IRS auditing entrepreneurial Texas jails that improperly used tax-exempt bonds

Finally, the IRS has begun to dig into shady Texas jail schemes where publicly backed bonds were used to enrich private companies, socializing risk while privatizing potential profits. Purchasers of those bonds may soon be on the hook for taxes on their earnings and counties could see their own bond ratings reduced. Turns out, the whole idea of filling entrepreneurial jails with federal inmates should never have qualified for issuance of tax-exempt bonds in the first place.

According to The Bond Buyer (Oct. 17, behind paywall, though you can sign up for a two week trial subscription), "Roughly $23 million of tax-exempt senior lien revenue bonds issued in 2003 to finance a jail may be taxable private activity bonds, an Internal Revenue Service agent has told the West Texas Detention Facility Corp." in Hudspeth County. And they're not the only one:

The jail bond deal is the latest of dozens under audit where the IRS has suggested that significant amounts of federal inmates paid for by the federal government and management contracts with private parties make the bonds taxable private-activity bonds.

Tax-exempt bonds are private-activity bonds if more than 10% of the proceeds are for private use and more than 10% of the payments for debt service are from private parties. Under federal tax laws and rules, the federal government is considered a nongovernmental or private entity. PABs are only tax-exempt if they are issued for a “qualified” purpose, and a jail is not one of these.

For example, in August (8/23), The Bond Buyer reported that:

Bond counsel Jackson Walker LLP, based in Houston, has tentatively agreed to pay $400,000 to settle a tax dispute between Crystal City Public Facility Corp. in Texas and the Internal Revenue Service over $13.94 million of revenue bonds issued to finance prison facilities. The bonds were issued in 2003, but have been under scrutiny by the IRS since 2010 and in default since last year when the U.S. Marshal withdrew inmates because misconduct and security problems, forcing the facilities to close in May 2012 for repairs and improvements.

Their liability would have been greater if they'd succeeded in getting enough federal inmates to pay the bills.

The IRS’ concerns were two-fold, according to bond-related documents. First the IRS took issue with the management contract the city had with BRG, under which the net profits were split between the two. The IRS argued this compensation structure suggested “an equity interest in the operation of the bond-financed facility,” creating a private use and payments problem.

In addition, the IRS claimed the prison had too many federal inmates. Federal inmates are considered private, not public, parties under the tax law. The IRS contended that the economics of the prison would not work without substantial federal, and therefore private, use and payments. The federal government tends to pay more for incarceration of its inmates that state or local governments.

The only reason the Crystal City jail wasn't dinged harder was that the federal inmates never materialized. If they had, "Normally that would cause a problem, but since the bonds are in default, bondholders have not been receiving any tax-exempt interest that the IRS could declare taxable."

Another facility in Burnet County did find federal inmates to fill their extra beds, but as a result may now lose the bonds' tax-exempt status, The Bond Buyer reported Aug. 8:

This week, U.S. Bank N.A. filed event notices for two separate issuers that financed jails saying the IRS had indicated the tax-exempt bonds or COPs were not tax-exempt. The bank was trustee for both sets of bonds.

One notice said the Burnet County, Tex., Public Facility Corp. has received four letters from the IRS, the first on Dec. 12, 2011 and the most recent on April 12 of this year, seeking information about $35.38 million of project revenue bonds that were issued in 2008 to build a jail.

The bank said that, in the most recent IRS letter, the issuer was asked to provide information “regarding a preliminary conclusion by the IRS that the ... bonds ... violate certain Internal Revenue Code rules that cause [them] to be taxable.” The notice said the issuer is cooperating with the IRS and that “it is unknown at this time what the outcome of the IRS examination will be.”

Bill Neve, president of the Burnet County Public Facility Corp., said the county built the 586-bed jail to hold county prisoners but provided for some extra space so it wouldn’t have to expand the jail during the next 20 years or so. The IRS is concerned about the number of federal prisoners in the jail, many of whom were housed for less than 100 days, he said.

The PAB rules contain an exception for short-term private use and define that to be less than 100 days. But Neve and other sources indicated that if the IRS thinks there is a significant number of federal inmates, it does not take that exemption into account.

In yet another instance down in Willacy County, The Bond Buyer reported Aug. 28th that the bond terms actually contemplated the possibility that the tax-exemption would be disallowed, showing they knew up front this was a dicey deal:

Bonds issued for Willacy County, Texas’s $7 million jail in the town of Raymondville are among several being audited by the Internal Revenue Service to determine whether its bonds should lose their tax exemption, according to County Judge John F. Gonzales.

Gonzales disclosed the audit at a meeting of the Willacy County Commissioners Court earlier this month, according to the Valley Morning Star of Harlingen.

The south Texas county, which has invested heavily in the prison industry, has a large stake in the tax-exempt status of the prisons. The county seat of Raymondville has earned the nickname “Prisonville” because of its heavy concentration of private lockups, most housing federal inmates on immigration violations.

Refinancing the $3 million of outstanding bonds as taxable would cost the county about $200,000, Gonzales said. The jail was built using 2004 bonds bearing 7.5% coupons on maturities of 2029 with yields of 7.75%, according to the Municipal Securities Rulemaking Board’s Emma Web site.

The original $7.65 million of unrated bonds were issued in the name of the County Jail Public Facility Corp. of Willacy County. ...

According to the official statement for the 2004 deal, interest rates would rise to 140% of the original issue rate if the deal were found to be taxable, or the issuer could redeem the tax-exempt bonds at a price equal to 105% of principal, plus accrued interest.

For barely populated Willacy County, it should be noted, $200K is real money.

The facility in Jones County that the Legislature refused to bail out last spring was another example of a failed "public-private partnership" whose bonds would lose their tax exemption if it were filled with federal inmates. The Bond Buyer reported May 2: 

The prison was pitched as an economic stimulus measure that would provide 200 jobs and annual economic impact of $5 million.  County commissioners promised county taxpayers that the for-profit prison would rely on lease payments from the state and never require local tax support. ...

The bonds used to build the prison carried junk ratings of BB from Standard & Poor’s.  Original coupons ranged from 7.25% to 9%. That rating fell to D when the default occurred. ...

The bonds were issued by the Midwest Public Facility Corp., a conduit issuer overseen by the county commissioners.  The bonds were issued as tax-exempt debt.  The issuer failed to make its $2.23 million interest and principal payment due on Oct. 1, 2011.

Meanwhile, The Bond Buyer reported Aug. 16, "Zapata County, Texas, may pay a settlement or refund bonds after an audit of $9.97 million of its debt by the Internal Revenue Service."

Lots of Texas counties have entered into these sorts of entrepreneurial jail deals and many of them have gone bust because federal inmates they counted on to pay the bills never materialized. These stories, though, show these were ill-considered and likely illegal schemes from the get-go - even if they "worked" and federal inmates were found to cover costs. Many Texas counties, like McLennan (Waco), already have had to raise taxes to cover costs for empty, never-should-have-been-built lockups. Now, it's clear their problems won't subside even if those much-touted federal inmates ever do arrive.

'Borderline Paranoia': Did visions of 'spillover' cause pointless border shooting?

Grits has argued repeatedly that, despite the raging cartel wars south of the Rio Grande, the concept of "spillover" violence into the United States fundamentally misunderstands what's happening at the border. Yes, there have been examples of drug loads dumped into the river following high-speed chases, and even one or two shootouts across the river as US law enforcement pursues escaping smugglers. But as a practical matter, the real "spillover" violence almost all happens in the other direction, with US gangs crossing the river into Mexcio to work as hit men in the cartel wars, murdering hundreds if not thousands in Juarez and elsewhere.

By contrast, towns on the US side of the border - particularly El Paso, sister city to the site of Mexico's worst cartel-related blood bath - ironically boast among the lowest crime rates in the state and are far safer places to live as a practical matter than, say, Houston or Dallas. That could just be because cartel leaders are smart enough not to s%*t where they sleep: According to Steve McCraw, head of DPS and formerly the Governor's top homeland security adviser, "command and control" of feuding Mexican gangs for the most part operates on the American side of the border.

At the Texas Observer, though, Melissa del Bosque describes another type of "spillover" that crime stats don't account for ("Borderline Paranoia," July 13): The spillover of irrational paranoia that's come to surround right-wing nativist thinking about immigration and border security. Her recent blog post opened:

It was an early morning in mid-May. Norberto Velez, 55, and his son Norangel, 32, were driving through ranchland in far West Texas. They were looking for a piece of property to buy near the U.S.-Mexico border in remote Hudspeth County.

The Velezes made a wrong turn onto a road  that apparently led to private land, and were met by an armed, 52-year old rancher named Joseph Denton who yelled, “Get down. Get down! I’m going to kill you!” Denton then quickly fired a rifle several times, Norangel Velez told El Paso’s KTSM-TV after the incident. “He never said freeze, he never gave us a warning, he never came out in front of us and say what we’re doing here, just boom, boom, boom,” Norangel said. Norangel was shot once. His father, Norberto, jumped on top of his son to absorb the brunt of the gunfire. The older man suffered three gunshot wounds.

The shooter has yet to publicly explain his actions, but the victim thinks they were mistaken for illegal immigrants, though "I’ve lived here all my life,” he told a local TV station. Del Bosque concludes:

The shooting comes amid growing panic in the area about “spillover violence.” Nearby El Paso was recently named the safest city of its size in the nation. Hudspeth County has seen only one murder in recent years. Yet Sheriff West has advised ranchers in the area to arm themselves in case of spillover from the drug war raging just across the border. “You farmers, I’m telling you right now: Arm yourselves,” he said during a crowded town hall meeting last year. “It’s better to be tried by 12 than carried by six, and I don’t want to see six people carrying you.” Denton may have just tested that frontier wisdom.

It's terribly sad and ironic that the main "spillover" violence seen in Texas so far results from Americans shooting Americans. And nobody seems to care about the real spillover violence from US citizens committing violence in Mexico. Stopping that should be the Number One US law enforcement priority from the local to federal levels, but giving preference to that strategy would run counter to the politically convenient if tactically simplistic "spillover" myth, which holds that we only need worry when the killing crosses the Rio Grande and that Mexican violence has nothing to do with Americans. As yet, nobody in officialdom seems willing to buck that false, counterproductive narrative. (Grits believes that providing more on-the-ground detail on the drug war would protect journalists, who are among the main American "spillover" targets to date, but that idea has yet to catch on.) Eventually politicians and their MSM enablers must move beyond culture war rhetoric and confront the grim, messy realities of border corruption and violence, at least if they want to do something about the problem instead of just grandstand and demagogue about it. Despite the massive deployment of security personnel along the border, it's not entirely clear to me that's the case.

Willie Nelson may still sing jailhouse blues in Hudspeth County pot bust

The New York Times this morning reports ("Case of Willie Nelson pot bust isn't extinguished yet"that the judge in Willie Nelson's pot possession case in Hudspeth County has refused to accept plea deals reached between the prosecution and Nelson's attorneys. The story opens:

The seemingly routine occurrence of Willie Nelson’s being found in possession of marijuana has stoked a small conflagration in a Texas county where a judge says she will not permit what she sees as the lenient punishment of this singer by an overly deferential prosecutor.

Judge Becky Dean-Walker of Hudspeth County said on Tuesday morning that she would not accept a mailed-in plea agreement for Mr. Nelson that stemmed from a 2010 drug arrest there and that she believed that the county attorney, Kit Bramblett, was giving the singer preferential treatment because he is famous.

“He’s supposed to file the charge he feels is appropriate,” Judge Dean-Walker said of Mr. Bramblett in a telephone interview. “Not what he feels he should do for his favorite singer. It is up to the judge to agree or not.”

Judge Dean-Walker added, “If you’re not going to do it for the guy in the corner, why do it for a celebrity?”

After detailing two plea deals reached by attorneys but rejected by the judge, the story concluded, “'At no point do I have to let him off,' the judge said. 'If Willie Nelson gets off with nothing, I’m not going to be part of it.'”

It's not so clear, though, that the judge herself wouldn't normally do exactly this for "the guy in the corner." She went on to say she'd actually, physically signed off on the deal before realizing Nelson was the defendant. "The judge said she had accidentally signed off on paperwork approving the latest deal for Mr. Nelson," reported the Times, "then crossed out her signature. 'I did sign it before I realized,' she said. 'I flipped it over and I said, ‘Oh, no.’”

It's not surprising she signed off on the deal before realizing she had a celebrity defendant. Very few Texas defendants convicted of low-level pot possession end up sentenced to jail time, so one wonders if, at this point, Nelson's case isn't being treated less favorably by the judge than normal because of his celebrity, in sort of a mirror image of the lenient stance she accuses the prosecutor of taking. Who knows? Certainly the Red Headed Stranger can afford the lawyers to flesh it all out. But I surely wonder what other sentences for comparable charges have issued from the same judge's court? I doubt many included jail stints.

See related Grits posts:

• We are all safer now: Willie Nelson busted for pot (in other news, sun still rises in east)
• DeGuerin: Willie Nelson pot bust an improper use of Border Patrol checkpoint
• Prosecutor wanted Willie to sing as part of pot plea

Prosecutor wanted Willie to sing as part of pot plea

I almost felt bad about cracking jokes after Willie Nelson's marijuana bust in Hudspeth County last year, but it turns out the prosecutor in the case is the biggest joke of all. Sentencing Law & Policy points to a story from Fox News declaring:

The prosecutor in Willie Nelson's marijuana possession case said the country music legend could get off with just a fine if he agrees to sing one of his songs in court, TMZ reported Monday.

Nelson, 77, was busted at a border patrol checkpoint in Sierra Blanca, Texas, en route to Austin on November 25 last year.  He was arrested but released when he posted $2,500 bond at Hudspeth County Jail.

The prosecutor in the case said he was willing to let Nelson off with a $100 fine if Nelson performed his song "Blue Eyes Smiling in the Rain" in the courtroom, TMZ said.  The prosecutor reportedly said the song would count as Nelson's community service.

If Nelson chooses not to accept the prosecutor's offer, he could face a maximum of 180 days in jail and a $2,000 fine if convicted when he appears in court, at a date yet to be decided.

The judge said that's not happening and later characterized the offer as a "joke," but Nelson deserves a mistrial and dismissal of charges over that sort of garbage. I don't often agree with SL&P commenter Bill Otis, but he was spot on when he declared, "I have no idea if the prosecution is frivolous, but I'm sure the prosecutor is." Community service, indeed!

If the prosecutor wants to haul Nelson into court more for his celebrity than his offense, indeed, apparently simply for his own enjoyment, it wouldn't surprise me if the same was true of officers who busted him in the first place. Thanks in part to wasteful border security grants, the Sheriff's department in Hudspeth County has 17 deputies who handled just 24 index crimes in 2009, the Texas Tribune reported in December, so I'm sure this was the most interesting thing to happen on their beat in many a year.

The funniest thing to me about all this is that the prosecutor got the song wrong! Willie's famous tune isn't "Blue Eyes Smiling in the Rain," but "Blue Eyes Crying in the Rain," thus completing the picture of an ignorant, star-eyed hick who was just happy to be in the same courtroom as the Red-Headed Stranger. What an embarrassment: Thanks, Mr. Prosecutor, for reinforcing every jerkwad stereotype about Texans and Texas Justice held by the rest of the country. (The story has Doug Berman at SL&P soliciting Texan jokes.)

It could have been worse, I suppose. He could have asked for "Georgia on My Behind."

DeGuerin: Willie Nelson pot bust an improper use of Border Patrol checkpoint

The other day I mentioned Willie Nelson was arrested for marijuana possession at a Border Patrol checkpoint in Hudspeth County. Now Jordan Smith at the Austin Chronicle reports that:

famed Texas defense attorney Dick DeGuerin – who just lost a bid to have former U.S. Rep. Tom DeLay acquitted of money laundering – told Rolling Stone that he believes Nelson should challenge the propriety of the stop: The Sierra Blanca stop is meant to check for illegal immigrants, not just as a random check of everyone: "It's supposed to be a checkpoint only for aliens, and [agents] overstep their authority all the time," he told the magazine. "I've had several cases from that checkpoint and they just use the opportunity to check out anybody they want to. If you have long hair, if you're driving a van or it looks like you're from California or you look like a hippie, they do profiling." And that, as we all know, isn't exactly legal.

DeGuerin's got a great point. In City of Indianapolis v. Edmond, SCOTUS held that checkpoints near the border for immigration enforcement are allowable but not if their "primary purpose was to detect evidence of ordinary criminal wrongdoing." Nelson's bus was driving east from California, not north from Mexico. And it's pretty certain nobody confused the Red Headed Stranger or his entourage for Mexican immigrants. Perhaps DeGuerin's right the propriety of the search deserves to be challenged. Notes Smith: "The question, of course, is why did they search the bus in the first place – because Nelson had done something wrong? At this point that isn't entirely clear."

RELATED: The Texas Tribune has a telling story on the Hudspeth County Sheriff's Office, which employs 17 deputies in a county that reported just 24 total crimes in 2009.

We Are All Safer Now: Willie Nelson busted for pot (in other news, sun rises in east)

From KVIA-TV: "According to Hudspeth County Sheriff Arvin West, Nelson was traveling in his tour bus from California to Austin when Nelson was detained by Border Patrol agents at about 9 a.m. Friday. Hudspeth County Sheriff's deputies arrived at the checkpoint and then booked Nelson into the Hudspeth County Jail on a $2,500 bond."

Don't you feel safer knowing that Border Patrol checkpoints are catching septuagenarian music stars with pot? I'd like to meet the genius investigator who figured out there might be marijuana in Willie Nelson's tour bus. Perhaps he thinks this will teach Shotgun Willie a lesson and henceforth he'll abstain?

Drug cartels are all but running parts of Mexico, while large quantities of drugs continue to successfully make their way north, with guns flowing south. None of these checkpoints, unmanned drones or other over-hyped tactics seem to make a dent in that problem, but at least they caught Willie, making him wait a few hours, perhaps crooning "In the Jailhouse Now," before posting bond and heading on his way.

So which of his songs do you think Willie was singing after he left the Hudspeth County Jail? A few offhand guesses: "Smoke! Smoke! Smoke! (That Cigarette)"? "I'm a Worried Man"? "No Alibi"? "Nobody's Fault But Mine"? "Last Thing I Needed First Thing This Morning"? "Nothing I Can Do About It Now"? Or maybe just, "On the Road Again"?

Willie seems like a laid back guy and I'm sure he doesn't hold a grudge. When he got back to Austin, I've little doubt he took his own advice from his funny (if mildly heretical) marijuana themed Christmas tune on a 2008 Stephen Colbert special:

And the Wise Men started tokin'
And Yea, the bud was kind
It was salvation they were smokin'
And His forgiveness blew their minds ...

Sleep well tonight, Texans. The Red-Headed Stranger has been apprehended and will be sternly dealt with. We are all safer now.