by Joe Watson
An Internal Revenue Service audit of tax-free bonds used to develop an immigrant detention facility in New Mexico was closed once the bonds were converted to taxable status.
Otero County issued $62.3 million in tax-free revenue bonds in 2007 to finance the construction of an Immigration and Customs Enforcement (ICE) processing center in Chaparral, New Mexico. The facility is operated by a private company, Utah-based Management & Training Corp.
Over the past several years, the IRS has been conducting similar audits at local jails that contract to house prisoners for the U.S. Marshals Service (USMS) or ICE. Under the tax code, the federal government is considered a private party, and private parties do not qualify for tax-free status. USMS and ICE officials have signed contracts with jails nationwide to house detainees in state and local bond-financed facilities, leading to tax disputes between the bond issuers and the IRS. [See: PLN, Sept. 2015, p.18].
According to the Bond Buyer, a trade publication, “the tax code classifies a bond as a private activity bond (PAB) if more than 10% of the proceeds are used for a private party and more than 10% of debt service payments are made or secured by private parties. PABs are tax exempt only if they fall into one of several categories, none of which include jails or correctional facilities.”
Janet White of the Otero County Board of County Commissioners signed a notice that indicated the remaining $44.28 million in outstanding bonds for the ICE facility was converted to taxable status on August 1, 2017. The IRS’ Tax Exempt Bonds Field Office in Houston confirmed three days later that it had closed its audit due to the conversion.
Investors who had purchased the bonds based on their tax-free status are now saddled with taxable bonds.
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