IRS Focuses Audit on 2009 Build America Bonds Sold by New Jersey Turnpike
The U.S. Internal Revenue Service is auditing $1.375 billion in Build America Bonds issued by the New Jersey Turnpike Authority in April 2009.
The authority, which plans to sell $2 billion of the federally taxable debt next month, said today in a public filing that it received a letter dated Sept. 27 from the IRS informing it that its 2009 Series F bonds were selected for examination.
The U.S. tax agency is auditing 15 to 20 deals in the $152.7 billion federally subsidized Build America market, Clifford Gannett, the IRS’s tax-exempt bond division chief, has said. It has asked for documents and other information on the pricing and sale of the bonds, as well as on how the proceeds were spent, according to the Turnpike Authority’s filing.
“The authority intends to comply with the requests of the IRS set forth in the letter,” the filing says.
The letter, signed by James Raybeck, an IRS agent, says the agency has “no reason to believe” the authority failed to comply with “applicable tax requirements.” Raybeck said the documents should be sent to his office in Nashville, Tennessee, by Nov. 1.
IRS reviews of Build America Bonds have been reported by San Antonio, in connection with $375 million in securities, and the Metropolitan Water Reclamation District of Greater Chicago, concerning a $600 million deal.
Queries Since February
The agency in February began sending questionnaires to issuers asking whether they monitor trading of their bonds soon after they are issued. It also asked whether the securities were purchased for the accounts of underwriters, which could reap added profits if they were sold at below-market prices.
The prices of some Build America Bonds have soared in trading immediately after they were issued, delivering potential gains to those able to buy the securities at the initial offering price. Such gains may indicate an issue paid interest at higher than the prevailing market rate, which may lead investors to bid up the price when trading begins.
The Treasury pays issuers 35 percent of the periodic interest due on Build America Bonds, so higher rates mean larger taxpayer subsidies.
In the case of the Turnpike Authority, its bonds rose as much as 6 percent to $1.06 on the dollar on the first day of trading, pushing down the yield by almost one-half of a percentage point, according to data compiled by Bloomberg.
Among the 94 buyers that acquired the bonds at the issue price was the New Jersey Investment Division, which manages funds for the state pension system that covers turnpike employees.
The division’s $10 million purchase was the first of about $2 billion in Build America Bonds acquired by the state for its $70 billion retirement funds, according to William Quinn, a spokesman for Treasurer Andrew Sidamon-Eristoff. The division also bought $50 million of the subsidized debt issued by the New Jersey Transportation Trust Fund Authority this month, he said.
In 27 deals, including the San Antonio issue under IRS review, the state has sold the BABs it acquired at the offering price in as little as five days, gaining a total of $9.2 million on the trades, state records compiled by Bloomberg show.
The federal government says in a notice on its website that it may deem Build American Bonds to be retired, and ineligible for the 35 percent rebate, if they were bought by related arms of government, such as pension systems.
The tax agency is also looking into whether transactions have run afoul of limits on fees paid to Wall Street banks and others involved in issuance, according to the IRS notice sent to the Turnpike Authority.
The authority paid its financial adviser on the 2009 deal, Jersey City-based NW Financial Group LLC, about 50 cents per $1,000 raised, or $690,240, state records show. The size of the fee prompted a review by Governor Chris Christie’s administration.
For the planned $2 billion Build America Bond deal, NW Financial won’t receive any payment beyond its $75,000 annual fee, James Simpson, state transportation commissioner and chairman of the authority, said in an interview last month.
The authority operates the 148-mile (238-kilometer) New Jersey Turnpike and the 173-mile Garden State Parkway that stretches from Cape May to the New York state line. The agency, in the first year of a 10-year, $7 billion capital-improvement campaign, issued $2.5 billion in bonds last year, generating $1.3 million in fees for NW Financial.
Complying With Request
Dennis Enright, NW’s principal, didn’t immediately respond to a telephone call seeking comment today. Tom Feeney, an authority spokesman, said the agency is complying with the federal government’s request.
The IRS can withhold subsidy payments from governments that don’t follow the rules, a step similar to the revoking the break it awards on traditional tax-exempt bonds. In a statement this week, the agency said it is considering ways to resolve infractions pertaining to the Build America Bond program that would avoid revoking subsidies, similar to its program to settle disputes over tax-exempt debt.
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