WASHINGTON — The Internal Revenue Service has reinstated the tax-exempt status of LEAP Academy University Charter School, Inc. as of May 17, 2012, but not during the 18 months before that, thereby jeopardizing the tax-exemption of interest earned on its bonds during that time.
The nonprofit organization and public charter school disclosed the IRS actions in a material event notice filed with the Municipal Securities Rulemaking Board’s EMMA system this week.
The IRS actions revolve around $8.5 million of charter school project revenue bonds that were issued in September 2003 by the Delaware River Port Authority. The authority lent the proceeds to LEAP, a 501(c)(3) nonprofit organization, to finance a charter school in Camden, N.J., on property owned by Rutgers University that was leased by LEAP.
But LEAP failed to file Form 990 financial statements to the IRS for three fiscal years ending June 30, 2007, 2008 and 2009. These are the annual financial forms that 501(c)(3) organizations must file with the IRS.
The IRS revoked LEAP’s tax-exempt status in November 2010 because of its failure to file the 990s. LEAP disclosed the revocation in a material event notice filed in January on EMMA.
In the event notice it posted Tuesday, LEAP said it received determination letters from the IRS dated Feb. 12 that confirmed its tax-exempt status as of May 17, 2012, but denied it for the period from Nov. 15, 2010 through May 16, 2012. The eighteen-month period appears to be between when IRS revoked LEAPs tax-exempt status and when the charter school applied for reinstatement and presumably updated its 990 filings.
LEAP said the IRS’ failure to reinstate its tax-exempt status for the entire period during which the $8.5 million of bonds have been outstanding could result in: a default of the bonds; a determination that interest on the bonds is taxable for a period of time; or an IRS assessment that LEAP owes federal income taxes.
The charter school pointed out that on Jan. 23 it received a notice from the trustee for the bonds stating that LEAP’s failure to maintain its status as a 501(c)(3) entity would constitute an event of default under its loan agreement if it failed within 60 days to take action to remedy the situation.
“The school has notified the trustee of all action instituted to date, and being diligently undertaken, by the school to cure such failure,” LEAP said in this most recent notice. “Accordingly, no event of default has occurred with respect to the bonds at this time.”
LEAP said it “is currently reviewing what further course or courses of action to take” and that it could: ask the IRS to reconsider its decision, appeal the decision, or enter into a closing agreement to preserve the tax-exempt status of the bonds.
“At the current time, LEAP cannot predict whether any such action will be successful, or the costs and expenses that may be incurred by LEAP” in connection with the tax dispute, including any payment the IRS would want it to make in a closing agreement, the charter school said in the notice.