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Puerto Rico, fiscal board seek court help for new Cofina bonds’ tax exemption

By on February 14, 2019

SAN JUAN – In connection with the consummation of the debt adjustment plan for the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), the government-owned corporation, the island’s Financial Oversight and Management Board and its Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), along with certain bondholders such as Ambac Assurance Corp., have filed a document in court, seeking a ruling or an agreement with the Internal Revenue Service, declaring the new Cofina bonds tax-exempt.

The “Tax Exemption Implementation Agreement” was filed in court Wednesday and provides that the parties “shall, among other things, continue to use reasonable best efforts to pursue a private letter ruling or other agreement with the Internal Revenue Service regarding the tax-exempt nature of the Exchange Bonds (as defined in the Tax Exemption Implementation Agreement).”

The tax exemption is defined as any bond whose interest is excluded from gross income for purposes of the federal income tax.

The restructuring of Cofina’s $17 billion debt, approved earlier this month, has two parts. In the first, commonwealth and Cofina bondholders settled their dispute over ownership of the sales & use tax (IVU by its Spanish acronym) by agreeing to divide the 5.5 percent portion of the 11.5 percent sales & use tax. From the 5.5 percent portion, Cofina will keep 53.6 percent and the commonwealth receives the rest. According to court documents, the split will result in the commonwealth receiving about $400 million a year from the sales & use tax over the next 40 years.

Secondly, under the debt plan, Cofina bondholders will exchange their current bonds for new bonds whose value is being cut. Cofina senior bondholders will recover 93 percent of the value of their original bonds and junior bondholders 53 percent.

Cofina said it filed a request in December for a private letter ruling or closing agreement with the IRS with respect to the new Cofina bonds, which began to be traded Feb. 12.

“Severely limited IRS operations during the recent federal government shutdown have hindered the IRS’s ability to make important determinations relating to the potential tax-exempt nature of certain of the Applicable Bonds…and such determinations may not be made prior to the Effective Date,” the agreement reads.

The agreement is slated to end Jan. 1, 2020, or if the IRS issues a ruling.

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