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IRS Auditing Capo for $37.5 Million Loan

The audit focuses on a bridge-financing loan taken out in 2009 to handle cash-flow issues at the Capistrano Unified School District.

The Internal Revenue Service is auditing the for a $37.5-million bridge-financing loan it took out in 2009.

The audit "is intended to assess the overall compliance risk of the bond issue,” the IRS wrote in a letter dated Sept. 22, according to Ron Lebs, the district's deputy superintendent of business services.

The review is considered a “correspondence audit,” meaning that the district only needs to provide responses to questions, Lebs said.

The district yearly borrows money using a financial vehicle called Tax and Revenue Anticipation Notes (or TRANs), to cover any cash-flow issues it may have. For example, for this school year, the district will take out two loans for a total of $75 million (see 11th slide of the PDF).

The cash-flow problems arise because the district receives most of its funding twice a year after property taxes are disbursed, Lebs has said. Also, in recent years, the state has promised funding in , and the district needs cash to tide itself over until the deferred monies are transferred to the district.

Like other years, in 2009, the district joined a pool of other cash-strapped school districts to get better financing terms. Called the South Coast Local Education Agencies Pooled TRAN Program 2009A, the other districts were , Brea Olinda Unified and Centralia Elementary School District in Buena Park, said Wendy Benkert, assistant superintendent of business services for the Orange County Department of Education.

To her knowledge, Capistrano Unified is the only district the IRS is targeting, she said.

Lebs said the district has had its bridge-financing vehicle audited in the recent past, though he wasn’t sure when.

IRS spokesman Raphael Tulino would not comment for this story. "The law provides we don't offer any information about a specific file," he said.

At its next meeting, the Board of Trustees will consider hiring a law firm that specializes in complex finance deals and tax law, Orrick, Herrington & Sutcliffe. The three Los Angeles-based lawyers who will represent the district will charge  $645 to $820 an hour, according to a report to trustees.

However, Lebs said despite the hefty fees, the matter should not take much time to resolve.

“Because the actual amount of work they are expected to perform is not that much, I believe the total estimated cost is approximately $5,000,” Lebs said.

Orrick was the firm that helped the pooled school districts issue the TRANs, “so they are the best and most knowledgeable to assist in this area of audit,” he said.

The board is set to meet 7 p.m. Monday at the district headquarters 33122 Valle Rd. in San Juan Capistrano.

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