The Long Beach Community College District in California is seeking a settlement with the Internal Revenue Service because of a private-activity bond problem with bonds it issued in 2008.

The district said it submitted a request for a voluntary closing agreement with the IRS on May 22 in an event notice posted on the Municipal Securities Rulemaking Board's online EMMA disclosure system on Tuesday.

The college district, which operates Long Beach City College's two campuses, said in the notice that it "cannot now predict precisely how the IRS will respond to its [voluntary closing agreement program] request but believes it will be able to arrive at an agreement that will preserve the exclusion of interest on the 2008 bonds from gross income for federal income-tax purposes."

In addition to the VCAP request, the district issued taxable advance refunding bonds in March and defeased some of the 2008 bonds. The defeased bonds will be redeemed in 2018.

"I think we've done everything we can to try to amend the error that was made," said Ann-Marie Gabel, vice president of administrative services at Long Beach City College.

The district issued $48.37 million of the 2008 Series A general obligation bonds to refinance several obligations, including certificates of participation it issued in 2001. By using the 2008 bond proceeds for this purpose, the proceeds refinanced property that had private business use.

The proceeds of the COPs were intended to be used to finance projects that included a new child development center, a new industrial technology building, seismic retrofits and repairs, barrier removals, and maintenance and hazardous remediation.

However, in the fall of 2013, the district discovered that it did not use a significant amount of the COP proceeds for those projects and instead spent them on other capital projects, including the purchase of real property in 2004, according to the event notice.

When the district purchased the property, a portion of it contained two buildings occupied by doctors and other tenants. The district intended to demolish and renovate the buildings so that there could be space for its culinary arts instructional program and its economic and workforce development program.

During the three-year period when the district owned the property and was working on developing the building plans, the existing tenants in the buildings remained and gave the district monthly lease payments. The property never ended up being used for instructional purposes.

The district said in its notice that it "has been advised [the private use and payments] constitutes a violation of section 141(b) of the Internal Revenue Code of 1986, as amended."

Section 141(b) states that, in cases where private business use is unrelated to bonds' governmental use, bonds meet private business tests if more than 5% of the proceeds are used for private business use and more than 5% debt service is secured by or paid for by private users.

If the private business tests are met, the bonds are private-activity bonds and could be taxable. Since the district used the proceeds of the 2008 bonds to refinance the property by prepaying the 2001 COPs, meeting the private business tests could cause those bonds to become taxable.

Sutter Securities Inc. served as underwriter for the 2001 COPs. Luce, Forward, Hamilton & Scripps, which has since merged with McKenna Long and Aldridge LLP, served as special counsel.

RBC Capital Markets Corp., E.J. De La Rosa & Co. and Citigroup Global Markets Inc. were underwriters of the 2008 bonds. Fulbright & Jaworski served as bond counsel.

RBC, De La Rosa & Co. and Piper Jaffray & Co. were the underwriters of the 2014 bonds and Nixon Peabody LLP served as bond counsel.

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