The Internal Revenue Service has temporarily revoked the tax-exempt status of Ham Lake, Minnesota-based charter school operator Parnassus Building Company, which could affect the status of some $27 million of debt if it isn't rectified.
Parnassus was notified of the IRS temporarily revoking of its 501(c)(3) status as the organization attempted to file its annual tax return.
“On or about March 6, 2022, when the borrower was attempting to file its form 990, the borrower was notified by the Internal Revenue Service that the borrower’s tax-exempt status had been temporarily revoked,” Parnassus said in a disclosure filed to EMMA this week.
This could indicate that the borrower hadn’t filed its Form 990 for some time, Matthias Edrich, tax partner at Kutak Rock said. Edrich said the IRS has had to warn charter schools in the past about maintaining up-to-date filings.
“There has been a history of charter schools especially forgetting to or missing their Form 990 filings and the IRS has reminded schools that they need to do their filings to continue to remain in compliance,” Edrich said.
Since the status of the borrower as a 501(c)(3) has been temporarily revoked, that could, if this status stays in place, lead to a change in the status of its $27.1 million Charter School Lease Revenue Bonds Series 2016A.
“Failure of the sole member and the corporation to continue to be recognized as tax-exempt organization under Section 501(c)(3) of the Code, may result in the loss of the tax exempt status of the interest on the Series 2016A bonds retroactive to the date of issuance of the Series 2016A bonds,” the Series 2016 bonds official statement said.
“If they lose it because of a procedural issue and they correct the procedural issue, you’d hope that there's a common sense result on the bond side,” said Rich Moore, tax partner at Orrick. “But in theory, the bonds become susceptible.”
So far, this is only an administrative notice and any result that would affect the status of the bonds would have to be disclosed separately, Edrich said.
But remedial action to restore its 501(c)(3) status is already underway.
“On March 28, 2022, borrower filed a 1023 seeking retroactive reinstatement of its tax-exempt status,” the disclosure said.
