WASHINGTON — The Conroe Industrial Development Corporation in Texas has paid a penalty and agreed to redeem bonds under the Internal Revenue Service's voluntary closing agreement program (VCAP) to settle a tax violation relating to bonds it issued in 2008 and refunded in 2012.

CIDC disclosed the VCAP settlement in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system. The CIDC, a nonprofit development corporation operating under the supervision of the Conroe, Texas City Council, uses revenue from a one-half cent city sales tax to provide funding to attract business and develop and acquire property.

It first requested the VCAP settlement in February 2015 after a review it conducted led to questions about the tax-exempt status of its 2008 sales tax revenue bonds and 2012 sales tax revenue and refunding bonds.

The corporation issued $15 million of sales tax revenue bonds in 2008 to finance the acquisition of property and the development of a technology park. It issued $25.4 million of sales tax revenue and refunding bonds in 2012 to refund the outstanding 2008 bonds.

The Deison Technology Park, named after R. A. "Mickey" Deison, who was chairman of the CIDC from March 31, 2008 to March 31, 2014, is a 248-acre park near the Lone Star Executive Airport, nearly 46 miles north of House. Designed by planning and management firm Burditt as an integrated technology business community, current plans call for the development of a 75,000 square foot office facility within the park.

CIDC reported to the IRS, according to an event notice filed in February 2015, that, because of the sale of properties purchased with proceeds of the 2008 bonds and the outstanding 2012 bonds, they were potentially used in the business of a "nongovernmental person", or private party, effectively jeopardizing their tax-exempt status.

The receipt of proceeds from the property sales could result in more than 10% of the debt service on the bonds as being secured by an interest in or payments of the properties, further adding to concerns met the private use and payments tests for being private-activity bonds.

Bonds become private-activity bonds if more than 10% of the proceeds are used by a private party and more than 10% of the debt service is paid or secured by a private party.

CIDC and the IRS entered into a closing agreement on final determination covering specific matters on March 31 of this year, according to the event notice filed Thursday.

CIDC has agreed to redeem on Sept. 1, 2022 $8.4 million principal amount of the 2012 bonds maturing on and after Sept. 1, 2022. It also paid an amount to the Treasury Dept. that was unspecified in the event notice. A lawyer involved in the settlement was unable to provide the amount at press time.

In exchange for the issuer's payment of the penalty and offer to redeem the bonds, the IRS agreed interest on both the 2008 and 2012 bonds will remain tax-exempt. The 2008 bonds have all matured or been redeemed, while the 2012 bonds were scheduled to mature in 2032, according to the event notice filed in 2015.

The refunding bonds were underwritten by Coastal Securities, Wells Fargo Securities, and Southwest Securities. Bond counsel was Winstead in San Antonio. Underwriters' counsel was Bracewell & Giuliani in Houston.

Meanwhile, the Davis County Community School District in Iowa is under audit by the IRS for $9.7 million of school infrastructure sales, services and use tax revenue bonds it issued in 2009.

The school district disclosed the audit in an event notice posted on EMMA after receiving a letter from the IRS about the audit on March 28.

The bonds were used to finance the construction of a new high school in Bloomfield and other construction projects.

The issuer said the IRS told it that it has "no reason to believe that your debt issuance fails to comply with any of the applicable tax requirements."

School district officials said they are cooperating in the examination.

"The district believes that the bonds complied with all applicable provisions of the Internal Revenue Code and the district is cooperating with the IRS in its examination of the bonds," they said in the event notice.

Underwriters for the bonds were Piper Jaffray, D.A. Davidson & Co., Northland Securities and Bernardi Securities. Ahlers & Cooney in Des Moines, Iowa was bond counsel.

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