IRS Concerns Trigger Audit of Bonds for Charter School Project in Philly

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WASHINGTON — The Internal Revenue Service has told a Philadelphia authority that it is conducting a targeted audit of bonds issued in 2005 for a charter school project because of information about potential tax law violations that the IRS received or developed.

The IRS informed the Philadelphia Authority for Industrial Development of the audit recently, according to an event notice posted Wednesday on the Municipal Securities Rulemaking Board's EMMA system.

The authority issued $10.7 million of bonds — of which $10.51 million were tax-exempt and $195,000 taxable — that were to be used by the LLPCS Foundation to finance the acquisition of a building and construction of another building for a charter school in Philadelphia. The foundation subleases the buildings to the Walter D. Palmer Leadership Learning Partners Charter School, according to bond documents.

All of the taxable bonds have since matured, according to the official statement.

The event notice did not say what the IRS' concerns were specifically. Alan Wohlstetter, an attorney at Fox Rothschild LLP and special counsel to the foundation for the audit said the IRS' questions have related to the tax-exempt status of the bonds and didn't focus on any one area.

The event notice noted that the foundation lost its tax-exempt status in 2011 because it had failed to file at least three annual Form 990s, which detail a nonprofit's finances. The foundation asked the IRS to reinstate its tax-exemption. The IRS agreed, except for a gap period of November 2010 to February 2012. The foundation requested the IRS retroactively reinstate its tax-exemption, but the IRS denied the request in July of last year.

The school is a separate 501(c)(3) organization from the foundation, and its 501(c)(3) status has been continuously maintained, according to the event notice.

But the School Reform Commission, which governs the Philadelphia School District, said in April that "the foundation could incur liabilities relating to the tax-exempt bonds and such liabilities could be passed to the school."

The SRC made that statement in a proposed resolution detailing grounds for revoking the school's charter status. It had voted in April to initiate revocation proceedings.

The resolution also said that the bond trustee issued a notice of default for the bonds in 2010 because of covenant violations and in 2011 "the bank made full demand of payment after 5 years on a loan scheduled to continue through 2027."

Additionally, the school had low test scores, failed to make timely pension contributions, failed to meet generally accepted fiscal-management standards, and is in poor financial health, according to the resolution.

Westhoff, Cone & Holmstedt was underwriter of the 2005 bonds and Cozen O'Connor was bond counsel.

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