PROVIDENCE, R.I. -- On July 26, 2012, state government officials got what Revenue Director Rosemary Booth Gallogly calls the "most dreaded of letters'' from the Internal Revenue Service.
The notice of an IRS audit began with these words: "The IRS routinely examines municipal debt issuances to determine compliance with federal tax requirements.
"We have selected the debt issuance named above for examination.''
The audit centered on what the state did with the $197,005,742 in proceeds from the 2007 sale of bonds backed by Rhode Island's share of a settlement with the big tobacco companies of litigation initially launched by the attorneys general in 46 states to recover the costs of smoking-related illnesses.
On Tuesday, Gallogly delivered the good news to the state's Tobacco Settlement Financing Corporation: The IRS has closed out the audit with no adverse findings.
She made public an undated letter, stamped as received on July 15, from Allyson D. Belsome, "manager, field operations,'' for the tax-exempt bond arm of the IRS that said, in part:
"We have recently completed our examination ... As a result, we have made a determination that interest received by the beneficial owners of the bonds is excludable from gross income.''
Gallogly said the audit delved into what Rhode Island did with the money, and whether any of those uses jeopardized the tax-exempt status of the bonds.
She said there was no prohibition on using the money as "working capital'' for general state government operations, but there are restrictions, for example, on how much the state can earn from the investment of the borrowed money.
At Tuesday's meeting, state Budget Officer Thomas Mullaney was elected chairman of the ministerial entity that has overseen the sale and repayment of two tobacco settlement-backed bond issues in 2002 and 2007. He replaces Gallogly in that role.