Corpus Christi, Texas, bond issuance may be retroactively taxable

BY SourceMedia | MUNICIPAL | 11/30/21 02:17 PM EST By Connor Hussey

The Internal Revenue Service has issued a preliminary determination that bonds issued by the City of Corpus Christi, Texas, in 2013 may be retroactively taxable.

The city disclosed on the Municipal Securities Rulemaking Board's EMMA website an adverse tax opinion or event affecting tax exempt status in relation to the issuance of its $97.9 million Texas Utility System Junior Lien Revenue Improvement Bonds, Series 2013, of which about $13.4 million remains outstanding.

On Sept. 16, 2020, the City of Corpus Christi received a notice that the IRS would be conducting an examination of the city?s obligations.

The city filed a material event notice pertaining to the routine exam and on Nov. 12, 2021, received the preliminary determination that ?the obligations are taxable retroactively to the date of issuance due to alleged noncompliance with the requirements of Section 149(g) of the Internal Revenue Code of 1986, as amended, which prescribes certain expectations for the timely expenditure of proceeds of the obligations,? the filing said.

This is a preliminary determination, meaning that the city has the opportunity to convince the IRS that it is in compliance.

?The City believes it has complied with the U.S. income tax laws and intends to vigorously defend its position,? the filing said.

Heather Hurlbert, director of finance and business analysis for Corpus Christi, said the city is are working closely with the IRS to ensure the IRS understands its position.

?We feel that some of their assumptions maybe aren't as accurate as we feel that they should be,? she said. ?We have a call scheduled with the IRS this week to talk through that a little bit more.?

Proceeds from the sale of the bonds were intended to go to ?acquiring, purchasing, constructing, improving, repairing, extending, equipping and renovating the City?s Combined Utility System,? the official statement said, referring to its combined water, wastewater and gas utility system, in addition to paying the costs of issuance related to the bonds.

Interest on the bonds is payable on Jan. 15 and July 15 of each year.

Stephanie Leibe, bond counsel at Norton Rose Fulbright based in Austin, who is acting as counsel to the issuer, did not respond to request for comment.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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