The Internal Revenue Service has notified the Montana Facility Finance Authority that it has closed its audit of $14.15 million of variable-rate demand revenue bonds issued in 2002 without any change to the bonds’ tax-exempt status.
The authority and its conduit borrower, Missions United Inc. — a nonprofit organization that used the bond proceeds to expand the Mission Ridge continuing-care retirement community in Billings — disclosed the IRS’ Feb. 22 letter about the audit in an event notice they filed Monday with the Municipal Securities Rulemaking Board’s EMMA system.
The IRS closed the audit after its chief counsel’s office issued guidance siding with the finance authority and Missions United in a four-year old dispute over whether the bonds for the CCRC were taxable.
An IRS agent had claimed that thousands of dollars of nonrefundable entrance fees, collected by the retirement-home operator from new residents, were “replacement proceeds” for the bond proceeds that had to be invested at a yield below the bond yield.
Under Treasury Department rules, for entrance fees or any other money to be considered replacement proceeds, there has to be a nexus between the money and the bonds. In addition, the bondholders have to have a reasonable assurance that the money will be available if the borrower experiences financial trouble.
The IRS began auditing the bonds in March 2007, eventually issuing a “proposed adverse determination” that the bonds were taxable because the entrance fees were replacement proceeds and had been invested at a yield above the bond yield.
In March 2009, the authority filed a protest and requested that the IRS’ office of appeals review the finding. In April 2010, the IRS’ tax-exempt bond office requested technical advice from the agency’s office of chief counsel.
On Jan. 19, the office of chief counsel issued a technical advice memorandum concluding the entrance fees were not replacement proceeds.
The TAM said that even though there was a nexus between the fees and bonds, because the fees were pledged with other revenues to pay debt service if the borrower suffered financial difficulties, there was no reasonable assurance the fees would be available for that purpose.
Missions United had commingled revenues in its accounts and was not limited in how it could spend the money, the TAM noted. At the end of the year, the borrower’s investment balance equaled only half the fees it had collected.