The Internal Revenue Service is investigating Sweetwater Union High School District’s L Street property –is this investigation only the tip of the iceberg?

In 2005 the district purchased a 24- acre parcel of land on L Street. The district made the purchase using Plan Nine Partners/California Trust for Public Schools, a non-profit or 501(c)(3) organization, to borrow $25 million in tax-exempt bonds to purchase the L Street property.

The public was told that the property was purchased for new district headquarters and a corporate yard, but that project never materialized. The district asserts that that the new district office was never able to get off the ground because the real estate market crashed shortly after the purchase, but some people—including the IRS—are wondering if the district ever intended to build a new district headquarters.

In a letter addressed to the district, Plan Nine Partners, and the bond company, the IRS investigator asserts that the stated purpose for obtaining $25 million in tax-exempt bond money “was to relieve the school district by expanding classroom size and relieving the burdens of crowded schools.”

But the investigator goes on to make this provocative statement:

“Obviously, classrooms could not be expanded to the L Street property since the zoning limitations would not allow for classrooms or school facilities to be developed in such property.”

The L Street property is zoned industrial and the investigator notes that in the 2004, an appraisal just prior to the purchase “clearly indicated the L Street zone only permitted office use as ancillary to industrial uses.”

Curiously, the letter from the IRS also states “During the examination, it was difficult to obtain reliable and timely documents from the School District. The School District was not cooperative in submitting records requested.”

The main concern asserted by the IRS was that the district and Plan Nine had collected too much money in rent/lease revenue from private businesses on the L Street property to be eligible for a $25 million tax-exempt bond.

Although the district ultimately occupied some office and vehicle space on the 24 acres, businesses like Harbor Freight Tools, Napa Auto Truck Parts, and Designer’s Carpet continued to rent or lease buildings from the district. Even, JDS, the private security group that policed board meetings during former superintendent Ed Brand’s time, rented space from the district on L Street.

The IRS audit began in September 2013 while Dr. Ed Brand was still superintendent. If the percentage of rent/lease agreements was a potential problem for the district, people are beginning to wonder who was advising the district. Why would the district’s former chief financial officer, Diane Russo, tell the trustees at a September 2011 board meeting, “We try to rent out as much of L Street as we can”?

Whether the district and Plan Nine Partners will have to pay back taxes on the bond is still a negotiation in progress, but the district has already begun to pay through the nose for the legal services to defend them on this misbegotten property.

In December the board passed a benignly worded resolution which states: “Due to the district’s continued work with the properties and the Asset Utilization Plan [real estate transactions], it is necessary to retain an attorney in connection with the examination of the Bonds and related matters.”

To that end the district hired the renowned tax-controversy attorney Bradley Waterman at $600.00 an hour.

A public relations spokesperson for the IRS said the agency was unable to comment on the audit.