The tax-exempt status of $8.5 million of bonds issued by the Delaware River Port Authority in 2003 for the LEAP Academy University Charter School, Inc., could be in jeopardy because the Internal Revenue Service has revoked the charter school’s tax-exempt status.
The university disclosed the concerns about the charter school project bonds in an event notice filed with the Municipal Securities Rulemaking Board’s EMMA system on Jan. 16.
The charter school’s 501(c)(3) tax-exempt status was revoked in November 2010 after LEAP failed to file Form 990 financial statements for three fiscal years ending June 30, 2007, 2008 and 2009.
However, LEAP said it did not become aware of the revocation until December 2011, more than one year later.
LEAP said it applied for reinstatement of its 501(c)(3) status on May 17, 2012 and hopes to prevail in the case.
“While LEAP believes that there is good cause to support the granting of such application, at the current time it is not certain whether the IRS will approve reinstatement of LEAP’s 501(c)(3) status or, if approved, whether such reinstatement will be retroactive to the date of original revocation,” LEAP said in the event notice.
In a statement provided to The Bond Buyer on Friday, LEAP stressed that it “has continued to maintain its status as a New Jersey nonprofit corporation, and a qualified charter school, in carrying out its charitable and educational mission in accordance with state law.”
It also said “does not believe this matter has, or will have, any effect on the operations of the school, or the quality of the educational services it provides to students in Camden County.”
LEAP said its failure to file Form 990s for the three years, “which resulted in automatic revocation of its tax-exempt status, was due to conflicting advice on the administrative need to do so as a New Jersey charter school.”
The charter school also said that it “has since prepared and filed the outstanding 990s in connection with the goal of restoring its federal tax-exempt status retroactively” and “made the timely 990 submission for its latest tax year.”
“LEAP is committed to resolving this matter to ensure that the tax-exempt status of the bonds is preserved,” the nonprofit organization said.
In the event notice, LEAP said that if the IRS determines it failed to maintain its tax-exempt status, the outcomes could include: an IRS assessment that LEAP owes federal income taxes; a default of the bonds; or a loss of tax-exemption on the interest earnings of the bonds.
“At the current time, LEAP is proceeding diligently to remedy this matter, including engaging in continuing discussions with the IRS as to the retroactive reinstatement of its 501(c)(3) status,” LEAP said in the notice.
LEAP said that if it does not prevail, it will seek a closing agreement with the IRS to preserve the tax-exempt status of its bonds for bondholders.
“At the current time, LEAP cannot predict whether, if such action is necessary, it will be successful in securing a closing agreement with the IRS or the amount of any payment to the IRS that might be required in connection therewith,” the charter school said in the notice.
The bonds were used to finance the costs of design, development, construction and equipping of the LEAP Academy University Charter School in Camden, N.J. Rutgers University has guaranteed debt service on the bonds, according to bond documents.
In 1993, the Camden campus of Rutgers University spearheaded the Rutgers/LEAP Initiative to create a comprehensive charter school aimed at enhancing opportunities for children and families of Camden through the integration of education, health and human service programs and community development, bond documents said.
TD Bank, N.A., who serves as the authority’s trustee and was listed as the point of contact on the event notice, declined to comment on the adverse tax notice.
Wachovia Securities, L.L.C., now Wells Fargo Securities, underwrote the bonds. Blank Rome, LLP of Cherry Hill, N.J. and Philadelphia, was bond counsel. Public Financial Management, Inc. was financial advisor for the bonds.