Converting a Tax-Exempt Student Loan Corporation

We advised a 501(c)(3) nonprofit organization in an Internal Revenue Code section 150(d)(3) conversion.

For many years, our client had focused solely on acquiring student loans incurred under the federal Higher Education Act. Recently, the nonprofit undertook a reorganization under Code section 150(d)(3) to broaden its charitable mission to support, advise, and aid California grade and secondary schools and their faculty, students and families. Our client needed to make this change in order to strengthen its position, given changes to the student loan program and economic conditions in general.

To complete the conversion, we advised our client on creating a wholly owned, for-profit subsidiary and several for-profit special purpose limited liability companies (LLCs) underneath that subsidiary. The student loan assets and liabilities were then transferred to the LLCs, while our client retained an equity interest in the transferred entities. This way, our client could use future income from those companies to support its new, broader educational and philanthropic activities.

With the new structure, our client’s outstanding bonds and other obligations would continue to be administered by the new for-profit subsidiary. Payments to the bondholders were not affected by the conversion, and interest on the bonds remained tax-free as Code section 150(d)(3) authorized.

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