Performing Arts Center Pays IRS

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BRADENTON, Fla. — The nonprofit Raymond F. Kravis Center for the Performing Arts Inc. in Palm Beach County, Fla., has paid $320,000 to the Internal Revenue Service to settle a violation of the Internal Revenue Code’s 5% limit on private use in a bond-financed facility.

The violation concerned a private vendor’s use of a ballroom built with a portion of the proceeds of $41.5 million of tax-exempt variable-rate demand revenue bonds that were sold on behalf of Kravis in 2002. Palm Beach County was the conduit issuer.

Palm Beach County commissioners last week approved a resolution accepting receipt of settlement closing documents between the Kravis Center and the IRS, county records show.

As part of the settlement, the Kravis Center has already called $2.88 million of the outstanding variable-rate bonds, which will be redeemed by May 3, according to a redemption notice published on the Municipal Securities Rulemaking Board’s Electronic Municipal Market ­Access system.

In a random audit, the IRS examined a contract between Kravis and a for-profit company operating in a food service area of a facility financed with tax-exempt bonds and determined that non-qualifying use had occurred, said John Theberge, a partner and public finance tax expert at Holland & Knight hired to represent Kravis in the matter.

“We didn’t necessarily agree with the IRS,” Theberge said, adding that negotiations were unsuccessful in convincing the IRS that the contract did not violate safe harbor provisions. “They were pretty adamant so we just decided to compromise.”

Theberge said that there was no deliberate intent on the part of the Kravis Center to violate bond regulations and that performing arts center officials believed the contract they entered was proper.

“We didn’t think it was a violation but we wanted to just resolve the issue and protect the bondholders,” Theberge said. “Kravis tried to do the right thing. It’s a done deal.”

Robert Henn, manager of tax-exempt bond field operations for the IRS, said the agency had no comment on the settlement with Kravis.

Generally, however, Henn said all private nonprofit organizations that benefit from the use of tax-exempt financing need to be careful with the contracts they enter to ensure they don’t violate the IRS code.

“The rules are pretty clear and many people follow them well,” Henn said.

Travis Gibbs, a partner at Nixon Peabody who is  a bond and tax attorney familiar with nonprofit issues, said service contracts such as this one represent an area where there are helpful and definitive guidelines on arranging the contracts to avoid problems with the 5% rule.

The IRS has recently required nonprofits to file an additional form annually regarding each tax-exempt bond issue with an outstanding principal balance of more than $100,000 where the tax-exempt organization is the beneficiary. The form requires substantial information about bonds issued since 2003, including non-qualified use of the bond-financed assets, Gibbs said.

Theberge said the settlement protects the tax-exempt status of the remaining outstanding variable-rate bonds.

The long-term rating on the bonds is Aa3 from Moody’s Investors Service, the only agency that rates them.

The Kravis Center operates three venues — a 2,193-seat concert hall, a 300-seat playhouse, and an outdoor amphitheater with a capacity for 1,400.

In addition to purchasing a parking garage and doing renovations, the bonds issued in 2002 were used to replace an existing catering and meeting facility with a larger building that also contained a rehearsal hall, education center, recording studio, offices, and a board room.

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