PLR 1326001: IRS grants more time to spend qualified bond proceeds

Plain-English summary

The IRS granted a municipality more time to spend proceeds from qualified zone academy bonds on public school rehabilitation and equipment. The original three-year expenditure period was delayed by unexpected events, including missing construction records, administrative delays, a state review, property-transfer problems, litigation, and unexpected PCB contamination. The IRS found reasonable cause for the delay and determined that the issuer would continue spending the proceeds with due diligence. The extension lasted until the redacted date identified in the ruling.

Ruling snapshot

• Question: Could the issuer extend the expenditure period for unspent qualified zone academy bond proceeds because unexpected events delayed the school projects?
• Outcome: Approved
• Key authorities: IRC §§ 54A, 54E, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201326001 Third Party Communication: None
Release Date: 6/28/2013 Date of Communication: Not Applicable
Index Number: 54.00-00
Person To Contact:
---------------------- -----------------, ID No. --------------
------------------------------------------------------------ Telephone Number:
------------- ----------------------
---------------------- Refer Reply To:
--------------------------- CC:FIP:B5
-------------------------------------------- PLR-101825-13
Date:
April 01, 2013

LEGEND:

City = --------------------------------

District = ------------------------------------------------

State = ------------------------------

Bonds = ---------------------------------------------------------------

Date 1 = ---------------------------

Date 2 = ---------------------------

Date 3 = ---------------------------

Date 4 = ----------------------

Date 5 = ---------------------------

Date 6 = --------------------

a = ----

b = ----------------

c = --------------
PLR-101825-13 2

d = --------------

e = ------------

Year 1 = -------

Dear -------------------:

This is in response to your request under Section 54A(d)(2)(B)(iii) of the Internal
Revenue Code for an extension of the expenditure period for the available project
proceeds of qualified tax credit bonds.

Facts and Representations

You make the following factual representations. City is a municipal corporation of State
and is largely responsible for the financing of local primary and secondary educational
expenditures. The Board of Education (the “Board”) is the official policy making body of
District. Board is composed of members appointed by the Mayor of City, and
administers City’s school system within District. The school system collectively
operates a elementary, middle, and high schools. Board’s operations are solely funded
through City appropriations, Federal and State aid to education, grants, and locally
generated revenues of Board.

The Bonds were issued on Date 1 by City, and were designated by City as qualified
zone academy bonds within the meaning of § 54E(a). Pursuant to § 54E (c)(4), State
allocated to the Bonds $b of its carryforward allocation of the national zone academy
bond limitation from Year 1. In preparing to issue the Bonds, District identified a pool of
public school facilities located within District that met the requirements for being treated
as qualified zone academies within the meaning of § 54E(d)(1) and were in urgent need
of rehabilitation and repair, and equipment. The Bond proceeds were allocated among
17 public school facilities of such previously identified pool of public school facilities
located within District (the “Project”).

Each of these school facilities was budgeted a specific stated amount of the Bond
proceeds. The original three-year expenditure period for the Bonds under §
54A(d)(2)(B)(i) will expire on Date 2. However, several unexpected events have
resulted in an unforeseen delay in the expenditure of the available project proceeds of
the Bonds. As of Date 3, the date of your request for a ruling, $c of the available project
proceeds of the Bonds remains unspent.

With respect to five of the 17 school facilities, although the rehabilitation work has been
completed, the State-required “as-built” drawings from electrical contractors installing
PLR-101825-13 3

wiring and electrical equipment at those five schools have not been received by District.
District is working with the electrical contractors to receive these drawings. Also,
reduced clerical staffing necessitated by budget cutbacks has resulted in unexpected
delays in various areas of project administration, including the processing of the
documentation for, and payments for, contracts with respect to another five of the 17
school facilities under which the rehabilitation and repair work had already been
completed. District expects to expend the allocated available project proceeds with
respect to these 10 school facilities by Date 4.

A lengthy review process by State with respect to the rehabilitation and repair design
plans of another one of the 17 school facilities has resulted in a delay in the
rehabilitation work with respect to that facility. At the time the Bonds were issued,
District did not foresee that this review process, which includes delays associated with
the project designer’s plans and specifications, would take such an extended period of
time. District expects the repair and rehabilitation of this school facility and the
expenditure of available project proceeds allocated thereto to be completed by Date 5.

The reduced clerical staffing referenced above has also caused an unexpected delay in
title transfer and control of the land and thus rehabilitation work with respect to one of
the 17 school facilities. District cannot commence the rehabilitation of the school facility
without the ownership and possession of the property. District will reallocate the
available project proceeds for this project to the “Rehabilitation Project” described
below.

The rehabilitation and repair work at another one of the 17 school facilities has been
completed. This project, however, is subject to litigation that arose after the work was
completed but before the allocable available project proceeds was expended. This
expenditure is delayed until the lawsuit is resolved. District will reallocate the available
project proceeds for this project to the Rehabilitation Project described below.

At another one of the 17 school facilities, the rehabilitation and repair work was
proceeding towards timely completion until it was discovered that the facility was
contaminated with polychlorinated biphenyl (“PCB”). The PCB contamination was
unexpected and has significantly expanded the scope of the project at this school, and
has also significantly increased its cost (collectively referred to herein as the
“Rehabilitation Project”) to approximately $d from the $e budgeted for the original
rehabilitation and repair project. Both the original portion and the expanded portion of
the Rehabilitation Project may not be completed, and the allocable available project
proceeds may not be expended, prior to Date 2. District expects to completely spend
the available project proceeds allocated to the Rehabilitation Project not later than Date
6.

The actual costs of the rehabilitation and repair of several of the 17 schools, some of
which are described above, unexpectedly were less than the original budgeted
PLR-101825-13 4

amounts. The available project proceeds that were originally budgeted for those
projects but were not expended, will be reallocated to the Rehabilitation Project.

This unexpected series of events has resulted in an unforeseen delay in the spend-
down of the available project proceeds.

City submitted this request for a ruling prior to Date 2.

Law and Analysis

Section 54A(d)(1) provides that a qualified zone academy bond is treated as a qualified
tax credit bond for purposes of Section 54A.

Section 54A(d)(2)(B)(i) provides in part that to the extent that less than 100 percent of
the available project proceeds of the issue are expended by the close of the expenditure
period for 1 or more qualified purposes, the issuer shall redeem all of the nonqualified
bonds within 90 days after the end of such period.

Section 54A(d)(2)(B)(ii) provides that for purposes of this subpart, the term “expenditure
period” means, with respect to any issue, the 3-year period beginning on the date of
issuance. Such term shall include any extension of such period under clause (iii).

Section 54A(d)(2)(B)(iii) provides that upon submission of a request prior to the
expiration of the expenditure period (determined without regard to any extension under
this clause), the Secretary may extend such period if the issuer establishes that the
failure to expend the proceeds within the original expenditure period is due to
reasonable cause and the expenditures for qualified purposes will continue to proceed
with due diligence.

Section 54A(d)((2)(C)(iv) provides that for purposes of this paragraph, in the case of a
qualified zone academy bond, a “qualified purpose” means a purpose specified in §
54E(a)(1).

Section 54A(e)(4) of the Code defines “available project proceeds” to mean (A) the
excess of (i) the proceeds from the sale of an issue, over (ii) the issuance costs
financed by the issue (to the extent that such costs do not exceed 2 percent of such
proceeds), and (B) the proceeds from any investment of the excess described in
subparagraph (A).

The Project was identified prior to the issuance of the Bonds and District reasonably
expected to spend all of its allocable available project proceeds within the three-year
period. The failure to spend all the available project proceeds of the Bonds by the
expiration of the three-year period on Date 2 was caused by events that were not
reasonably expected at the time the Bonds were issued and were beyond the control of
PLR-101825-13 5

either City or District. However, City and District to the extent possible considering all of
the described unexpected external events that resulted in unforeseen delays, have and
will continue to exercise due diligence in spending the remaining available project
proceeds on the Project. City and District expect to spend all available project proceeds
not later than Date 6.

Conclusion

Under the facts and circumstances of this case, we conclude that District’s failure to
expend its allocable portion of the available project proceeds of the Bonds was due to
reasonable cause and that District’s expenditures of the proceeds for qualified purposes
will proceed with due diligence. Therefore, City is granted an extension of the
expenditure period with respect to the Bonds until Date 6.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

In accordance with a Power of Attorney on file with this office, a copy of this letter is
being sent to City’s authorized representative.

The ruling contained in this letter is based upon information and representations
submitted by City and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified any of the materials submitted in
support of the request for a ruling, it is subject to verification upon examination.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (Financial Institutions & Products)


                                                    /S/
                                       By: _________________________
                                           Timothy L. Jones
                                           Senior Counsel, Branch 5