WASHINGTON - The Massachusetts Development Finance Agency and the Wentworth Institute of Technology have entered into a settlement with the Internal Revenue Service to resolve tax issues relating to land located in Concord, Mass. that was acquired with tax-exempt bond proceeds.
The institution sold the land in 1998 without redeeming bonds or finding an alternative qualified use for the proceeds of the sale at the time.
The settlement, which was entered into on Nov. 6 and was made under the IRS' voluntary closing agreement program, was disclosed in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system on Wednesday.
The agreement preserves the tax-exempt status of series 2007A MDFA bonds that are in part a successor to the bonds that financed the land. The institution and the MDFA submitted a VCAP request to the IRS in February, and the following month the institution got the MDFA to redeem the 2007A bonds that were allocable to the land, the institution said in the event notice. A redemption notice said that $905,000 of the bonds were to be redeemed then.
In 1992, the institution financed the acquisition of the land and the construction of facilities with $5.25 million of proceeds from variable rate demand revenue bonds issued by the Massachusetts Health and Educational Facilities Authority, which merged into the MDFA in 2010. Those bonds were refinanced with the proceeds of bonds issued in 1993 by the authority, according to the event notice.
In 1997, the institution discontinued its educational programs at the facilities and leased the property to a for-profit entity. To remediate the lease, the institution paid down $3.75 million of the 1993 bonds that were allocated to the facilities. However, roughly $1 million of the bonds allocated to the land remained outstanding, the institution stated.
The institution sold the land in 1998, and it did not redeem any of the 1993 bonds right after the sale. The proceeds of the sale do not appear to have been used for an alternative qualified use of tax-exempt bond proceeds, according to the event notice.
In order for 501(c)(3) bonds to be tax exempt, no more than 5% of the proceeds can be used by private parties and no more than 5% of the debt service can be paid for or secured by private parties. Under Treasury Department regulations, bonds issued for 501(c)(3) organizations can lose their tax-exempt status if the issuer or borrower takes a deliberate action that causes the bonds to exceed the private business use tests. The tax-exempt status of the bonds can be preserved if the issuer takes a remedial action, such as redeeming or defeasing them within 90 days of the action or using the proceeds from the sale of bond-financed property in a way that does not cause the bonds to exceed the private business use tests.
The 1993 bonds were refinanced in 2003 with bonds issued by the MDFA, and the 2003 bonds were refinanced as part of the series 2007A, $50.16 million MDFA variable rate revenue bond issue.
The institution intended to refinance the 2007A bonds in 2013. As part of its tax due diligence ahead of the 2013 issue, the institution discovered the non-redemption of the 1993 bonds relating to the land and the apparent failure to use the proceeds from the sale of the land for an alternative qualifying use, according to an event notice filed last year. The institution intends to refinance the rest of the series 2007A bonds.
The event notice from last year stated that the institution will use its own funds for any VCAP resolution payment. The notice posted this week did not say if a payment was part of the settlement.
