IRS audits Calif. city bond issuance

VERNON, Calif., Aug. 29 (UPI) -- The Internal Revenue Service says it's auditing a bond issue by Vernon, Calif., in the third major investigation of the troubled community in the past year.

City officials said they were notified this month by the IRS that it had obtained information about the $490 million tax-exempt bond issue that "causes a concern that the debt issuance may fail one or more provisions" of the Internal Revenue Code, the Los Angeles Times reported Sunday.

Vernon already faces possible disincorporation by the state Legislature after a series of scandals that saw three top officials convicted of corruption in recent years.

Legal experts said the IRS investigation probably centers on whether the city's bond issue violated restrictions on tax-exempt debt, and if the bonds are deemed taxable then Vernon could face millions of dollars in unpaid taxes.

Despite its small population of only about 100, Vernon's government has an operating budget of more than $300 million, most of its revenue coming from its Light & Power Department, which sells electricity to about 1,800 companies in Los Angeles.

From 2003 to 2009 Vernon issued more than $1 billion in bonds to finance the construction of a power plant but suffered significant losses on the deal and has since sold the powerplant to a private company.

Vernon officials said they are cooperating with the audit and deny any violations.

"There's no reason to think there's anything wrong with the deal," Larry Sobel, an attorney representing Vernon in the audit, said. "My own guess is that once the IRS looks at it, they're going to say it was a pretty standard refunding."