Jefferson County Faces IRS, Lay Offs & Bankruptcy

Jefferson County, Alabama has been battling bankruptcy for some three years because of $3.2 billion of debt it realized from its soured sewer system financing. It now faces having to lay off nearly 1,000 workers, or 40% of the 2,300 employees, in addition to an Internal Revenue Service (IRS) investigation into the tax free status of the sewer bonds that put the county on the brink of bankruptcy, according to Bloomberg and Dow Jones Newswires.

A finance committee meeting on Friday, June 10, 2011 will finalize the actual number of layoffs. County officials had hoped for assistance from the state legislators by passing a law giving Jefferson County the ability to raise its own revenue, however, they have only passed a resolution allowing the county to charge a business license tax, which would raise about $7 million a year.

The sewer bonds sale in 2003 were sold to investors as tax free bonds, meaning investors would not be required to pay taxes on the income generated from the periodic interest payments. The IRS has now began an investigation into the tax free status of the bonds known as the 2003 fixed rate warrants, auction rate warrants and variable demand warrants. Past IRS investigations of the tax free status of municipal bonds has centered around a concept called “yield burning”, which occurs when a municipality wants to refinance old debt at better interest rates, as Jefferson County did in 2003. The lead banks on the Jefferson County 2003 refunding bonds were JP Morgan Chase and Merrill Lynch. Attorneys who have been hired to provide opinions on the tax free status of the bonds have also come under scrutiny of the IRS, since the tax codes allows the agency to pursue legal remedies against “market participants” who cause issuers to make false representations to investors. To date, 21 defendants have been charged in the probe of the construction and financing of the Jefferson County sewer system, including the former mayor of Birmingham, Larry Langford. He was convicted of taking $240,000 in cash and gifts from a Montgomery investment banker, Bill Blount, who pleaded guilty to bribing Langford for a piece of the bond sale action. Langford got 15 years in prison.

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