WASHINGTON — The Internal Revenue Service has told the Toledo-Lucas County Port Authority that $3.5 million of development revenue bonds it issued in 2005 to finance a manufacturing facility could be taxable.
The bonds were issued to finance a 52,500-square-foot manufacturing facility to build tractor trailer sleeper cabs for Truckland Ohio Holdings Inc., according to the preliminary offering statement. However, the facility has been closed, and comments from a Truckland employee raise doubts about whether it was intended to do much manufacturing.
The IRS sent the authority two notice of proposed issue forms in June, which detailed why the bonds may be taxable. The port said it received the IRS notice and insisted the bonds still meet the requirements for tax-exempt debt in a material event notice it filed last week with the Municipal Securities Rulemaking Board’s EMMA system. The authority said it is preparing responses to the IRS’ “tentative adverse conclusions.”
The Ohio authority has had issues with other conduit borrowers that have led to some recent credit downgrades.
The Truckland bonds were issued as part of the Northwest Ohio Bond Fund, which was established in 1988 to encourage economic development in the region and is funded by deposits from conduit borrowers.
The facility was closed less than two years after it opened in 2008. An unscheduled draw on the primary reserve fund was required in November to make debt-service payments due to “current financial difficulties of the borrower,” according to an earlier material event notice filed by the Port Authority.
The Bank of New York Mellon, serving as trustee for the bonds, filed a foreclosure suit in June against Truckland and its affiliate, Alumi-Bunk Corp, according to the Toledo Blade.
The authority has not disclosed the IRS’ problems with the bonds, but the agency could be focused on whether the bond proceeds were used for manufacturing.
Generally, tax rules stipulate that 75% of the proceeds from small issue manufacturing bonds must finance manufacturing, while the remaining 25% can go toward ancillary facilities like office space.
But comments from a Truckland employee seem to suggest the facility was not principally focused on manufacturing.
In a 2008 article about the opening of the facility in the trade publication Expediters Online, sales manager Sheel Advani touted the facility’s repair capabilities, two floors of office space, and a sales floor spread across 20,000 square feet. He was quoted saying, “We will eventually do some production work here.”
If the IRS maintains its stance that the bonds are taxable and issues a proposed adverse determination, the authority expects to appeal that determination to the IRS office of appeals, it said in its most recent material event notice.
The bonds were underwritten by Robert W. Baird & Co. and Bricker & Eckler LLP was bond counsel.
Bradley S. Waterman, the tax controversy attorney representing the issuer before the IRS, declined to comment.
Authority officials did not return calls for comment. Officials with Canada-based Alumi-Bunk could not be reached for comment.