DALLAS -- The Internal Revenue Service has demanded that Tulsa County, Okla., pay $1.6 million in arbitrage profits, penalties, and interest for its participation in three controversial cash management programs from 1990 through 1992.
In a document sent to the county, the IRS claimed that the municipality owed the arbitrage rebate because it sold more than $57 million of taxexempt tax anticipation notes based on overstated budget deficits for the three years, a county official said.
Under federal tax law, municipalities can legally sell tax-exempt bonds to cover temporary cash shortfalls, but the need must be documented and fall within certain parameters or the bonds are declared taxable and arbitrage rebate is assessed.
The IRS said "the county did not need as much money as we declared we needed," Clay Edwards, chief deputy to the Tulsa County Commissioners, said yesterday.
Edwards said county commissioners have instructed the Tulsa County district attorney's office to negotiate a settlement with the IRS that could be similar to agreements made by the Oklahoma City and Tulsa school districts.
The IRS letter received by Tulsa County on June 29 is the latest chapter in a long-standing controversy over Oklahoma cash management programs that involved 270 school districts, 14 vocational-technical institutes, and three counties.
So far, the IRS has sent letters to several school districts and has reached closing agreements with two.
Last month, the Tulsa school district agreed to pay the IRS $500,000 in arbitrage profits in three installments and succeeded in getting the interest and penalties dismissed. The district could have been forced to pay up to $3.5 million.
At the about the same time, Oklahoma City School District agreed to pay $276,656 to the IRS in arbitrage profits in exchange for IRS dismissal of penalties and interest payments.
Tulsa County should be given the same deal, Edwards said. "They gave all these other people the same kind of deal," he said. "We are entitled to the same kind of courtesy."
He said the county had not yet broken out its arbitrage profits, but the IRS has asked for the following rebates: $735,506 on the $20.2 million in notes sold in the 1990 program; $607,944 on the $19.4 million in notes sold in the 1991 program; and $256,345 on $17.6 million in notes sold in the 1992 program.
Edwards said Tulsa County does not have the money in its general fund to pay the arbitrage rebate and probably will use money from the municipality's sinking fund for damage awards and judgments.
He said the IRS has not imposed a deadline for payment. "We will have to ask them when we have to have some closure and what some of the funding vehicles could be," Edwards said.
Bond industry firms involved in the cash management program either could not be reached for comment or declined to comment. A spokesman for the underwriter, Stifel, Nicolaus & Co., had no comment. An official at the Tulsa law firm of Hilborne & Weidman, Tulsa County's bond counsel, did not return a phone call.
The cash management programs have drawn scrutiny from several government agencies including the Securities and Exchange Commission, which is investigating the 1990-92 programs for possible violations of securities laws.