Treas. Reg. Section 1.141-12 provides remedial actions that could allow an issuer that has sold or disposed of bond financed 501(c)(3) property to remediate what would otherwise be a violation of IRC Section 145(a). However, the remedial action provisions require particular actions during specific timeframes and are unlikely to be available to all issuers. IRC Section and Treas. Regulation IRC Section 145 Qualified 501(c)(3) Bond Treas. Reg. Section 1.141-12 Remedial Actions Treas. Reg. Section 1.145-1 Qualified 501(c)(3) Bond Treas. Reg. Section 1.145-2 Application of Private Activity Bond Regulations Other Resources TEB Phase I Training, Lesson 7, Remedial Actions/Change in Use Rules PDF TEB Phase I Training, Lesson 12, Section 145 – Qualified 501(c)(3) Bonds PDF TEB Self-Correction: Some Basic Concepts Revenue Procedures 2016-44 and 2017-13 Contain additional safe harbor conditions under which a management contract does not result in private business use. Revenue Procedure 2018-26 provides certain remedial actions that issuers of State and local tax-exempt bonds and other tax-advantaged bonds (as defined in Section 1.150-1(b) of the Income Tax Regulations) may take to preserve the tax-advantaged status of the bonds when nonqualified uses (as defined in Section 4.04 of this revenue procedure) of the bond proceeds occur. Analysis IRC Section 145 defines a qualified 501(c)(3) bond as any private activity bond issue if, among other requirements, all the property which is to be provided by the net proceeds of the issue is owned by a 501(c)(3) organization or governmental unit. IRC Section 145 modifies and supplements IRC Section 141, and Treas. Reg. Section 1.145-2(a) makes Treas. Reg. Sections 1.141-0 through 1.141-15 applicable to IRC Section 145(a) (with some exceptions). Thus, under Section 1.145-2(a), if the issuer takes a deliberate action that causes a facility financed with 501(c)(3) bonds to no longer be owned by a 501(c)(3) organization or governmental unit, the bonds are treated as though they meet the private use test of IRC Section 141. If the issuer meets the conditions set out in Treas. Reg. Section 1.141-12(a), it may be able to remediate the violation under Treas. Reg. Sections 1.141-12(d), (e), (f), or (h). Remedial actions under Treas. Reg. Section 1.141-12 may include redemption or defeasance of nonqualified bonds, alternative use of disposition proceeds, and alternative use of bond-financed property. Treas. Reg. Section 1.141-12(d)(3) also provides for anticipatory remedial action, which allows an issuer to declare its official intent to redeem or defease bonds that would become nonqualified in the event of a subsequent deliberate action that would cause the bonds to meet the private use test of IRC Section 141. Note that the anticipatory remedial action provision is only available for deliberate actions that occur on or after January 25, 2016. Generally, the redemption or defeasance of nonqualified bonds must occur within 90 days of the date of the improper disposition of property or other deliberate action. If a defeasance escrow is established, the issuer must provide notice of such defeasance to the Commissioner within 90 days of the escrow's establishment. A defeasance escrow cannot be used if the period between the issue date and the first call date is more than 10.5 years. Also, generally, the alternative use of disposition proceeds must occur within 2 years of the date of the deliberate action. Treas. Reg. Section 1.141-12 provides definitions of the terms disposition proceeds and nonqualified bonds as well as other special rules required for these remedial actions. If an issuer discovers it has improperly disposed of 501(c)(3) bond financed property and has not met the requirements for remedial action, it can seek resolution in the Tax Exempt Bonds Voluntary Closing Agreement Program ("TEB VCAP"). In the context of TEB VCAP, I.R.M. 18.104.22.168.2(2) allows an issuer to resolve an unremediated ownership violation by paying 100% of taxpayer exposure (or more, depending on the timing of the request) on the nonqualified bonds from the date of the violation to the date the nonqualified bonds are redeemed and retired or cancelled. In the context of an audit, sale or disposition of a bond financed 501(c)(3) facility with no remediation presents a presumption that all the bonds are private activity bonds and nonqualified. Issue Indicators or Audit Tips Ensure all the property provided by the net proceeds of the issue continues to be owned by a 501(c)(3) organization or governmental unit. In the case of a disposition, it may also be relevant to analyze whether the disposition causes the issue to meet the private business tests.