Puerto Rico Being Audited By The IRS for $877.9 Million in School Construction Bonds Issued in 2011

In 2011, the U.S. issued $877.9 million in bonds in an effort to build and renovate 100 schools in Puerto Rico. Now the IRS is auditing for four Series 2011 R taxable of school construction bonds that totaled $756.4 million and $121.5 million in Series 2011 T direct-pay qualified zone academy bonds.

In a letter dated February 7th, the IRS notified the Puerto Rico Fiscal Agency and Financial Advisory Authority that it will be examining certain forms related to these Series R and Series T bonds. This information was filed on the Municipal Securities Rulemaking Board’s EMMA website on behalf of the Public Buildings Authority.

The bonds granted for the construction and renovation of these schools were issued in accordance with a provision set by the 2009 American Recovery and Reinvestment Act, which was enacted during the Obama administration.

Financial and tax laws are often a complicated beast that the average U.S. citizen can’t begin to understand. Bonds in their most simple form are representations of debt obligations that can be considered a way of borrowing from the government. This money is expected to be repaid over time. The government commonly gives out bonds in order to smoothly assist with the funding of public needs such as roads, dams, and, in this case, schools. Puerto Rico requested this money to construct schools in an attempt to help their quality of living grow.

The federal payments for the direct-pay subsidy are where the federal tax issues are at stake. This though is not one of the IRS audit priorities for the current fiscal year. The plan was actually for its auditors to work on the excessive cost of issuance when it comes to such things as private activity bonds, defeasance, and public safety or jail bonds, at least according to the IRS Tax Exempt bonds office. The office in 2018 managed to close 480 of its audits during the fiscal year ending September 30th, but this year they hope to close 500.

The 2011 Office Statement remarked “Under most circumstances, interest from the bonds will be exempt from United States federal income taxation to (i) individuals who are bona fide residents of Puerto Rico during the entire taxable year in which such interest is received and (ii) Puerto Rico corporations.” The Office Statement went on to clarify “The bonds are not otherwise exempt from United States federal income taxation.”

The 2011 OS basically is stating that all interest payments for the bonds are exempt from commonwealth income, municipal license, and property taxes. That being said, the federal government still continues to make subsidy payments on outstanding bonds even though the issuance of qualified zone academy bonds is no longer authorized by Congress.

An attorney for the Public Building Authority named Kristin Franceschi who is also a partner at DLA Piper in Baltimore states that “At this juncture, it is too early in the process to make any comments.” That being said, the Building Authority seems to show no hostility toward this action and has stated that they intend “to respond to all correspondence from the IRS and intends to continue to cooperate with the IRS in connection with the examinations.”

Tom Sanzillo, director of finance for The Institute for Energy Economics and Financial Analysis showed support for the IRS stating that “The IRS decision to review the Public Buildings Authority bonds will bring the commonwealth and the people of Puerto Rico one step closer to a new day, hopefully one without the kind of destructive political interference and bond market practices that has brought the economy to its knees.”

Those who are interested in learning more about this case and others like it can find more information at the Jeff Newman Law Whistleblower Help Center!