DALLAS -- The Tulsa and Oklahoma City school districts have agreed to pay a total of $776,656 in arbitrage profits to the Internal Revenue Service to settle a long-standing dispute over cash management programs and to prevent blacklisting of bond issues.
The settlements, which amount to $500,000 for Tulsa and $276.656 for Oklahoma City, represent a small fraction of what the IRS Could have assessed the districts if penalties and interest had been charged.
According to estimates last year, Tulsa could have owed $3.5 million and Oklahoma City more than $1 million to the IRS in arbitrage profits, penalties, and interest for sale of tax anticipation notes during cash management programs starting in 1990.
But in ensuing negotiations, the IRS agreed to the districts' request that it accept only the arbitrage profits. The districts' bond could have lost their tax-exempt status if the disputes were not resolved. The closing agreements from the IRS were received this week by both school districts.
"We are obviously delighted that we don't have to pay $3.5 million to retain the tax-exempt status of our bonds," said Jerry Zimmerman, an attorney with Rosenstein, Fist & Ringold, which represents the Tulsa district. "We have resolved a critical issue, and we will not have to face the threat of having our bonds black-listed."
Under the closing agreement, the Tulsa school district must pay $230,000 by July 1 1994; $185,000 by July 1, 1995; and $85,000 by July 1, 1996.
The payments will settle the IRS claim that the district violated federal tax laws when it sold $137.5 million in tax anticipation notes in 1990, 1991, and 1992 based on overstated budget deficits.
District officials said they did not expect to raise taxes or cut programs to pay the arbitrage bills, which will come from the general fund. "It's already planned for in the next budget," said Charles Stidham, treasurer for the Tulsa district.
In Oklahoma City, school officials also said they did not expect to raise taxes or cut programs by making the payments from the district's general fund.
"By making this payment, the district preserves the tax-free stratus of the bonds," said district sopkesman L.D. Barney. "It will close the dispute between the district and the IRS concerning arbitrage rebate."
Under the agreeement, the Oklahoma City district must pay $138,328 on June 30 and Dec. 31. The money is the amount of arbitrage profits earned during cash management programs in 1990 and 1992, when the district sold a total of $47 million in tax anticipation notes based on what appeared to be exaggerated budget deficits.
The settlements will resolved part of a long-standing controversy over cash management programs that involve more than 200 school districts in Oklahoma and the sale of more than $500 million in bonds during 1990 and 1991 alone.
The cash management programs were underwritten by Stifel, Nicolaus & Co., which some taxpayers and some members of the Oklahoma City school district have contended should foot the bill. However, Stifel refuses to pay and has said that government institutions pay rebates as a matter of routine.
A Stifel spokesman could not be reached for comment yesterday on the closing agreemtns, and an IRS spokesman declined to comment, saying he was prohibited by law from talking about taxpayers' cases.
Other industry and government sources said they did not know if the IRS settlement with the Tulsa and Oklahoma City school districts would set a precedent in other distrcits that were involved in cash management programs.
So far, several other districts have been contacted by the IRS, including Putnam City, Lawton, and Broken Arrow, and some more of the larger districts could be contacted in the future.
Terence Burke, a First Southwest Co. director who specializes in arbitrage rebate and other tax issues, said he did not know how many districts were being investigated by the IRS. But he said that the federal agency would probably look at the larger districts because only districts that sold more than $5 million in bonds annually would be subject to arbitrage rebate requirements.
Burke also said that the IRS will probably assess arbitrage rebate on a case-by-case basis, and not necessarily pattern it after the Oklahoma City and Tulsa closing agreements. "I don't know if it will set a precedent because the IRS will look at each case individually," Burke said.
Meantime, a taxpayer group in Oklahoma City could refile a suit against the school district there, alleging that Stifel should pay the damages for the district's involvement the cash management programs.
The group withdrew a lawsuit it filed last fall after the Oklahoma City school district temporarily decided not to pay the arbitrage rebate to the IRS. But the group's attorney, Larry Patton, said he could refile the suit if taxpayer money was used to pay the bill.
Patton could not be reached for comment yesterday.