Municipal bonds are part of many investors portfolios. They’re tax advantaged, as most municipal bonds are tax free. Of course, the issuing agency must follow some rules: the bonds must be for an essential government function.
The Cabazon Band of Mission Indians operates a very successful casino on Interstate 10 just east of Palm Springs, in Indio, California. They used municipal bonds to help fund a new hotel and a convention center.
And then the IRS stepped in. The IRS usually rubber-stamps the tax-exempt status of municipal bonds. However, the IRS has tentatively ruled that these bonds are, “private activity bonds because [the East Valley Transportation Authority] and the Cabazon Band of Mission Indians should not be treated as states where they have not issued their obligations for essential governmental functions.” Reuters has the full details here.
Unless the IRS and the Cabazon Indians can come to an agreement within thirty days, some investors may have a rude surprise. And this is the second time this issue has come up–back in 2005 the IRS notified the Cabazon Indians and California that they would be investigating this issue.