WASHINGTON – The Treasury Department has determined that $385,118 of taxable general obligation qualified zone academy bonds issued by a Missouri school district in 2012 do not qualify for refundable tax credits.
The East Prairie R-II School District disclosed the Treasury's finding for the Series 2012B bonds in an event notice recently posted to the Municipal Securities Rulemaking Board's EMMA system.
The district claimed refundable tax credits for interest payments it made on the bonds, but Treasury argued the bonds were issued pursuant to a bond allocation from a year in which these tax credit bonds were not eligible to be issued in this mode.
The Hiring Incentives to Restore Employment Act of 2010 allowed QZAB issuers to receive Build America Bond-style payments at the lesser of the actual interest rate on the bonds or the tax credit rate. In other words, QZABs could be used in a direct-pay bond mode, but only if they were allocated in 2010 and not thereafter.
The school district is repaying the tax credit payments it received and is redeeming the bonds, according to the event notice. John Brickler, a partner with Spencer Fane Britt & Browne LLP, the bond counsel for the bonds, said Treasury is assessing a penalty under Section 6676 of the federal tax code. That section addresses taxpayers who erroneously claim a tax credit or refund unless the entity has "reasonable basis" for the claim. A credit claim made for an excessive amount carries a penalty of 20% of the excessive amount.
Brickler said he is not sure of the exact penalty the school district will face or the amount of tax credit payments it received.
"Whatever they got paid by feds they weren't entitled to," Brickler said. "The feds would reimburse them for interest paid and it wasn't eligible."
The bond counsel opinion in the official statement for the bonds said that bond interest would be taxable but that the bond counsel "undertakes no responsibility for the accuracy, completeness or fairness of [the] official statement" and "express[es] no opinion with respect to any other federal, state or local tax consequences with respect to the bonds."
The Series 2012B qualified zone academy bonds, issued in June of that year, were underwritten by L.J. Hart & Company in St. Louis.
Qualified zone academy bonds, created under the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, enable school districts to issue the taxable bonds with tax credits in lieu of interest payments. The HIRE Act allowed issuers to receive payments from Treasury for QZABs allocated for 2010.
The East Prairie School District, located in southeastern Missouri roughly 150 miles south of St. Louis, filed an event notice in July of last year saying it was redeeming the bonds. But a letter Brickler sent to the trustee bank describing the tax issue with the Treasury and dated July 14, 2015, was not released on EMMA until it was included with this event notice.
The bonds were issued to fund the renovation to the district's high school, window replacement at R.A. Doyle Elementary School and roof replacement at the junior high school as well as the cost of issuance.