The Internal Revenue Service has closed an audit of $119.2 million of student loan bonds issued by the Massachusetts Educational Financing Authority with no change to the tax-exempt status of the debt.
The MEFA disclosed the IRS’ decision in a material event notice filed last week with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system.
In the notice, the issuer said it received a May 19 letter from the IRS stating the agency had finished its audit of the bonds.
The IRS initiated the audit on Feb. 9 and told the MEFA that the examination was part of a specific initiative looking into “compliance trends in the qualified student loan bond area.”
IRS tax-exempt bond office director Clifford Gannett said in 2008 his group was specifically looking into tax-exempt student loan bond issuers, and that his office planned to audit five to 10 student loan bond issuers.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC served as bond counsel on the Massachusetts deal, according to bond documents. The issue was underwritten by Smith Barney Inc., now Citi; PaineWebber Inc., now part of UBS; Fleet Securities Inc., and BayBank NA.
Although the Massachusetts bonds received a clean bill of health from the IRS, the service is currently in a dispute with a Pennsylvania student loan lender and issuer over two issues that market participants said could have far-reaching consequences for the student loan bond sector.
The Pennsylvania Higher Education Assistance Agency said last month that the IRS disagreed with the agency’s stance regarding its reallocation of student loans to various bond issues, as well as its treatment of “consolidation loan rebate fees” as a qualified administrative expense.
The dispute is centered around $150 million of student-loan revenue bonds PHEAA sold in 2002, and the lender’s stance on those two points are thought to be relatively commonplace among student loan bond issuers, according to bond lawyers.
In its disclosure announcing the IRS disagreement, which was issued last month, PHEAA said it was cooperating with the agency during the examination and plans to “make every effort to protect the tax-exempt status of the bonds.”
If the IRS declares the bonds taxable, PHEAA said it could appeal such a ruling with the IRS Office of Appeals, or enter into a closing agreement with the service, likely involving some sort of payment in exchange for the bonds remaining tax-exempt.
Obermayer, Rebmann, Maxwell & Hippell LLP of Philadelphia served as bond counsel on the PHEAA deal, and Cozen O'Connor was underwriter's counsel, according to bond documents.
There were five underwriters: UBS PaineWebber Inc., Wachovia Bank NA, NatCity Investments, Siebert Brandford Shank & Co., and Bear Stearns & Co. and RRZ Public Markets, now both part of JPMorgan.
