Wachovia Bank, the trustee for a $610 million advance refunding deal done by the Pennsylvania Intergovernmental Cooperation Authority, is in settlement talks with the Internal Revenue Service over rebating arbitrage triggered by the banks inadvertent failure to blend down the investment yield in PICAs escrowed securities on time, the authoritys executive director said Friday.
The dispute with the IRS was triggered when Wachovia missed a scheduled rollover of the refunding escrow that was initially invested in higher-yielding Treasury securities into zero-interest rate State and Local Government Series securities, said Joseph C. Vignola, PICAs executive director.
Wachovia missed a SLGS roll by a couple of days, he said, noting that the trustee is now negotiating with the IRS.
His comments came after PICA issued a brief material-event notice late Thursday revealing that the IRS had sent a letter to the authority on April 15 notifying it that the trustees failure to reinvest the bond proceeds from the 1999 deal in zero-yield SLGS in a timely manner resulted in arbitrage that there is reason to believe should have been rebated to the federal government.
Vignola said in a telephone interview Friday that he does not know the amount of arbitrage rebate the IRS contends should be paid.
Wachovia says it should be zero because it was only a couple of days, but I dont know what the IRS is requesting, he said.
Vignola said Wachovia is being represented by Pat S. Conti, an attorney with the Washington, D.C.-based firm Crowell & Moring, but Conti could not be reached Friday to discuss the case.
PICAs notice was issued the same day that IRS officials said the agency plans to randomly audit about 100 issues for possible arbitrage violations when trustees inadvertently fail to blend down the investment yields of the securities in advance refunding escrows.
The IRS allows issuers to reinvest refunding escrows in higher-yielding Treasury securities instead of SLGS as long as they eventually lower the higher yield by investing in zero-interest rate SLGS to avoid violating arbitrage restrictions.
But in some cases, the IRS said trustees have neglected to roll the escrows into zero-interest SLGS, which would have blended down the investment yields and avoided arbitrage violations. Unless the excess earnings are rebated to the federal government, the bonds could be declared taxable.
Vignola said Wachovia was scheduled to roll over the escrowed proceeds into zero-rate SLGS on Dec. 16, 2002, but failed to shift the funds for two days because an employee was absent due to a family problem.
Vignola said PICA learned of the delayed rollover when its auditors found the error during the authoritys annual audit.
At that point, he said PICA asked Wachovia to investigate what happened and agency notified the IRS of the mistake.
The case also comes as Wachovia is believed to still be involved in negotiations with the IRS over repaying the illegal arbitrage that was earned by a predecessor securities firm in several yield-burning cases in the late 1980s and early 1990s.
A source close to several of those cases said Friday that Wachovia continues to balk at reaching settlements in the cases which have been pending for about two years.
Officials in Wachovias corporate communications office in Charlotte, N.C., did not return phone calls Friday seeking information on either the PICA case or the pending yield-burning settlements.
