WASHINGTON — The Internal Revenue Service has determined that multifamily housing revenue bonds issued by the Tulsa County Industrial Authority in 2003 are taxable, but it is unclear to what extent bondholders will be affected by the Service's conclusion.
The variable rate auction bonds, which were cancelled in 2011, were found to be taxable by the IRS after it revoked the 501(c)(3) tax-exempt status of the conduit borrower, the American Housing Foundation (AHF).
The IRS issued a notice a proposed adverse determination with respect to the bonds on Dec. 19 and a notification of final adverse determination on March 17. The notices were disclosed in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system on Monday.
The authority — a public trust for the use and benefit of Tulsa County, Okla. — issued the $35 million of series 2003B bonds as variable-rate auction bonds. The proceeds of the bonds were loaned to AHF Tulsa LLC, a subsidiary of AHF, and used to purchase of three apartment complexes in Tulsa.
AHF was established as an Amarillo, Texas-based 501(c)(3) organization that provided affordable housing to low and moderate income families. It owned and operated more than 13,000 residential units in Arizona, Florida, Georgia, Mississippi, North Carolina, Oklahoma, South Carolina and Texas, according to the proposed adverse determination notice.
In April 2009, the foundation's president and founder, Steve Sterquell, died in a car crash that was eventually ruled a suicide. Afterwards, creditors initiated an involuntary bankruptcy case for AHF, alleging they were owed more than $26.3 million from nonprofit.
The creditors also discovered that weeks before his death, Sterquell transferred at least $24 million in life insurance from the ownership and benefit of AHF to various trusts controlled by or for the benefit of himself and his family, according to court papers filed by the creditors.
In June 2009, AHF voluntarily filed for bankruptcy. It later entered into a bankruptcy settlement with creditors that transferred the apartment complexes that were purchased with the 2003 bond proceeds to the creditors as of Oct. 3, 2011.
The bonds were cancelled in November 2011 because they were deemed worthless since there were no remaining assets for distribution to the bondholders, according to the IRS.
In December 2014, the IRS revoked AHF's status as a 501(c)(3) organization retroactively to Jan. 1, 2006. Under Treasury Department regulations, bonds cease to be qualified 501(c)(3) bonds if the borrower takes deliberate action that leads to the revocation of its status as a tax-exempt organization.
In the IRS notice of final adverse determination, Bob Griffo, acting manager of field operations for the IRS tax-exempt bond office, said that the authority should "advise the appropriate paying agents to report the interest as taxable to the past, present and future beneficial owners of the bonds." He also said that, "corrected information returns, Form 1099, must also be filed with the IRS and issued to the bondholders as required under section 6049 of the Internal Revenue Code."
However, the extent to which bondholders will actually be affected by the finding of taxability isn't immediately clear. Typically, if the IRS thinks a bondholder needs to pay tax on bond interest in a certain year, the service needs to take action within three years of when the taxpayer filed his or her return for that year. At the present time, the IRS can generally only go after interest paid in 2011 and later, but 2011 will no longer be an open taxable year after April 15.
John Weidman, who represents the authority, said that in 2011, bondholders were paid about $105,000 from a reserve fund. However, he said he is not sure if that money would be treated as interest. Instead, it could be treated as return on principal, since the bondholders never got back the full amount of their principal, he said.
The bonds were issued in conjunction with the issuance of tax-exempt and taxable bonds issued by five other issuers in Texas, Florida and Arizona, according to the official statement.
Banc of America Securities and Newman & Associates were the underwriters of the bonds. Hilborne & Weidman was the Oklahoma issuer's bond counsel and Ballard Spahr was special tax counsel.