WASHINGTON – Mobile, Ala., next week will file a protest and an appeal of the Internal Revenue Service's proposed adverse determination that some general obligation refunding and improvement warrants it issued in 2006 are taxable.
The filing, which will be made by Dec. 7 to the IRS' Office of Appeals, was disclosed in a notice posted this week on the Municipal Securities Rulemaking Board's EMMA system.
The city had asked the IRS to extend the deadline for filing the protest and appeal to Jan. 31, 2016 or 30 days after TEB and the city concluded settlement negotiations have failed, whichever is later.
But TEB rejected the city's request for an extension, according to the notice.
Mobile said its request for an extension was rooted in its view that TEB should not have issued the proposed adverse determination until it was evident that settlement negotiations had failed. The city also said that, having issued the document, TEB should have extended the deadline for the protest while settlement negotiations were pending.
"The city and its representatives are aware of only one other case in which TEB closed an examination and issued a proposed adverse determination in similar circumstances," said the notice posted on EMMA. In that case, TEB erroneously believed the issuer did not intend to request a conference.
"In contrast there was no misunderstanding in the city's case," the notice said.
TEB has been auditing the warrants since 2013 and asserted the bonds were taxable in an Information Document Request it sent the city in January 2014. TEB maintained its view that the warrants are taxable in the Notice of Proposed Issue it sent the city in September of this year.
Neither the IRS, city officials, nor the city's tax controversy attorney Brad Waterman will disclose what the tax dispute is about. Waterman won't comment on the case, but his name appears on the notices filed on EMMA.
Mobile issued $63.4 million of the warrants in July 2006 to finance the costs of some capital improvements and to current and advance refund some previously issued warrants, according to the official statement for the warrants. Almost $36.50 million appear to be still outstanding, based on the maturity dates in the OS.
A little more than $26 million of the proceeds were deposited into an improvements account to be used for drainage repairs and other improvements in the city. Almost $38 million of the proceeds were to be deposited into an escrow trust agreement with Regions Bank, the trustee. The money was used to invest in U.S. Treasury obligations, which would be used to refund previously issued warrants, according to the OS.
The city wanted to current refund almost $23.30 million of warrants issued in 1996 that were subject to redemption prior to maturity on Aug. 15, 2006 at a price of 102% of the principal amount plus accrued interest, the OS stated. Mobile wanted to advance refund about $12.64 million of warrants that were issued in 2000 and subject to redemption prior to maturity on Feb. 15, 2010 at 101% of the principal amount plus accrued interest.
After negotiations over the taxability of the 2006 warrants appeared stalemated in August 2014 without any resolution, the IRS initiated audits of warrants the city issued in 1998, 2001 and 2008. Some observers considered that action retaliatory.
But TEB recently pulled out of all of the audits except for the 2006 warrants.
Raymond James & Associates, Inc. was lead underwriter, Hand Arendall LLC was bond counsel, Miller, Hamilton, Snider & Odom was underwriter's counsel and Galloway Smith Wettermark & Everest was counsel for the city for the 2006 warrants. All three are based in Mobile, Ala.
