Types of Remedial Actions
If the issuer meets the threshold requirements , taking a remedial action can cure the impermissible use and protect the tax-exempt status of the bonds . Depending on the facts , the remedial actions available are :
Redemption or Defeasance . If the disposition proceeds are exclusively cash , the issuer may remediate by redeeming “ nonqualified bonds ” on the earliest call date after the deliberate action is taken . If the bonds are not currently callable , the issuer may alternately provide for a defeasance escrow within 90 days , but only if the bonds were callable within 10½ years of their issue date and the issuer provides the IRS with notice that the defeasance escrow has been established within 90 days of establishing the escrow . “ Nonqualified bonds ” are the portion of the outstanding bonds in an amount that , if the remaining bonds were issued on the date of deliberate action , the remaining bonds would not meet the private business tests .
◊ An issuer need only remediate for the highest amount of private business use above the permitted threshold , as measured in any one-year measurement period occurring after the deliberate action . This is different from the general measurement rules , which allow an issuer to take into account average private use over the measurement period .
An issuer cannot “ pick and choose ” the bonds to redeem or defease . Rather the allocation of nonqualified bonds must be made either ( i ) on a pro rata basis or ( ii ) in a manner that would not extend the weighted average maturity of the bond issue .
An important timing consideration is that a deliberate action occurs on the date an issuer and the private party enter into a binding contract that is not subject to material contingencies . This can sometimes cause unexpected timing hiccups , as a contract for sale with no material contingencies may be signed well before the actual closing date , meaning that the issue may not have actually received amounts needed for redemption or defeasance within the required timeframe .
Alternative Use of Disposition Proceeds . If the disposition proceeds are exclusively cash , the issue may use the disposition proceeds for capital expenditures related to an alternative governmental purpose , so long as the issuer reasonably expects to expend them within two years for capital expenditures related to valid governmental purpose . Any disposition proceeds remaining after two years must be used to redeem or defease nonqualified bonds .
At one time , the IRS took the informal position that this remedial action requires that all of the disposition proceeds be used for capital expenditures related to an alternative governmental purpose within the prescribed two-year period even if the amount of the disposition proceeds is in excess of the amount of bond proceeds used for the financed property . It is unclear whether the IRS continues to enforce this position .
The issuer should also make sure that the alternative expenditure meets state law requirements regarding use of bond proceeds .
Alternative Use of Facility . If the deliberate action results in the property being used for a qualifying purpose for another type of tax-exempt bond ( e . g ., a qualified private activity bond ), the nonqualified bonds may be treated as reissued , provided that the new user does not use proceeds of another issue of tax-exempt obligations to finance its interest in the property . Generally , the issuer must use the disposition proceeds to pay debt service on the reissued bonds on the next available payment date or to establish a yield-restricted escrow to pay debt service .
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