest call date on Aug. 15, 2017. They estimate that amount of bonds equals the 5.56% of project proceeds.

Robert Lazarus, a partner at Jones Walker, formerly Watkins Ludlam Winter & Stennis PA in Jackson, Miss., which was bond counsel on the 2007 deal and was advised of the sale of the equipment after it occurred, said Monday that the authority and borrower may be entering into the IRS’ voluntary closing agreement program.

Under VCAP, an issuer or conduit borrower who discovers any noncompliance with the tax requirements can voluntarily go to the IRS and negotiate a settlement or so-called closing agreement. The agreement, which is designed to protect the tax-exempt status of the bonds, may include the redemption or defeasance of some of the bonds and the payment of a penalty amount.

Meanwhile, the Bucks County, Pa., Water and Sewer Authority, recently disclosed that the IRS has asked it for documents and information regarding $109.85 million of sewer system revenue bonds that it sold in 2006 to fund capital improvements and advance refund some previously issued bonds.

The disclosure was made in an event notice the authority filed with the EMMA system that said the IRS had requested the information in a Nov. 7 letter that noted it “routinely examines municipal debt issuances to determine compliance with federal tax requirements.”

Some of the proceeds of the 2006 bonds were used to purchase state and local government series securities from the U.S. Treasury. The SLGs were deposited into an escrow to be used to defease the previously issued bonds, the Bucks County authority said.

In its notice, the authority said it “provided the documents and information requested in the [IRS] letter and intends to continue to cooperate fully with the service in the course of its examination.”

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