WASHINGTON – A California authority and a high school district said this week that they are prepared to file a protest and appeal of an expected Internal Revenue Service proposed adverse determination that $25.4 million of tax-exempt variable rate demand bonds are taxable.
The California Statewide Communities Development Authority and the Sweetwater Union High School District disclosed their plans in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system on Monday.
The IRS tax-exempt bond office asserted that the 2005 bonds are taxable private-activity bonds in a "Notice of Proposed Issue" it sent the authority in January of this year and in an earlier Information Document Request, according to the event notice.
"The authority and the district expect that TEB will issue a proposed adverse determination and close the examination," authority officials said in the event notice. "If TEB issues a proposed adverse determination, the authority and the district will respond by filing a protest, including a request for view of the [IRS] Office of Appeals."
Typically, cases handled by the appeals office involve disagreements between taxpayers and government entities, and result in out-of-court settlements, the IRS said on its website.
In an unusual conduit structure driven by concerns about state laws, the authority issued $25.4 million of tax-exempt variable rate demand revenue bonds and $8.2 million of taxable variable rate bonds in February 2005. It lent the proceeds to Plan Nine Partners, LLC, a subsidiary of California Trust for Public Schools, a nonprofit that helps expedite land acquisitions for public schools, according to group's Form 990 tax form.
The proceeds were then used to purchase a 23.82 acre parcel of industrial mixed-use land located at the corner of L Street and Industrial Boulevard in Chula Vista, Calif.
Plans were for Plan Nine Partners to lease the land to the Sweetwater school district, which wanted to build a new administrative headquarters, academic buildings and a bus yard on about 73% of it, according to the official statement.
About $120 million of additional bonds would be needed to finance the development of those projects, the OS said, adding, "There can be no assurance … that such additional bonds can or will be delivered."
It does not appear those bonds were issued, based on information filed with EMMA and other information repositories.
About 27% of the land was to be used for development and sale for private business use, the OS stated.
"It was always contemplated that the taxable debt would relate to some private use of the income generating facilities," Sweetwater said in the annual financial report filed in June 2013.
The land was to be held in the name of Plan Nine Partners until the bonds were paid off in 30 years and was to then be conveyed to Sweetwater in an exchange agreement, according to that report.
Under the lease agreement, the district would pay rent equal to the bond debt service to Plan Nine Partners. This event notice is the latest development in a nearly four-year long dispute between the IRS, the authority, and the school district.
The IRS first opened an audit in September 2013, and issued an information document request in October 2014. The authority and Sweetwater responded to the IDR in January 2015, arguing the tax-exempt bonds issued were not taxable. TEB filed a Notice of Proposed Issue on January 26 again asserting the bonds were taxable PABs.
Under the federal tax code, at least 95% of the proceeds of 501(c)(3) bonds must be used for "good" or non-private purposes.
According to the event notice, both the authority and Sweetwater requested a meeting with a TEB manager regarding the NOPI, but the conference was never held.
"The authority and the district still disagree with TEB's analysis and its conclusion," they said in the event notice.
Sweetwater Union High School District, headquartered in Chula Vista, operates 14 high schools and 11 middle schools in southwestern California between San Diego and the Mexico border. It serves roughly 42,000 students, according to the district's website.
Red Capital Markets, Inc. and Piper Jaffray & CO. underwrote the 2005 bonds, and Best Best & Krieger LLP was bond counsel.
Brad Waterman, counsel for the district in the audit, declined to comment.
