School bond proceeds receive a ten-month expenditure extension

Plain-English summary

A state instrumentality issued qualified zone academy bonds to rehabilitate and repair public schools. Contract disputes, permitting delays, historic-building redesignations, and unexpected population shifts delayed work at some schools beyond the original three-year expenditure period. The issuer requested relief before that period expired and represented that it would continue spending the proceeds with due diligence. The IRS found reasonable cause and extended the expenditure deadline by approximately ten months to the represented completion date.

Ruling snapshot

• Question: May the issuer extend the period for spending qualified zone academy bond proceeds on its school project?
• Outcome: Approved through the requested later date, approximately ten months after the original deadline.
• Key authorities: IRC §§ 54A(d) and (e), and 54E(a).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201516051 Third Party Communication: None
Release Date: 4/17/2015 Date of Communication: Not Applicable
Index Number: 54A.00-00
Person To Contact:
---------------------------------------------- ----------------, ----------------------
------------------------ Telephone Number:
------------------------------------------------- --------------------
------------------------------------------------------------ Refer Reply To:
----------------------- CC:FIP:B05
---------------------------------------------------------- PLR-134584-14
Date:
December 18, 2014

LEGEND:

Authority = ---------------------------------------------------------

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

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

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

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

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

x = ---

y = ---

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 zone academy bonds.

Facts and Representations
PLR-134584-14 2

Authority is a body corporate and politic constituting an instrumentality of State. The
primary functions of Authority are to design and construct office buildings, quarters,
courts, warehouses, shops, schools, health facilities, social welfare facilities, and related
facilities for lease to State or any of its departments, agencies, instrumentalities, or
municipalities. Authority is empowered to issue bonds for any of its corporate purposes.

Authority issued the Bonds on Date 1 and designated the Bonds as qualified zone
academy bonds within the meaning of section 54E(a). All available project proceeds of
the Bonds were to be spent on rehabilitating and repairing approximately x public
schools throughout State (the “Project”). All available project proceeds of the Bonds
were expected to be spent not later than Date 2.

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.

Due to unforeseen circumstances at y of the approximately x public school facilities,
Authority does not expect to complete the rehabilitation efforts before the expiration of
the Original Expenditure Period. These unforeseen circumstances include major
contract disputes with contractors, delays in the governmental permitting process,
certain schools being redesignated by State as historic buildings, and altered
development plans resulting from unexpected and significant population migration.

Authority represents that all of the available project proceeds of the Bonds will be spent
on the Project by Date 3, which is approximately 10 months after the Original
Expenditure Period expires.

Authority submitted this request for a ruling prior to the expiration of the Original
Expenditure Period.

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).
PLR-134584-14 3

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).

At the time the Bonds were issued, Authority 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 due to reasonable cause. The expected failure was caused by events that
were not reasonably expected at the time the Bonds were issued and were beyond the
control of Authority. These events caused a significant delay in committing and
spending the Bond proceeds.

Authority will continue to spend the remaining available project proceeds on the Project
with due diligence. Authority expects to spend all available project proceeds not later
than Date 3, which is approximately 10 months after the Original Expenditure Period
expires.

Conclusion

Under the facts and circumstances of this case, we conclude that Authority’s expected
failure to expend the available project proceeds of the Bonds by Date 2 is due to
reasonable cause and that Authority’s continued expenditure of the proceeds for
qualified purposes will proceed with due diligence. Therefore, Authority is granted an
extension of the Original Expenditure Period with respect to the Bonds until Date 3.

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.
PLR-134584-14 4

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

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