DALLAS - The board for Oklahoma's Broken Arrow school district is expected to decide today how to respond to the IRS' demand for $1.26 million in arbitrage profits, penalties, and interest due to the district's participation in three cash management programs.
"The [Internal Revenue Service] wants a response by July 1," said Dwayne Thompson, the district's finance director. But, "there is no way we can pay that amount. We will have to look at alternatives," he said.
Thompson said the board would consider taking the same approach as the Tulsa and Oklahoma City school districts, which reached a settlement with the IRS to repay only the arbitrage profits, not the penalties and interest.
"We will discuss every possibility that we have," Thompson said.
The IRS' demand for arbitrage profits from Broken Arrow is the latest development in a long-standing controversy over several cash management programs fro 1990-93 that involved more than 200 Oklahoma school districts.
Under the programs, the IRS said, some district appear to have sold tax-exempt tax anticipation notes based on exaggerated budget deficits, and now the districts need to pay arbitrage rebate or lose the tax-exempt status of the bonds.
So far, the Tulsa school district has agreed to pay the IRS $500,000 in arbitrage profits, and the Oklahoma City district has agreed to pay $276,656. Originally, the IRS had sought $1.6 million from Tulsa school district and more than $1 million from the Oklahoma City district.
In Broken Arrow, the IRS asked for $1.26 million in arbitrage profits, penalties, and interest for almost $28 million of bonds the district sold during three cash management programs in 1990, 1991, and 1992. The district earned $287,277 in profits on the tax anticipation notes.
"Our examination of the bonds indicates they are arbitrage bonds . . . because the issuer's expectations for projecting the cumulative cash flow deficit were not reasonable," the IRS said in a recent letter to the Broken Arrow district. "Unless the issuer pays rebatable arbitrage to the United States, interest on the bonds is not tax-exempt."
Thompson said the district might consider allowing the bondholders to be taxed, but more likely would follow suit with the other districts by settling with the IRS. However, he also said the board might consider suing the financial firms that recommended the district's level of participation in the programs.
The cash management programs were underwritten by Stifel Nicolaus Co., which is being investigated by the Securities and Exchange Commission for its involvement in the programs. The firm has been blamed by the Oklahoma City school district for contributing to its troubles with the IRS. Stephen L. Smith was the financial adviser and program manager for the Broken Arrow district.
A Stifel spokesman said the firm had no comment, and Smith could not be reached for comment.
In a prepared statement, Broken Arrow superintendent Jerry Hill said the district "complied faithfully and earnestly with all regulations of the tax code as advised by the financial firm handling the cash management program."
Hill also said the district worked with the IRS to review its records.
Industry sources said they expect the Broken Arrow district to cooperate with the IRS and reach a settlement similar to the ones made by Tulsa and Oklahoma City.
Meanwhile, the IRS reportedly has contacted other larger school districts in Oklahoma that participated in the cash management programs, including Putnam City and Lawton.
