The Internal Revenue Service is examining a $338.4 million 2015 bond issuance by the Clark County School District in Nevada and asking questions about federal tax compliance, according to a letter the district received from the IRS that was disclosed on EMMA.
According to the disclosure filing, the IRS is asking for copies of specified documents and responses to specific questions.
“The issuer is cooperating with the IRS in its examination of the bonds,” the disclosure notice said.
Although the the notice is officially voluntary, bond attorneys have another name for the process. “In our world, when they refer to an audit, it means the IRS is examining, so it’s the same thing,” said Matthias Edrich, a tax partner at Kutak Rock LLP. “The IRS is examining to make sure the bonds are not private activity bonds, and whether the bonds are arbitrage bonds.”
For the bonds to retain their tax-exempt status the issuer must comply with yield restrictions that govern what can be done with the proceeds. Leasing out a bond-financed school bus garage at market rate, for example, could squelch a tax-exempt status.
“When you look at the minutiae of the Internal Revenue code and Treasury regulations, there are dozens of requirements that must be satisfied in order for interest on a bond issue to be tax-exempt,” said Rich Moore, tax partner, Orrick Herrington & Sutcliffe. “In the context of an audit, the IRS can look at as few or as many of those requirements as it chooses and assess compliance.”
Audits can be triggered by tips about possible malfeasance, an agency emphasis on specific troubled categories of issuers, or they can be totally random. The age of the issuance can also play a role. “This is for an audit of bonds issued in 2015 and the IRS will examine bonds that are older than five years,” said Edrich. He points to the five-year mark as an IRS milepost for proper and timely rebate obligations.
The paper carried an AA- rating from S&P and an A-1 from Moody’s at the time of issuance and employed the services of Sherman & Howard L.L.C., as bond counsel. They were issued in denominations of $5,000, with maturation dates ranging from 2017-2035. The proceeds are allocated to the district’s capital improvement plan and an advance refunding of an earlier issuance, which could be a clue for the audit.
“The IRS is always wary of advance refunding bonds and interested in auditing them,” said Johnny Hutchinson, partner, Nixon Peabody LLP. “If there was any targeting here, that may have been, it but the EMMA notice about the audit suggests that the audit was random.”
The accounting practices of schools in Clark County are also getting a scouring from Republican Governor Joe Lombardo who announced a third-party audit of Nevada’s seventeen public school districts and charter schools in February. The decree was issued via executive order and includes a review of finances, civil rights compliance, underperforming schools, and employee benefits.
A year earlier, Democratic lawmakers proposed a legislative audit to examine programs designed for English Language Learners, students from low-income households, a switch to a new statewide funding formula and how pandemic relief funds were allocated.
The tax attorneys don’t see a connection between the state’s auditing plans and the Treasury examining school bonds in Clark County, but instances have been cited of the IRS noting signs of financial discomfort before swooping in for a closer look.