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

The city disclosed on EMMA 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 the City of Corpus Christi said that they are working closely with the IRS to ensure the IRS understands their 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, which is the City’s 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 and acting as counsel to the issuer, did not respond to request for comment.