U.S. government asks for extra time to object to COFINA deal

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The U.S. government, citing the government shutdown, asked the Title III bankruptcy court for more time to object to the Puerto Rico Sales Tax Financing Corp. (COFINA) plan of adjustment.

A U.S. Department of Justice attorney, on behalf of the Internal Revenue Service, filed the request late on Wednesday to extend the deadline indefinitely from 4 p.m. Atlantic Standard Time on Jan. 2.

U.S. municipal bankruptcy expert James Spiotto said the IRS may have an issue with the tax-exemption status of the restructured COFINA bonds.

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On Thursday, Title III Judge Laura Taylor Swain responded by extending the deadline just for the U.S. government to 4 p.m. on Jan. 4.

The IRS didn’t give reasons for its objection to the debt restructuring plan. The Justice Department explained its request for an extension by saying that federal spending for the Justice Department and IRS has lapsed.

“Absent an appropriation, Department of Justice attorneys and many employees of the Internal Revenue Service are prohibited from working, even on a voluntary basis, except in very limited circumstances.”

The Justice Department asked for a pause until funding was restored and its attorneys had a chance to create an objection. Swain said the extension for the U.S. government to object to Jan. 4 was “without prejudice to a further application for an extension.”

The Justice Department didn’t immediately respond to an inquiry as to the nature of the IRS objections to the COFINA plan of adjustment.

Swain currently plans to hold a hearing on the COFINA plan of adjustment on Jan. 16 and possibly Jan. 17.

At least three parties have filed objections to the plan of adjustment. There is $17.6 billion in outstanding COFINA debt, making it the biggest class of Puerto Rico public sector debt.

Chapman Strategic Advisors Managing Director James Spiotto said the IRS may have issues with the tax-exempt status of the new restructured bonds.

The Puerto Rico Oversight Board on Wednesday filed a motion in the Title III COFINA bankruptcy case asking for an extension of the “election of distribution” deadline. In it the board mentioned that the IRS has yet to provide an opinion about the tax exempt nature of the bonds. The board asked for the deadline to be extended to Jan. 11 from Jan. 8.

Spiotto, a leading expert on U.S. municipal bankruptcy, said that it is possible that the IRS will find the new restructured bonds to be taxable, even if the restructuring agreement advertises them as tax-exempt. In that case it would be wiser for investors to have elected to take the explicitly taxable COFINA bonds being offered, because they will offer a higher interest rate.

Because of this situation, it is better that the IRS be given the opportunity to offer its view of the deal before Swain approves the plan of adjustment, Spiotto said.

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