WASHINGTON - A nonprofit corporation that was reorganized after going bankrupt cannot treat itself as a new entity in order to refinance its assets with tax-exempt bonds, the Internal Revenue Service said in a recent ruling.
The corporation, which was not identified in the private letter ruling, wanted to issue 501(c)(3) tax-exempt bonds to refund and reduce the costs associated with its outstanding taxable debt.
The firm contended that it was a new entity because it had been reorganized through bankruptcy proceedings. As such, the firm argued, it would be acquiring the assets it had previously owned before bankruptcy, including residential rental property.
But the IRS ruled that the corporation was not a new entity and therefore would not be acquiring any new assets. The agency said in the ruling that "the emergence from bankruptcy did not result in a new corporation for tax purposes."
The IRS also ruled that when it emerged from bankruptcy, the corporation "did not acquire [its] assets in exchange for assuming the taxable obligations" that were to be refinanced with the tax-exempt bonds.
The corporation had told the IRS that the taxable debt to be refunded had been used to finance some equipment, litigation costs, and some capital expenditures that it could not identify.
The IRS said in the ruling that to treat the corporation as acquiring assets "would not be consistent" with tax law provisions that limit the maturity of tax-exempt private-activity bonds according to the economic life of the assets to be financed.
The corporation also had wanted to be treated as acquiring its assets so it could qualify as a "first time" user of the residential rental property and then issue 501(c)(3) refunding bonds. Such bonds are less restrictive than other private activity bonds used to finance housing.
Under the tax law, 501(c)(3) bonds can only be used to finance residential rental property if certain conditions are met. For example, the organization financing the property must be a first-time user of the property.