WASHINGTON — A New Hampshire issuer is moving toward appealing, and asking the IRS's tax-exempt bond office to revisit, its conclusion that $720 million of student-loan bonds are taxable.

The case, which involves the New Hampshire Health and Education Facilities Authority, is likely to be closely watched by student loan bond issuers that reallocated loans to bonds other than the ones that financed them and have not settled alleged tax law violations with the Internal Revenue Service, said Tom Vander Molen, a tax partner at Dorsey & Whitney in Minneapolis who is not involved in the audit.

The IRS' proposed adverse determination was issued Dec. 18, before the authority's Dec. 26 deadline to respond to the IRS' notices of proposed issue, or NOPIs, suggesting that there were tax-law violations. The most recent development was disclosed in an event notice filed on the Municipal Securities Rulemaking Board's EMMA system.

The bonds that were audited were from 11 of the authority's bond issues, sold from 1998 to 2011, including two that were issued under the authority's old name, the New Hampshire Higher Educational and Health Facilities Authority. The bonds were issued for the conduit borrower, the New Hampshire Higher Education Loan Corp., which used sales proceeds to acquire student loans, according to the event notice. Most of the bonds were redeemed before 2012.

The IRS audit began after the authority became the first issuer to withdraw from its special voluntary closing agreement program for student-loan bonds. The IRS has been concerned some student-loan bond issuers have been engaged in so- called loan-swapping, allocating student loans to bonds other than the ones used to finance them. That could make the bonds taxable arbitrage bonds.

The IRS announced the VCAP for student-loan bond issuers in 2012. The New Hampshire authority submitted a request to the IRS for a closing agreement under. But the issuer, the conduit borrower and the IRS were ultimately unable to negotiate an agreement because the IRS wanted the authority to admit that the corporation ran afoul of requirements. The authority withdrew its request for a closing agreement on June 27, 2013.

On Nov. 26, the IRS' tax-exempt bond office issued the NOPIs that said it believed the bonds were not tax-exempt and that the authority could request an informal conference with an IRS supervisor to discuss the case. The deadline to respond was Dec. 26.

In a letter dated Dec. 20, the issuer's representative requested a conference. However, it turns out that two days earlier, the TEB office had issued the proposed adverse determination concluding the bonds were taxable, according to the event notice.

In its proposed adverse determination, the IRS said that "following the issuance of the [NOPIs], the issuer's representative notified the service that no written response would be provided on behalf of the issuer." But the event notice said the IRS' contention was "incorrect."

The conduit borrower continues to believe it complied with tax law, and as a result, the authority plans to request an appeal of the IRS' finding. Additionally, it will renew its request for a conference with a TEB supervisor and will ask the bond office to reopen the examinations. If the authority and TEB can reach a settlement, the appeal will not be necessary, according to the event notice.

The conduit borrower previously set aside an amount that it believed was sufficient to fund a settlement under the VCAP, and TEB subsequently requested an amount that was about equal to what the borrower had reserved.

The borrower said in the event notice that it will continue to reserve same amount of money because it "does not believe that its exposure in the examinations exceeds the amount which it previously reserved."

Naomi Jagoda is a reporter for The Bond Buyer.