Deals & Deal Makers:

IRS Scrutinizes Muni-Bond Deal

March 6, 2001
Wall Street Journal

The Internal Revenue Service has launched an examination into a municipal-bond deal that sparked a debate between a Spokane, Wash., developer and citizens groups concerning the proper use of tax-exempt securities.

At issue is a $31.3 million bond issue that helped finance a parking garage for a mall in downtown Spokane, triggering a disagreement about whether the bonds met the IRS’s rules that govern how bond proceeds can be used for private projects. Questions relating to the bond deal were raised in a series of stories in the late 1990s by The Wall Street Journal.

An IRS spokesman had no comment on the examination, which was undertaken by the agency’s tax-exempt bond division. But in recent years the IRS has stepped up its scrutiny of municipal-bond deals across the country. According to an IRS memo, the agency wants to know how funds from the bond deal “were spent and how they were invested.”

Leslie Weatherhead, a spokesman for the garage’s developer, the Cowles family, owners of a broadcasting, publishing and real-estate empire in eastern Washington state, said, “The bonds were reviewed by two regional law firms specializing in these types of issues and we have no reason to think they aren’t totally in order.”

But Mark Schwartz, a former investment banker and an attorney for a citizens group that opposed the financing, called the IRS’s action “welcomed but long overdue,” adding: “Spokane would have been spared a lot of pain if the IRS prevented this deal in the first place."