Tax Alert: NEW IRS REV PROC RELATED TO CERTAIN NONQUALIFIED USE
April 23, 2018
On April 11, 2018, the IRS released Rev Proc 2018-26 that provides for certain remedial actions relating to tax-exempt bonds when nonqualified uses of the bond proceeds occur.
Certain requirements exist regarding the use of the proceeds of tax-advantaged bonds and nonqualified use occurs when the use does not meet these requirements. Prior to the release of Rev Proc 2018-16, the existing remedial actions for tax-exempt governmental bonds did not include a remedial action to cure the nonqualified use that usually occurs from the lease of bond financed property to private businesses, other than bond redemption or defeasance corresponding to the amount of the leased property.
- alternative use of disposition proceeds remedial action
- funds equal to the lease amount as disposition proceeds
Since 2008, Section 501(c)(3) organizations have had to file SCHEDULE K (Supplemental Information on Tax-Exempt Bonds) with their annual IRS Form 990, providing very detailed information about the expenditure of bond proceeds and the use of bond-financed facilities. The accurate completion of SCHEDULE K requires Section 501(c)(3) organizations to review management and service contracts, research agreements, and other use agreements to determine if such contracts or agreements give rise to private business use and to prepare detailed calculations of an annual private business use percentage on a per bond issue basis.
Recent IRS bond audits confirm that the IRS is actively monitoring prior SCHEDULE K responses. IRS audit requests now include specific questions based on SCHEDULE K information such as — backup information supporting annual private business use calculations, safe-harbor intake procedures for management contracts/sponsored research and inquiries regarding the late expenditure of bond proceeds.
Given this heightened scrutiny by the IRS, accurate monitoring of post-issuance compliance requirements and the related SCHEDULE K reporting is essential to Section 501(c)(3) organizations to ensure compliance with applicable federal tax laws and that the tax-exempt status of the bonds is not jeopardized. Make sure your organization is getting it right.
If BLX can assist your organization’s internal post-issuance compliance efforts, please do not hesitate to contact us.