Seminole Tribe, Capital Trust Agency Settle IRS Audit

WASHINGTON - Florida’s Capital Trust Agency has settled a long-running Internal Revenue Service audit of $469 million of tax-exempt bonds loaned to the Seminole Tribe of Florida for convention and resort hotel facilities. The settlement, reached on Sept. 25 but announced today, resolves “all matters” related to the debt and protects its tax-exempt status and requires the agency to notify the IRS before it issues any more munis on behalf of Indian tribes. The agency also made a payment to the IRS to close the case, but did not reveal its amount in the material event notice it filed today with the nationally recognized municipal securities information repositories. Proceeds from five series of Capital Trust Agency bonds, sold in 2002, 2003, and 2004, were loaned to the Seminole tribe to finance a convention center near Tampa and a convention center, conference hotel, and ancillary facilities in Hollywood, Fla., near the tribe’s reservation. The tax code allows Indian tribes to issue tax-exempt bonds for “essential government functions,” or activities customarily performed by state and local governments with general taxing powers. In conduit financings such as the Seminoles’, the rules are not as clear-cut. The IRS several years ago opened an examination of the Capital Trust bonds and took the position that bond proceeds were required to be used for an essential government function, even though they were issued by a municipal authority, not the tribe. The IRS’ tax-exempt bond office and chief counsel staff have said their interpretation of the rules is in keeping with Congress’ intentions when granting Indian tribes the rights to borrow at tax-exempt rates. Neil P. Arkuss, the agency’s counsel with Edward Angell Palmer and Dodge LLP, and Jim Allen, chief executive officer of the Seminole tribe, did not return calls for comment. Merrill Lynch & Co. and JPMorgan underwrote the bonds, and Orrick Herrington & Sutcliffe LLP acted as special tax counsel, issuing the legal opinion that the debt complied with tax code rules. Orrick attorneys were unavailable for comment. “They had a tough case. Their position was they can do anything they want with bond proceeds [since] the tribe itself didn’t issue the bonds,” said one market source who did not wish to be identified. “I like the argument - there’s lot to be said for it - but unfortunately that isn’t the Service’s view.” The Capital Trust issues covered by the settlement are: --$290.6 million of Series 2002A bonds --$25 million of Series 2002B bonds --$29.4 million of Series 2002C bonds --$74 million of Series 2003 bonds --$50 million of Series 2004A bonds The IRS initially examined only the 2002 bonds, which were redeemed in 2005. Capital Trust announced in December that the Series 2003 and 2004 bonds, used for the Hollywood facilities, had also come under scrutiny.