• The San Juan Daily Star

IRS opposes debt adjustment plan in dispute over interest on ‘post-petition’ tax claims

The U.S. Internal Revenue Service has filed a reservation of rights and limited objection to the confirmation of Puerto Rico’s debt adjustment plan.

By The Star Staff

The U.S. Internal Revenue Service has objected to the seventh amended debt adjustment plan that would restructure some $35 billion in Puerto Rico central government debt because of a dispute over interest on tax claims.

The IRS on Tuesday filed a reservation of rights and limited objection to the confirmation of the Commonwealth of Puerto Rico’s plan of adjustment after the entity’s counsel raised various objections to the plan with counsel for the Financial Oversight and Management Board (FOMB), most of which were resolved.

“The FOMB has not agreed, however, to provide interest on any post-petition tax claims of the IRS,” the IRS said. “Such claims are entitled to interest under existing circuit court precedent.”

Accordingly, the IRS said the court should not confirm the commonwealth’s plan of adjustment unless it expressly provides that administrative tax claims are to be paid with interest and that any such interest will be paid as an administrative expense, which means it will have a priority in payment.

The legislation to enable the debt deal is still pending legislative approval. On Tuesday, the island Senate appointed the members that will participate in a conference committee with House representatives to try to create a single version of the bill after the House did not concur with Senate amendments to House Bill 1003.

The Teachers Association filed an objection to the plan because, they said, the debt deal adversely affects the benefits of teachers who will retire in the future because their defined benefit plan will be eliminated. The group noted that a Supreme Court ruling makes crystal clear that the Puerto Rico Constitution precludes modification or reduction of teachers’ pension benefits in such circumstances.

“The FOMB makes no attempt in the Proposed Plan or Disclosure Statement to describe how PROMESA [the Puerto Rico Oversight, Management and Economic Stability Act] permits it to impose the freeze without violating the Puerto Rico Constitution,” the Teachers Association said. “Rather, the Oversight Board states in conclusory fashion that any laws that may be in effect would be preempted as necessary to impose the Freeze. But PROMESA would not preempt Puerto Rico law protecting teachers’ pension rights.”

Similarly, the University of Puerto Rico Retirement System also called for a rejection of the plan because it treats pensions as unsecured credits, which will lead to cuts.

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