Project delays justified more time to spend bond proceeds

Plain-English summary

A city authority issued new clean renewable energy bonds to finance two solar facilities and a hydroelectric plant. A labor-jurisdiction dispute, the need to change the construction arrangement, and unforeseen site conditions delayed the second phase of one solar facility. The other projects and the first phase had been completed, and the remaining bond proceeds were allocated to the unfinished phase. The IRS found reasonable cause for the delay and found that spending would continue with due diligence. It extended the three-year expenditure period by 18 months.

Ruling snapshot

• Question: Could the authority receive more time to spend the remaining clean-energy bond proceeds?
• Outcome: Approved, with an 18-month extension
• Key authorities: IRC §§ 54A(d)(2)(B) and 54C(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201531002 Third Party Communication: None
Release Date: 7/31/2015 Date of Communication: Not Applicable
Index Number: 54A.00-00
Person To Contact:
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--------------------- Telephone Number:
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-------------------------------------- Refer Reply To:
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---------------------------------------------------- PLR-113277-15
Date:
April 28, 2015

LEGEND:

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

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

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

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

a = -----------

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

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

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

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 new clean renewable energy bonds.

Facts and Representations
PLR-113277-15 2

Authority is a department of City and issues debt on behalf of City. City is duly
organized and existing under the Constitution and laws of State. City is a political
subdivision of State.

Authority issued the Bonds on Date 1 and designated the Bonds as new clean
renewable energy bonds within the meaning of § 54C(a). All available project proceeds
of the Bonds were to be spent on two solar energy facilities (“Facility A” and “Facility B”)
and a renewable hydroelectric plant (“Facility C”) (together, “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”). At the time the Bonds were
issued, Authority expected that all available project proceeds of the Bonds would be
spent on the Project not later than Date 2. However, several unexpected events have
resulted in an unforeseen delay in the expenditure of $a of the available project
proceeds of the Bonds.

A jurisdictional dispute between two private labor unions developed over which union
had the right to participate in the construction of Facility A and Facility B. Authority and
City worked together to resolve the dispute. This resolution involved requesting
clarification from State. No clear direction was provided by State, making final contract
approval with a private contractor impractical. Resolution of the dispute contributed to
construction delays of Facility A and Facility B. Finally, approximately 10 months after
Date 1, in order to expedite the two projects and avoid the union dispute, Authority
developed a new working relationship with City under which the solar electric systems
were designed by Authority engineers and Facility A and Facility B were constructed by
City work crews.

Construction of Facility B consists of two phases. The first phase (“Phase 1”), design
and installation of a solar electric system, has been completed. However, this phase
took longer than originally anticipated due to site constraints and unforeseen site
conditions. The second phase (“Phase 2”) consists of the design and installation of a
second solar electric system. Because of the delays in completing Phase 1 of Facility
B, Authority and the City work crews used their available resources to complete the
construction of Facility A before proceeding with Phase 2. Facility A, Phase 1 of Facility
B, and Facility C have now been completed, and Authority and the City work crews will
now commence work on Phase 2 of Facility B. The $a of remaining unspent available
project proceeds of the Bonds are allocated to Phase 2.

In order to spend the remaining available project proceeds of the Bonds, Authority
requests an extension of the expenditure period for the available project proceeds until
Date 3, which is 18 months after the Original Expenditure Period expires.

Authority submitted this request for a ruling prior to Date 2.
PLR-113277-15 3

Law and Analysis

Section 54A(d)(1) provides that a new clean renewable energy 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)(ii) provides that for purposes of this paragraph, in the case of a
new clean renewable energy bond, a “qualified purpose” means a purpose specified in
§ 54C(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 18 months after the Original Expenditure Period expires.

Conclusion
PLR-113277-15 4

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.

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

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