• IRS Provides Education Resources on Sale of Assets Financed with Tax-Exempt Bonds
  • October 30, 2012 | Authors: Harold Altscher; Henryka W. Gryc Craig; John R. Devine
  • Law Firm: Miles & Stockbridge P.C. - Baltimore Office
  • The Tax-Exempt Bonds office (the “TEB”) of the Internal Revenue Service (the “IRS”) recently posted on its web site an education resource entitled “Sale of Assets Financed with Tax-Exempt Bonds by State and Local Governments and 501(c)(3) Organizations” (the “Educational Posting”). The Educational Posting was issued as a part of TEB’s educational services and outreach program designed to increase understanding and compliance with tax law applicable to tax-exempt bonds and, as indicated by the TEB, is not intended to be cited as an authoritative source.

    The Educational Posting discusses tax consequences of sales of assets financed with tax-exempt bonds to private nonqualifying parties and remedial actions that should be taken to ensure that such sales do not cause the interest on the bonds to become taxable. As a general rule, a sale of property financed with tax-exempt bonds to a private nonqualifying party will not affect the tax-exemption of the bonds if the issuer does not reasonably anticipate, on the date of the issue, to sell the financed facility to a private nonqualifying party and the proceeds of such sale are applied either to redeem the bonds or to provide an alternative qualifying use. Certain arbitrage restrictions pertaining to yield and notice to the IRS apply to such sale. The Educational Posting provides specific examples of the application of these regulatory requirements to various scenarios in which assets financed with tax-exempt bonds are sold to nonqualifying users.

    The municipal bonds community has struggled with an example described in the Educational Posting dealing with an application of sale proceeds for an alternative qualifying use. The example involves a $10 million facility financed with a $4 million equity contribution from a conduit borrower and proceeds of a $6 million tax-exempt bond issue (the entire principal amount of which remains outstanding for the purpose of TEB’s example). The conduit borrower eventually sells the facility for $12 million. The Educational Posting provides that, if the conduit borrower wanted to utilize the alternative qualifying use remedial option to ensure that the tax-exemption is maintained (instead of applying $6 million of the sale proceeds to the redemption of the $6 million of bonds), the borrower would have to use all (rather than a pro-rata portion) of the $12 million disposition proceeds for the alternative qualifying use. The municipal bonds community awaits further guidance from the IRS on this issue.