I decided to do a little exercise to get an approximate value of the penalty that might be involved if the VCCDD decides to negotiate a settlement with the IRS.
The press loves to throw the 355 million dollar figure around because it turns head and sells newspapers. But the truth is that the IRS is only staking a claim on the taxes that should have been paid on the interest by the bondholders if the bonds had been issued as taxable municipal bonds.
Keep in mind that these are very rough estimates for discussion purposes (see the attached images). So I looked up the budgets that have been posted for the VCCDD in the current and recent years and with some extrapolation was able to construct a table of values representing the interest paid by the VCCDD starting back in 2003 and continuing through 2012.
Next I computed the tax based on a 29% tax rate. That is rate purported to be the rate that the IRS uses in settlement discussions as reported on page 12 of
this document. And finally I added in the interest rate that the IRS used during those years. This yielded the sum
total of 43 million dollars in uncollected taxes with interest.
However, if the VCCDD were to refuse to negotiate a settlement and the IRS were forced to go after the bondholders, the statute of limitations limits them to going back only 3 years prior to the year they notify the taxpayer of the deficiencies. So I recomputed the values based on that and come up with a new figure of around
13 million dollars owed to the IRS.
So if a negotiated settlement is reached, I’m guessing it will be in the 10-12 million dollar range.
Now this does not include the actual cost to the VCCDD for buying back the outstanding bonds at their present value and issuing new taxable Muni bonds. But keep in mind that the VCCDD has already paid off over fifty million of those bonds in principal payments to date.