RE: ARBITRAGE REBATE OPINION REQUEST
ATTORNEY GENERAL LOVING HAS REQUESTED THAT I RESPOND TO YOUR LETTER WHEREIN YOU REQUEST THAT THIS OFFICE MAKE A DETERMINATION AS TO WHETHER THE OKLAHOMA CITY PUBLIC SCHOOLS MAY LAWFULLY PAY AN ARBITRAGE REBATE IMPOSED BY THE INTERNAL REVENUE SERVICE.
AS WE HAVE DISCUSSED, THIS OFFICE IS EXTREMELY RELUCTANT TO ISSUE ANY OPINION IN RESPONSE TO YOUR QUESTION, AS THE MATTER BETWEEN THE SCHOOL DISTRICT AND THE IRS IS, FOR ALL INTENTS AND PURPOSES, AN ADVERSARIAL ONE IN WHICH THIS OFFICE HAS NO ROLE AS LEGAL COUNSEL. AS HAS BEEN THE POLICY OF MANY PAST ADMINISTRATIONS, THE ATTORNEY GENERAL FEELS THAT IT IS INAPPROPRIATE FOR THIS OFFICE TO ISSUE A LEGAL OPINION WHICH RELATES TO WHAT IS, ESSENTIALLY, A MATTER IN LITIGATION. NEVERTHELESS, AFTER OUR MEETING WITH YOU AND A REPRESENTATIVE OF THE DISTRICT, IN WHICH THAT REPRESENTATIVE STRONGLY URGED THE ATTORNEY GENERAL TO ASSIST THE DISTRICT IN RESOLVING THIS LEGAL ISSUE, THE ATTORNEY GENERAL DID AGREE TO ISSUE THIS INFORMAL RESPONSE.
MOREOVER, YOUR QUESTION MAY BE ANSWERED BY REFERENCE TO CONTROLLING STATUTES AND CASE LAW. THEREFORE, THE ISSUANCE OF A FORMAL OPINION OF THE ATTORNEY GENERAL IS NOT NECESSARY. THE DISCUSSION THAT FOLLOWS IS NOT, THEREFORE, AN OFFICIAL OPINION OF THE ATTORNEY GENERAL; IT REPRESENTS, RATHER, THE ANALYSIS AND CONCLUSIONS OF THE UNDERSIGNED ASSISTANT ATTORNEY GENERAL.
IT IS MY UNDERSTANDING THAT THE INTERNAL REVENUE SERVICE HAS TAKEN THE POSITION THAT CERTAIN CERTIFICATES OF INDEBTEDNESS ISSUED BY THE OKLAHOMA CITY PUBLIC SCHOOLS WERE, IN FACT, ARBITRAGE BONDS AND HAS ASSESSED A REBATE. TO DATE, THE SCHOOL DISTRICT, ACTING ON ADVICE OF COUNSEL, HAS REFUSED TO PAY.
IN MY OPINION, THE DISTRICT HAS LEGAL AUTHORITY TO PAY THE REBATE SHOULD IT SO CHOOSE. IT IS MY UNDERSTANDING FROM DISCUSSION OF THIS MATTER WITH THE DISTRICT'S ASSISTANT LEGAL COUNSEL THAT IT IS THE DISTRICT'S POSITION THAT ARTICLE X, SECTIONS 14 AND ARTICLE X, SECTION 19 OF THE OKLAHOMA CONSTITUTION PROHIBIT A SCHOOL DISTRICT FROM MAKING A VOLUNTARY PAYMENT WITHOUT CONSIDERATION AND THAT PAYMENT OF THE REBATE WOULD BE A VOLUNTARY PAYMENT. TWO REASONS WERE CITED. FIRST, THE REBATE IS NOT OWED BY THE DISTRICT BECAUSE ASSESSMENT OF ARBITRAGE REBATE IS NOT A TAX OBLIGATION OF THE DISTRICT. SECOND, PAYMENT OF THE REBATE IS FOR THE BENEFIT OF THE BONDHOLDERS AND THE UNITED STATES BUT NOT FOR THE BENEFIT OF THE SCHOOL DISTRICT AND THEREFORE IS NOT FOR AN AUTHORIZED PUBLIC PURPOSE.
OKLAHOMA LAW ALLOWS SCHOOL DISTRICTS TO ISSUE CERTIFICATES OF INDEBTEDNESS AS PART OF A CASH MANAGEMENT PROGRAM. 70 O.S. 5-136.1 (1991). THE CONCEPT IS THAT DISTRICTS WILL USE CERTIFICATE PROCEEDS TO PAY CURRENT EXPENSES PENDING RECEIPT OF AD VALOREM AND/OR OTHER TAX REVENUES. FOR FEDERAL TAX PURPOSES, SCHOOL DISTRICT CERTIFICATES OF INDEBTEDNESS ARE BONDS AND INTEREST ON THEM IS GENERALLY EXCLUDED FROM THE PURCHASERS' GROSS INCOME. 26 U.S.C.A. 103(A). THE TAX EXEMPT FEATURE ALLOWS THE ISSUER, IN THIS CASE A SCHOOL DISTRICT, TO MARKET THE CERTIFICATES AT AN INTEREST RATE LOWER THAN THAT APPLICABLE TO TAXABLE