September 1, 2015
See Rev. Rul. 80-58. No gain is recognized under section 1001 of the Code on the sale of land by a taxpayer who accepts reconveyance of the land and returns the buyer’s funds in the taxable year of the sale. If the reconveyance occurs after the taxable year of sale, the seller reports the sale in the taxable year of sale and acquires a new basis in the property when it is reconveyed equal to the amount paid for the reconveyance. Query whether this analysis can apply to rescind bond redemptions.
Also consider a slightly related situation in private letter ruling 9507010 (dated November 14, 1994). This is an important ruling relating to a frequently discussed issue, namely, whether proceeds of bonds must be used directly for payment of debt service on a prior issue to enable the bonds to qualify as refunding bonds. In other words, may there be a gap of some sort between the refunding bonds and the bonds that are treated as the refunded bonds? The ruling holds, in the context of timing necessitated by GNMA procedures, that bonds are refunding bonds even though the proceeds are used to reimburse a bank for prepayment of a GNMA security where the GNMA security prepayment was used to redeem the prior issue.
July 9, 2013
(a) General rules;
(b) Change in use of facilities financed with tax-exempt private activity bonds;
(1) Mortgage revenue bonds;
(2) Qualified residential rental projects;
(3) Qualified 501(c)(3) bonds;
(4) Certain exempt facility bonds and small issue bonds;
(5) Facilities required to be owned by governmental units or 501(c)(3) organizations;
(6) Small issue bonds which exceed capital expenditure limitation;
(c) Exception and special rules for purposes of subsection (b);
(d) Qualified scholarship funding bond; and
(e) Bonds of certain volunteer fire departments.
Impact for 501(c)(3) Bonds:
UTOB: If a qualified 501(c)(3) bond financed facility is owned by a 501(c)(3) organization but is used in a trade or business of an entity that is not a 501(c)(3) organization or a governmental unit, then the 501(c)(3) organization is treated as being engaged in an unrelated trade or business (as defined in I.R.C. 513).
Denial of Deduction: No deduction is allowed for interest on any financing of such facility which accrues while the facility is so used. (Would deduction otherwise be attempted for the portion of the interest allocable to the UBTI?)
If a bond-financed facility is required to be owned by a governmental unit or a 501(c)(3) organization as a condition to maintaining tax-exemption of interest on the bonds, and the facility is not so owned, then no deduction is allowed for interest paid on the bonds.