IRS Asserts that California Issuer's Bonds Are Taxable PABs

WASHINGTON — The Internal Revenue Service is asserting that $25.42 million of bonds issued by the California Statewide Communities Development Authority in 2005 are taxable private-activity bonds.

The audit of the bonds, which were issued for the benefit of the Sweetwater Union High School District, was disclosed in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system on Friday.

The authority issued the tax-exempt variable rate demand revenue bonds under audit and $8.24 million of taxable variable rate bonds in 2005. The authority loaned the proceeds to Plan Nine Partners, LLC. That entity used the proceeds and other funds to purchase property in Chula Vista, Calif., and to defray the cost of issuing the bonds. Plan Nine Partners then leased the property to the Sweetwater Union High School District, according to the event notice and the official statement for the bonds.

The IRS began auditing the tax-exempt bonds in September 2013 and said at the time that the agency routinely audits municipal debt issuances. In October 2014, the IRS issued an information document request in which it asserted that the bonds are taxable PABs, according to the event notice.

In January, the authority and the school district responded to the IRS, saying that they disagree with the agency's analysis and conclusion, the event notice stated.

The event notice didn't explain why the IRS thinks the bonds are taxable PABs. Under federal tax law, bonds are PABs if more than 10% of the proceeds are used by private parties and more than 10% of the debt service is paid by or secured from private parties.

The property acquired by Plan Nine Partners was a 23.82 acre site on L Street in Chula Vista. Most of the property was to be used by the school district for administrative buildings, an adult education center and a corporate yard, according to the official statement.

Initially, unused portions of the property would be developed by others and sold to the developers to pay off the lease for the site. Also, several others of the district's properties were initially expected to be used as an exchange for the ultimate purchase of the L Street property. Those other properties were also expected to be developed and sold to generate funds to pay off the lease. The bonds were expected to be retired quickly within a few years with sale proceeds, according to an August 2014 letter to the Sweetwater community from the district's interim superintendent at the time.

But the plan created in 2005 was based on assumptions made by former consultants and legal teams that did not happen, the letter stated. Bonds remain outstanding and the "exchange properties" weren't sold.

The consultants believed that the properties to be exchanged could be sold with appreciation over a short period of time, but a downturn in the real estate market has led the real-estate assets involved in the plan to have depreciated in value since 2005. Also the school district expected to have access to funds from the City of Chula Vista Redevelopment Agency. However, those funds never materialized, and in 2012, the California state legislature enacted laws to dissolve redevelopment agencies, according to the letter.

The loan made to Plan Nine Partners by the authority and the lease of the property by Plan Nine Partners to the district remain in effect, according to the event notice. There are district department offices on L Street, according to the letter.

Red Capital Markets, Inc. and Piper Jaffray & Co. were the underwriters of the bonds, and Best Best & Krieger LLP was bond counsel, according to the official statement.

Brad Waterman, counsel for the district in the audit, declined to comment.

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