The Internal Revenue Service has sent a notice to the University of Rhode Island informing the school that two series of higher education facility revenue bonds issued in 2018 are now considered to be taxable hedge bonds due to alleged noncompliance with requirements of Section 149(g).
"A 149g violation means that the IRS is asserting that the bonds are hedge bonds because the university did not 'reasonably expect' to spend the money quickly enough," said Rich Moore, a tax partner at Orrick.
"This requirement is clearly based on reasonable expectations on the bond closing date as to the timing of expenditure of bond proceeds. It is not a requirement to actually spend bond proceeds within that time frame."
The IRS notes that the determination is not a final judgment, while the university acknowledges that "the notices make a preliminary finding that the bond proceeds were not expended within required timeframes." The school is currently evaluating how it will respond.
The bonds include Educational and General Revenue Issue Series 2018 A and Auxiliary Enterprise Revenue Series 2018 B which encompasses 23 CUSIP numbers.
The bonds were issued on behalf of the university by the Rhode Island Health and Educational Building Corporation, which was established in 1966. The RIHEBC has provided over $8.7 billion in financing and currently oversees $3.15 billion in outstanding bonds.
According to the school the bonds in question, "financed several infrastructure-related projects for the university, including the repaving of roadways and walkways, and upgrades to utility and fire alarm systems."
Section 149g disputes are often complicated by hindsight observations about expectations of when projects will be completed as opposed to actual construction schedules.
"The IRS attack is usually not that the issuer did not expect to spend the proceeds in a timely manner; it is that such expectations were not reasonable," said Moore.
"The university will likely argue that it did have the requisite expectations, and that such expectations were reasonable because of the diligence that the university did prior to bond issuance."
Moore notes that the infrastructure improvements were commissioned prior to the pandemic, which may have played a role.
Section 149g is a perennial starting point for IRS actions with many tax attorneys objecting to the subjective nature of the rules. Deciding the final outcome may come down to diligent bookkeeping or the lack thereof.
Per the university's statement, "URI takes seriously its obligations with respect to debt issuance and, in partnership with RIHEBC, has worked collaboratively with the IRS and has taken steps to strengthen internal compliance practices."
The future of audit frequency is becoming uncertain as the IRS began laying off an expected 6,000 employees in February in an effort to shrink the federal workforce.
The agency has also seen its $80 billion budget increase by way of the Inflation Reduction Act being whittled away with a $20 billion reduction during contentious debt ceiling negotiations in 2023 with another $20 billion locked up in the current budget freeze.
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