ATLANTA - If Brevard County, Fla., voters opt to cease making lease appropriations on an insured certificates of participation issue in an upcoming referendum, interest payments could be declared taxable, a 1988 Internal Revenue Service private-letter ruling suggests, tax lawyers said yesterday.
In particular, the lawyers said a paragraph near the end of the private-letter ruling issued, which came in response to an unnamed issuer's questions, could spell trouble for holders of the $23.9 million Brevard County financing.
Last week, four of the five Brevard County commissioners voted to hold a referendum March 16 on whether to discontinue lease payments on the issue, which was sold in 1989 to fund a controversial government operations center in Viera. But the vote on the issue, which is insured by Municipal Bond Investors Assurance Corp., may be delayed because of technical reasons.
"On one interpretation, the ruling seems to be saying that if appropriations on the lease obligation are stopped, then there is no continuing obligation, and thus there can be no tax exemption," said Frederic L. Ballard Jr., partner at the Washington, D.C., office of Ballard Spahr Andrews & Ingersoll.
Ballard said, however. that he believes a strong case can be made that the insurance payments made to investors in event of nonappropriation should not be declared taxable.
"Despite the letter-ruling, one can argue that even after the nonappropriation, there is a sufficient continuing municipal obligation to qualify the interest as tax-exempt even though the obligation is not being funded through appropriations." he said.
Another tax counsel at a large Washington law firm, who declined to be identified, also expressed concern.
"Brevard County is pushing to the limit the question of the risks of COPs issues," he said. "It is my guess that there is precedent here for declaring the interest payments taxable if there is nonappropriation. But I can't believe the IRS would really go after certificate holders because there is no real tax abuse here."
An IRS official said yesterday that the agency could not give specifics on the Brevard County case and that the private-letter ruling does not set precedent. But he said that on a matter of general principle, the agency would be inclined to deny tax exemption to interest payments following nonappropriation unless the failure to appropriate is due to a genuine lack of available revenues, such as a municipal bankruptcy.
Near the end of the IRS' five-page private-letter ruling, a paragraph declares that in the event of nonappropriation on the COPs financing, interest payments would continue to be tax-exempt only "to the extent that the payments would have been characterized as exempt interest if the payments had been made directly by the governmental unit."
The paragraph then continues: "This ruling is explicitly limited to the described payments with respect to a default of amounts that had been subject to an annual appropriation and does not apply to any other payments."
County Commissioner Karen Andreas said she could not predict whether concerns over the tax exemption of the COPs deal would affect preparations for the referendum.
"I cannot say right now how this issue will eventually play out," she said. "For my own part, this seems to be one more unfortunate instance of the risks of the COPs now being spelled out."
Michael Ballinger, a vice president at MBIA, said yesterday the insurer is aware of the private-letter ruling and the potential taxability of insurance payments following a nonappropriation on the Brevard County issue.
As a result, he said, "MBIA has put language in its official statement disclosure materials that there are no assurances that payments made by MBIA in the event of nonappropriation would be tax-exempt."
Meanwhile, county officials say the referendum may be delayed beyond the planned March 16 date because of the need to follow notification guidelines.
According to Andreas, a delay could result because of a series of legal challenges to county elections held Nov. 3, which has led to election records being impounded by a Florida circuit court.