School Bonds May Lose Tax-Exempt Status

The Internal Revenue Service has made a ruling that could cost the Los Angeles Unified School District millions of dollars a year by disallowing the tax-exempt status of bonds sold to build the troubled Belmont Learning Complex.

If upheld, the preliminary ruling would probably cause investors to call in more than $80 million in low-interest loans rather than pay taxes on the interest income. “We’ll have to figure out how to finance this money,” said Harold J. Kwalwasser, general counsel for the district. “That’s going to cost us a lot of money.”

Any investors charged back taxes by the government could also sue the district to recover the losses, he said.

An IRS investigator in Colorado notified the district of the decision in a Sept. 28 letter.

Kwalwasser said the district intends to contest the ruling first in an informal hearing, and if necessary, appeal to federal court.

“The district believes that this preliminary conclusion is just not supported by the reasoning in the letter,” he said.

The 20-page IRS letter based the decision on a detailed history of the project to build a high school just west of downtown. Since its inception in the mid-1990s, Belmont has been enmeshed in conflict and disappointment.

After approving the highest of three bidders on the project to build a badly needed high school, the Board of Education was forced to float $91.4 million in bonds to pay for the school. The state refused to contribute its usual 50% share because of environmental concerns at the site, and as a result, a citizen oversight committee declined to dip into the 1997 Los Angeles school bond for the other half.

As concerns mounted over the presence of explosive and toxic gases on the oil field site, the board voted to abandon the nearly completed project in January 2000.

Supt. Roy Romer has tried to put an end to the fiasco by asking for proposals to fix the school’s environmental problems and complete it or to purchase it for other uses.

The deadline for those bids is later this year.

In its letter, the IRS leaned heavily on a 1998 report by the California Joint Legislative Audit Committee. That report found irregularities, including onetime plans to incorporate a retail shopping center in the project, which would have made it a commercial venture. The IRS also found that the numerous problems at the site violated “reasonable expectations” for a tax-exempt project.