Fer­til­izer Bonds Are Tax­able: IRS

The Bond Buyer - - Front Page - By lynn Hume

WASH­ING­TON — The In­ter­nal Rev­enue Ser­vice has pre­lim­i­nar­ily de­ter­mined that $1.26 bil­lion of eco­nomic devel­op­ment rev­enue bonds as well as re­fund­ing bonds is­sued for In­di­ana-based Mid­west Fer­til­izer Com­pany are tax­able.

The com­pany dis­closed on July 27 that the IRS had is­sued a “No­tice of Pro­posed Is­sue” stat­ing that the rev­enue and re­fund­ing bonds vi­o­late fed­eral tax laws and are there­fore not tax-ex­empt.

The dis­clo­sure, posted on the Mu­nic­i­pal Se­cu­ri­ties Rule­mak­ing Board’s EMMA site, did not pro­vide any in­for­ma­tion about the IRS con­cerns. But the com­pany said it was responding to the IRS and that it and its coun­sel “con­tinue to be con­fi­dent that there should be no change to the tax-ex­empt sta­tus of the bonds or the re­fund­ing bonds.”

Com­pany of­fi­cials, a lawyer

for the com­pany, bond coun­sel in­volved in the trans­ac­tions, In­di­ana of­fi­cials and Posey County, Ind. of­fi­cials, ei­ther did not re­turn calls or re­fused to com­ment on the dis­pute with the IRS or pro­vide any in­for­ma­tion on the fi­nanc­ing of the project.

But there are sev­eral in­ter­est­ing as­pects of the fi­nanc­ing, ac­cord­ing to bond doc­u­ments.

First, the In­di­ana Fi­nance Au­thor­ity rushed to mar­ket with nearly $1.3 bil­lion of bonds for the project in the lat­ter half of De­cem­ber 2012 to take ad­van­tage of the Mid­west­ern Dis­as­ter Area Bond pro­gram, which ex­pired at the end of 2012.

The state of In­di­ana later dropped out of the project and was re­placed by Posey County, Ind., which then re­funded or re­mar­keted the bonds six times be­tween July 2013 and Novem­ber 2015.

Also, Posey County and the com­pany agreed to a tax in­cen­tive pack­age un­der which cer­tain tax in­cre­ment rev­enues and special as­sess­ments would be ap­plied over a 25-year pe­riod to re­pay tax in­cre­ment and special as­sess­ment bonds, ac­cord­ing to bond doc­u­ments.

The fi­nanc­ing is one of sev­eral the IRS has au­dited re­cently that it sees as de­vel­oper-driven.

In some of th­ese trans­ac­tions, the de­vel­oper re­ceives, or is to re­ceive, tax in­cre­ment rev­enue or other money to re­im­burse it­self for as­so­ci­ated in­fra­struc­ture costs.

Some tax at­tor­neys have ques­tioned the IRS’ stances re­gard­ing th­ese fi­nanc­ings.

The nearly $1.3 bil­lion of bonds were is­sued in late 2012 to build a state-ofthe-art, ni­tro­gen fer­til­izer pro­duc­tion plant on 220 acres in the county, which is lo­cated in the South­west­ern cor­ner of the state.

The cost of the plant is now ex­pected to be al­most $3 bil­lion, ac­cord­ing to a Mid­west Fer­til­izer press re­lease dated July 27 of this year.

The plant is to be one of the largest in the U.S. in more than 20 years.

Ground­break­ing of the project is ex­pected in 2018 and the plant is ex­pected to be­gin op­er­at­ing in 2022 to pro­duce about 2 mil­lion tons an­nu­ally of am­mo­nia, urea am­mo­nium ni­trate so­lu­tion and diesel ex­haust fluid, a diesel ad­di­tive that re­duces diesel ex­haust emis­sions, the press re­lease said.

Mid­west Fer­til­izer chose to base the plant in In­di­ana be­cause the In­di­ana Eco­nomic Devel­op­ment Corp. (IEDC) had of­fered an in­cen­tive pack­age ac­cepted by the com­pany on Nov. 30, 2012, that in­cluded ac­cess to tax-ex­empt fi­nanc­ing through the al­lo­ca­tion of a por­tion of the state’s vol­ume cap un­der the dis­as­ter bond pro­gram.

Ac­cord­ing to the com­pany, the IEDC of­fered it up to $2.9 mil­lion of con­di­tional tax cred­its and up $400,000 train­ing grants based on the com­pany’s job cre­ation es­ti­mates.

It also of­fered the com­pany up to $300,000 in con­di­tional in­cen­tives from the Hoosier Busi­ness In­vest­ment tax credit. But the IEDC made clear that the com­pany would have to cre­ate jobs and in­vest in In­di­ana to re­ceive the in­cen­tives.

The com­pany told the state it would cre­ate more than 2,500 con­struc­tion jobs and as many as 200 on­go­ing reg­u­la­tor and con­tract em­ploy­ment op­por­tu­ni­ties. It also said U.S. farm­ers in the state would ben­e­fit from its fer­til­izer prod­uct.

Mid­west Fer­til­izer is a U.S. com­pany owned by multi­na­tional in­vestors, the prin­ci­pal one be­ing Fa­tima Group, one of the largest con­glom­er­ates in Pak­istan.

The com­pany calls Fa­tima Group “a leader in the south Asian fer­til­izer in­dus­try.” Mid­west Fer­til­izer hopes to add other multi­na­tional in­vestors.

Just be­fore the bonds were is­sued in late 2012, a rep­re­sen­ta­tive of the U.S. De­fense Depart­ment’s Joint-Im­pro­vised-Threat De­feat Agency (JIDA) tes­ti­fied dur­ing a con­gres­sional hear­ing that the Fa­tima Group had been “less than co­op­er­a­tive” in im­ple­ment­ing se­cu­rity for its fer­til­izer prod­ucts to pre­vent them from be­ing used in ex­plo­sive de­vices de­ployed against Amer­i­can sol­diers in Afghanistan and Pak­istan.

Then-In­di­ana Gov. Mike Pence, a day af­ter tak­ing of­fice in Jan­uary 2013, halted state sup­port of the project and then for­mally dropped all state in­volve­ment in mid-May of that year, ac­cord­ing to bond doc­u­ments.

Fa­tima met with rep­re­sen­ta­tives of the FIDA and agreed on a range of vol­un­tary co­op­er­a­tive mea­sures to ap­pease them, in­clud­ing by sus­pend­ing fer­til­izer sales in two Pak­istani prov­inces bor­der­ing Afghanistan.

It also re­for­mu­lated a fer­til­izer prod­uct that would be less sus­cep­ti­ble to mis­use as an ex­plo­sive.

Mid­west Fer­til­izer turned to Posey County to take the state’s place. In Oc­to­ber 2013, Posey County of­fered the com­pany tax in­cre­ment in­cen­tives val­ued at $144 mil­lion and up to $480,000 in em­ploy­ment in­cen­tives, ac­cord­ing to bond doc­u­ments.

As of late 2013, the com­pany said had spent about $32 mil­lion on the project, an of­fi­cial state­ment said.

In 2014, Pence, who was still gov­er­nor at the time, an­nounced he would re­open talks with Fa­tima about the bond-funded fer­til­izer plant and said that he was hope­ful the state would be able to re­new its sup­port for the project.

But in Jan­uary 2015, the com­pany with­drew its re­quest for the state in­cen­tive pack­age and de­cided to de­vote its ef­forts to sup­port Posey County in se­cur­ing state fund­ing and county in­cen­tives, ac­cord­ing to of­fer­ing doc­u­ments.

On July 7, 2015, Posey County and the com­pany agreed to a re­vised tax in­cen­tives pack­age.

“The agree­ment ap­plies cer­tain tax in­cre­ment rev­enues and special as­sess­ments for the pro­ceeds of which will fund project costs,” an of­fi­cial state­ment said.

“A por­tion of the pro­ceeds … will fund project costs and a por­tion … will fi­nance the West­ern By­pass, a road planned around Mount Ver­non and near the project,” the OS said.

As of late 2015, the com­pany said in an of­fi­cial state­ment that it had spent $76.7 mil­lion to de­velop the project, not in­clud­ing ex­pected is­suance costs as­so­ci­ated with re­mar­ket­ing the bonds, and that it had ex­e­cuted agree­ments for ad­di­tional project ex­pen­di­tures to­tal­ing $280.4 mil­lion.

The IRS opened its au­dit of the bond fi­nanc­ings in Jan­uary of this year. It is­sued its No­tice of Pro­posed Is­sue stat­ing its pre­lim­i­nary find­ing that the bonds were tax­able less than six months later.

In an an­nual re­port dated Aug. 29, Mid­west Fer­til­izer said that on Aug. 2, 2016, the bonds be­came sub­ject to a manda­tory ten­der for pur­chase and were re­mar­keted for an ex­tended ini­tial pe­riod. The com­pany said that, fol­low­ing the re­mar­ket­ing, it pur­chased all of the bonds and in­tends to re­main sole owner.

The first bonds, is­sued by the In­di­ana Fi­nance Au­thor­ity, were un­der­writ­ten by Guggen­heim Se­cu­ri­ties, LLC. Ice Miller was bond coun­sel. Coun­sel for the is­suer was Be­nesch, Fried­lan­der, Co­plan & Aronoff. Un­der­writer’s coun­sel was Si­d­ley Austin. Coun­sel for the com­pany was Pills­bury Winthrop Shaw Pittman.

Cit­i­group joins Guggen­heim in later re­fund­ings. Barnes & Thorn­burg be­comes bond coun­sel and it is joined by Bal­lard Spahr as co-bond coun­sel in the last re­fund­ing. ◽

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