Learn What the IRS Expects After Your Institution Closes a Bond Deal

April 2013Articles Campus Legal Advisor

Most colleges and universities take advantage of tax-exempt bonds issued on their behalf by a local municipal authority. The bond proceeds are used to finance a capital project or to refinance other existing bonds.

Institutions must comply on an ongoing basis with a number of requirements of the tax code that can easily become lost in the shuffle of everyday business.

The following are significant categories of obligations:

Private business use of tax-exempt financed property

At a minimum, the finance or business office must be informed of all potential uses of tax-exempt financed facilities by third parties so they can make the necessary determination before any commitments are made.

Arbitrage

Generally, the IRS does not want borrowers to invest tax-exempt proceeds at yields higher than yields on the bonds (known as arbitrage).

Investments of bond proceeds

Generally, investments bought with bond proceeds must be purchased at not greater than the fair market value of the investment.

Allocation of bond proceeds

In addition to monitoring their compliance with the timing of project fund spending as discussed above, borrowers must also formally allocate the bond proceeds to project expenditures generally no later than 18 months after the project is placed into service.

Written procedures

The IRS has a growing interest in effect to monitor post-issuance compliance with the Code.