WASHINGTON - The Sierra Kings Health Care District in California has paid the U.S. Treasury $20,000 to settle tax issues and preserve the tax-exempt status of bonds it sold in 2007 and 2009.

The settlement, called a closing agreement, between the Internal Revenue Service and the district, was disclosed in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system.

The closing agreement cautions that the IRS never "formally asserted any claims against the issuer or sought to tax interest on the bonds."

However, the document states that the IRS could have charged the interest from bonds was taxable because the district's transfer of its hospital and equipment to Reedley Community Hospital caused the bonds to meet the private business tests of the tax code. The Reedley hospital is an Adventist Health, faith-based hospital.

Under Section 141 of the federal tax law, bonds are private-activity bonds if more than 10% of the proceeds are used by private parties and more than 10% of the debt service is either secured, or paid, by private parties. PABs are taxable unless they fall into certain "qualified" or tax-exempt categories.

Tax-exempt PABs can be used to finance projects for 501(c)(3) nonprofit organizations, including hospitals. However, the non-501(c)(3) and nongovernmental use of the net proceeds can't be greater than 5% under the private use and private payment tests.

The IRS said the district also failed to file, on a timely basis, Form 8038, the information return for tax-exempt private-activity bonds.

The closing agreement was signed by Sanford Haskins, the interim chief executive officer of the district, and Rebecca Harrigal, director of the IRS Office of Tax-Exempt Bonds.

The bonds were from a $16 million general obligation bond issue the district sold in 2007 and $4 million of GO bonds it sold in 2009.

The main asset of the district, located 30 miles from Fresno in Reedley, Calif., was a 44-bed hospital.

The district filed for bankruptcy under Chapter 9 of the federal bankruptcy code in October 2009, but its GO bonds were protected from that process.

The district had been losing money since at least 2006, according to its financial statements. To partially counter those losses, it had misapplied $1.7 million of its bond proceeds to operating expenses beginning in 2008, according to an event notice it fled on EMMA about the bankruptcy notice.

The district's plan of adjustment, which was approved in early 2012, called for the sale of the hospital.

Chapman and Cutler worked with the district in an effort to maintain the tax-exempt status of the bonds.

The bond proceeds were to have been used in part to upgrade facilities, purchase equipment, and improve heating, ventilation and cooling systems as well as a parking lot. They also were to have been used to expand and renovate hospital facilities.

Stone & Youngberg underwrote the 2007 bonds. Piper Jaffray and Southwest Securities underwrote the 2009 bonds. Quint & Thimmig in San Francisco was bond counsel as well as disclosure counsel on both transactions. G.L. Hicks Financial in Provo, Utah was financial advisor in both deals.

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