Issue

We have talked with several Christian colleges recently who are looking into utilizing tax-exempt bond financing to build additional facilities. This can be a positive endeavor – not to mention a worthy revenue enhancement opportunity (REO) – but care must be taken to “get it right”. In this first of a multi-part series, we begin to look at this highly technical arena.

Situation

Saltwater Christian College (SCC), a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii), is contemplating a deal whereby they would become a conduit borrower of “qualified 501(c)(3) bonds”. SCC plans to use the bond proceeds to build a new “student community center” which will also be financed with donor contributions. They call to ask us what advice we would give them in this arena.

We have a multi-faceted answer to that question, but begin by emphasizing the importance of “post-issuance compliance”.

Rules

From IRS Publication 4077, Tax Exempt Bonds for 501(c)(3) Charitable Organizations:

State and local governments receive direct and indirect tax benefits under the Code that lower borrowing costs on their valid debt obligations. Because interest paid to bondholders on these obligations is not includable in their gross income for federal income tax purposes, bondholders are willing to accept a lower interest rate than they would accept if the interest was taxable.

These benefits apply to many different types of municipal debt financing arrangements including bonds, notes, loans, lease purchase contracts, lines of credit and commercial paper (collectively referred to as “bonds” in this Publication).

This Publication also addresses practices and steps an issuer or 501(c)(3) organization can take to protect the tax-exempt status of qualified 501(c)(3) bonds. For example, because requirements and limitations generally apply at the time the bonds are issued and throughout the term of the bonds, this Publication encourages issuers and beneficiaries of tax-exempt bonds to create procedures for monitoring compliance throughout the life of the bonds.

Steps to Better Monitoring of Qualified 501(c)(3) Bonds. In formulating procedures, issuers and 501(c)(3) organizations may consider:

  • Designating one or more officials to assist in post-issuance compliance, including completion of Schedule K (Form 990);
  • Providing training or other technical support to designated official(s);
  • Designating time intervals within which compliance monitoring activities will be completed; and
  • Timely completing remedial actions (including requests under TEB’s Voluntary Closing Agreement Program) to correct or otherwise resolve identified noncompliance.

Bottom Line

Financing using tax-exempt bonds might be a great option for your institution – but the stakes are high. Always ensure that you are getting counsel from a knowledgeable, enthusiastic advocate. He or she will be able to help you develop a set of post-issuance compliance procedures that will ensure that your school is operating within IRS rules.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.