WASHINGTON – The issuance of new bonds is a refunding, notwithstanding the technical termination of a partnership within six months, the Internal Revenue Service concluded in a recent private-letter ruling.
The favorable letter ruling was dated March 28 but was not made available to the public until late last week by the IRS chief counsel’s office. Timothy Jones, senior counsel, signed the letter, which did not identify the issuer, borrower, banks or third parties that were associated with the transactions and partnerships in the deal.
The issuer was a governmental agency who was authorized to issue bonds on behalf of a public benefit corporation for the purpose of providing low-income housing. The borrower was a limited-liability company formed for the purpose of constructing and developing a multifamily rental housing development.
Two banks owned an undisclosed percentage of the partnership while another company owned another undisclosed percentage of it. Third parties owned the remaining percentage of the capital and profits interest in the partnership.
The rental housing facility was financed by a mortgage loan from the issuer to the borrower. For federal tax purposes, the borrower is a disregarded entity and because of that, the principal is treated as the obligor on the bonds. Less than four months after the purchase date, the bonds were remarketed in a way that showed a reissuance occurred. The proceeds of the new bonds were used to pay the principal of the bonds.
Issuers may apply proposed regulations Treas. Reg 1.150-1(d) in whole, but not in part, to any issue that is sold on or after April 10, 2002 and before the applicability date of the final regulations, the IRS said. The issuer is applying the proposed regulations to the new bonds and at the time of the refunding the obligor of the bonds being refunded was the borrower/principal and the obligor of the new bonds was the borrower/principal, the IRS said in the letter.
“No change occurred at that time in the ownership of either principal or partnership,” the IRS said. “However, within six months of the refinancing a termination and transfer of assets and liabilities of partnership occurred. The partnership is treated as exchanging it’s percentage interest in principal resulting in a termination and transfer of assets and liabilities of principal.”
The IRS ruled that the new bonds are refunding bonds because the obligors of the bonds and the new bonds were the same on a certain date and the transfers of assets and liabilities of principal and partnership on another date were between related parties.
These proposed regulations are 11 years old and the IRS has never finalized them but you can still apply them in this situation, said Linda Schakel, partner with Ballard Spahr LLP. It was the borrower who was technically looking for this ruling because they were the one who owns the project and had the most financial stake, she said.
“It is just a technical application that says even though there were all these undisclosed percentage changes in the ruling, which makes it hard to provide a lot of information, whatever those changes were allowed the IRS to conclude that this was an exchange between related parties and it was a refunding,” Schakel said.
If the IRS had ruled it was a new issue, then the issuer would have had to start all over, get new volume cap and rehabilitate 15% of the project, she said.
“I think this ruling won’t be widely applied because it is so complicated,” said a bond lawyer who declined to be identified. “There are too many special facts and won’t open the way for similar transactions.”
The letter-ruling is only for the taxpayer who requested it and it may not be used or cited as precedent, the IRS wrote.
