School district gets more time to spend construction bond proceeds

Plain-English summary

A public school district issued qualified school construction bonds and expected to spend all available project proceeds within the original three-year period. Unexpected reductions in state funding led to staff layoffs, a suspension and reprioritization of the facilities plan, school closures, and additional planning and bidding work. The district requested relief before the original period expired and expected to spend the remaining proceeds about 16 months later. The IRS found reasonable cause for the delay and due diligence in the district's continued spending, so it extended the expenditure period to the requested redacted date.

Ruling snapshot

• Question: Could the district extend the period for spending qualified school construction bond proceeds after unforeseen financial and planning delays?
• Outcome: Approved
• Key authorities: IRC §§ 54A(d)(2)(B), 54A(e)(4), and 54F(a)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201514005 Third Party Communication: None
Release Date: 4/3/2015 Date of Communication: Not Applicable
Index Number: 54A.00-00
Person To Contact:
---------------------- --------------------------------------------
----------------------------- Telephone Number:
--------------------------------------------- ---------------------
------------------------------- Refer Reply To:
----------------------------------- CC:FIP:B05
PLR-140233-14
Date:
December 08, 2014

LEGEND:

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

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

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

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

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

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

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

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

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

x = ---

y = ---
PLR-140233-14 2

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

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

Facts and Representations

District is a public school district and an agency of State. District issued the Bonds on
Date 1 and designated the Bonds as qualified school construction bonds within the
meaning of section 54F(a)(3). At the time the Bonds were issued, all available project
proceeds of the Bonds were expected to be spent before Date 2 on meeting the
requirements of certain selected portions of District’s plan (the “Plan”). The purpose of
the Plan is to identify the capital needs for the facilities of District, including but not
limited to new construction, major renovations, alterations and improvements to existing
facilities, emergency and code compliance requirements and equipment, and
technology necessary for the operation of District. Prior to issuing the Bonds, District
had identified all of the projects from the Plan that it expected to finance with the Bond
proceeds (the “Project”).

The original three-year expenditure period for the Bonds under section 54A(d)(2)(B)(i)
will expire on Date 2 (the “Original Expenditure Period”). However, several unexpected
events have resulted in an unforeseen delay in the expenditure of the available project
proceeds of the Bonds.

Subsequent to issuing the Bonds, District encountered financial distress caused
principally by reductions in funding provided to District by State. This financial distress
impeded District’s operations and caused layoffs of teaching, support, and
administrative staff. Among the steps taken by District to address its financial condition
was a review and reprioritization of facilities and building uses. On Date 3,
implementation of the Plan was suspended pending completion of this review. No
additional commitment of funds to the Project could be made during this suspension
period.

Upon completion of the review on Date 4, District determined and identified x schools to
be closed (the “School Closure Plan”). As of Date 5, y schools have been closed. As
part of the School Closure Plan, District changed its building uses. This necessitated a
reprioritization of projects in the Plan, including projects identified as part of the Project,
and required determinations concerning which projects would be substituted for those
previously earmarked for the closed schools.
PLR-140233-14 3

As a result of this substitution and reprioritization, District was required to undertake
additional planning and preparation of specifications and bidding, which was necessary
to comply with applicable law. This caused a significant delay in committing and
spending the proceeds of the Bonds and will prevent District from spending all of the
available project proceeds of the Bonds by Date 2. All of the available project proceeds
of the Bonds will be spent on the Project by Date 6, which is approximately 16 months
after the Original Expenditure Period expires.

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

Law and Analysis

Section 54A(d)(1) provides that a qualified school construction 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)(v) provides that for purposes of this paragraph, in the case of a
qualified school construction bond, a “qualified purpose” means a purpose specified in
section 54F(a)(1).

Section 54A(e)(4) 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).

At the time the Bonds were issued, District reasonably expected to spend all available
project proceeds within the Original Expenditure Period. The expected failure to spend
all available project proceeds of the Bonds by the expiration of the Original Expenditure
Period was caused by events that were not reasonably expected at the time the Bonds
PLR-140233-14 4

were issued, that were beyond the control of District, and that caused a significant delay
in committing and spending the Bond proceeds. The expected failure to spend all
available project proceeds was due to reasonable cause.

District will continue to spend the remaining available project proceeds on the Project
with due diligence. District expects to spend all available project proceeds not later than
Date 6, which is approximately 16 months after the Original Expenditure Period expires.

Conclusion

Under the facts and circumstances of this case, we conclude that District’s expected
failure to expend the available project proceeds of the Bonds by Date 2 is due to
reasonable cause and that District’s continued expenditure of the proceeds for qualified
purposes will proceed with due diligence. Therefore, District is granted an extension of
the Original 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 District’s authorized representative.

The ruling contained in this letter is based upon information and representations
submitted by District and is 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: _________________________
                                           James Polfer
                                           Chief, Branch 5