COFINA settles longstanding dispute with IRS

By The Star Staff

The Puerto Rico Sales Tax Financing Corporation (COFINA in Spanish) has settled a $12.6 million claim with the U.S. Internal Revenue Service (IRS), ending a dispute that began in 2017.

The information is contained in a July 17 court order from COFINA’s Title III bankruptcy case, which ended in 2019, without resolving the claim with the IRS.

According to a July 12 stipulation, the IRS agreed to withdraw its claim. However, the IRS, which has been auditing COFINA’s tax filings related to some of its bonds, said it will continue with the audit.

The federal agency said it will pay COFINA the amount as has been agreed to by the IRS and COFINA in settlement of the audit before closing the audit, according to the order. 

Under former sections of the U.S. Internal Revenue Code of 1986, COFINA was permitted to issue Build America Bonds (BABs) during 2009 and 2010. Under applicable Tax Code sections, holders of BABs are entitled to a tax credit equal to 35 percent of the interest payable by the issuer of the BABs. In lieu of bondholders receiving a tax credit, however, the Tax Code permitted issuers of BABs such as COFINA to instead elect to receive with respect to each interest payment date a direct subsidy payment from the Internal Revenue Service (the IRS) equal to 35 percent of the interest payable to the holder under that BAB for that date.

Similarly, the Tax Code permitted COFINA to issue recovery zone economic development bonds (RZEDBs) during 2009 and 2010. RZEDBs were similar to BABs except that the IRS’s direct subsidy payments were established at 45 percent of the interest payable, rather than 35 percent. On June 30, 2010, COFINA issued both BABs and RZEDBs and elected to treat those bonds as direct payment bonds. For each interest payment date on the BABs, through and including February 1, 2019, COFINA submitted the request for the direct payment, and the IRS made all requested payments except for the February 1, 2019 payment. For each interest payment date on the RZEDBs, COFINA submitted the request for the direct payment, but the IRS ceased making payments to COFINA beginning with the May 1, 2018 payment.

After the commencement of COFINA’s Title III Case on May 5, 2017, the Title III Court ordered Bank of New York Mellon, as trustee, to hold the pledged sales taxes used to pay interest on the bonds and not pay them to the COFINA bondholders, including holders of the COFINA BABs and RZEDBs. As a result, throughout the pendency of COFINA’sTitle III Case, all required interest payments, including with respect to the BABs and RZEDBs, were deposited by the Corporation into the appropriate BNYM accounts.