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Bayville makes pre-emptive offer to pay IRS

Bayville Village Hall at 34 School St. on

Bayville Village Hall at 34 School St. on July 10, 2013. Credit: Tara Conry

The Village of Bayville has proposed paying the Internal Revenue Service to resolve an apparent violation of laws regarding tax-exempt bonds issued 15 years ago.

Village officials disclosed last week that they were seeking to enter the IRS' Voluntary Closing Agreement Program, which provides a procedure to address compliance problems.

Mayor Douglas G. Watson said the village's bond counsel, Norton Rose Fulbright LLP, discovered the issue when it was hired to prepare a refinancing of Bayville's outstanding bonds at lower interest rates to save money. The bond counsel, which has offices in Manhattan, told him the firm first needed to resolve an issue with the older bonds because "the way it was done wasn't done 100 percent kosher," Watson said.

The village sold $3 million in bonds in 1999 for various purposes, including about $2.2 million to acquire private property, according to bond documents.

The village used part of the proceeds to buy a gas station at Ludlam and Bayville avenues that was considered an eyesore. It was demolished and turned into a public space and parking lot. The village also purchased land for drainage and a marina.

Some of the funds were used to improve property that is leased to private businesses, which could imperil the bonds' tax-exempt status, according to Watson and the disclosure. IRS rules determine what uses qualify for tax-exempt status. The tax exemption allows governments to borrow at lower interest rates.

Watson, who was a trustee at the time, said the village had acted in good faith.

"There was no malice or any bad thought on anyone's part," Watson said. "It was done with professional counsel."

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