Unspent Build America Bond proceeds do not defeat prior credits

Plain-English summary

A bond issuer planned to use tax-exempt refunding bonds to redeem Direct-pay Build America Bonds while some original project proceeds remained unspent. It represented that the remaining proceeds and their earnings would still be spent on capital expenditures. The IRS ruled that having those proceeds unspent on the redemption date would not retroactively disqualify the original bonds under section 54AA(g)(2) or eliminate the issuer's section 6431 credits for the period before redemption. The ruling was conditioned on the issuer not using any of the remaining proceeds for noncapital expenditures.

Ruling snapshot

• Question: Does redeeming Direct-pay Build America Bonds while project proceeds remain unspent retroactively disqualify the bonds and their prior credits?
• Outcome: approved; the bonds retain qualified status and prior credits if the unspent proceeds are used only for capital expenditures
• Key authorities: IRC §§ 54AA(d), 54AA(g), 6431, 54A; Treas. Reg. § 1.142-2(d)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201702009 Third Party Communication: None
Release Date: 1/13/2017 Date of Communication: Not Applicable
Index Numbers: 103.02-02, 54.09-00
Person To Contact:
----------------------- ---------------------- ID No. ------------
---------------------- Telephone Number:
--------------------------------------------------------- --------------------
------------------------ Refer Reply To:
-------------------------------- CC:FIP:5
PLR-112574-16
Date:
October 14, 2016

Legend

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

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Issuer = --------------------------------------------------------------

-

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

-

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

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

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

a = -------------------------
PLR-112574-16 2

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

This letter is in response to your request for a ruling that the existence of unspent
available project proceeds of the Bonds on the date that proceeds of the Refunding
Bonds (as defined below) are used to redeem the Bonds in a current refunding will not
retroactively cause the Bonds to lose their status as “qualified bonds” within the
meaning of section 54AA(g)(2) of the Internal Revenue Code (“Code”), and therefore
will not cause the Issuer to lose any credit under section 6431 for the Bonds.

FACTS AND REPRESENTATIONS

On Date 1, the Issuer issued the Bonds to finance certain capital projects for the City
and irrevocably elected to treat the Bonds as Direct-pay Build America Bonds under
sections 54AA(d)(1), 54AA(g) and 6431. Consistent with section 54AA(g)(2), the Issuer
covenanted to spend 100 percent of the available project proceeds of the Bonds for
capital expenditures (excluding available project proceeds deposited in a reasonably
required reserve fund for the Bonds) (the “Capital Expenditures Requirement”). On Date
2, a percent of the available project proceeds of the Bonds (excluding amounts in the
reasonably required reserve fund) remain unspent (the “Unspent Proceeds”). The
Issuer represents that all of the available project proceeds except the Unspent
Proceeds and amounts in a reasonably required reserve have been spent for capital
expenditures.

The Issuer and the City intend to refinance the Bonds by issuing tax-exempt bonds (the
“Refunding Bonds”) to currently refund the Bonds on a date before Date 3. To
accomplish the proposed refunding, proceeds of the Refunding Bonds, the proceeds of
the Bonds currently held in the reasonably required reserve fund for the Bonds, and
revenues, if any, in a bona fide debt service fund for the Bonds will be deposited into an
escrow fund to pay principal of and interest on the Bonds at redemption. The Issuer
represents that it expects to spend the Unspent Proceeds, and any earnings thereon,
on capital expenditures by Date 3.

LAW

Section 54AA(d) provides that the term “build America bond” means any obligation
(other than a private activity bond) if (A) the interest on such obligation would (but for
this section) be excludable from gross income under section 103, (B) such obligation is
issued before January 1, 2011, and (C) the issuer makes an irrevocable election to
have this section apply.

Section 54AA(g) provides that in the case of a qualified bond issued before January 1,
2011: (1) in lieu of any credit allowed under this section with respect to such bond, the
issuer of such bond shall be provided a credit as provided in section 6431 and (2) for
purposes of this subsection, the term “qualified bond” means any build America bond
PLR-112574-16 3

issued as part of an issue if (A) 100 percent of the excess of (i) the available project
proceeds (as defined in section 54A) of such issue, over (ii) the amounts in a
reasonably required reserve (within the meaning of section 150(a)(3)) with respect to
such issue, are to be used for capital expenditures, and (B) the issuer makes an
irrevocable election to have this subsection apply. (We refer to bonds described in
section 54AA(g) as “Direct-pay Build America Bonds” and the election in section
54AA(g)(2)(B) as the “Election Requirement”.)

Section 54A defines available project proceeds as (1) the excess of the proceeds from
the sale of an issue over the issuance costs financed by the issue to the extent such
costs do not exceed 2 percent of such proceeds and (2) the proceeds from the
investment of such excess.

ANALYSIS

At issue is whether the proposed current refunding will cause the Bonds to fail to meet
the Capital Expenditures Requirement when, at the time of the refunding, proceeds of
the Bonds remain unspent. Section 54AA(g)(2) requires that 100 percent of the
available project proceeds over the amounts in a reasonably required reserve are to be
used for capital expenditures. The phrase “are to be used” appears in many of the
Code provisions related to tax-advantaged bonds. For example, an exempt facility bond
under section 142 means a bond that is part of an issue of which 95 percent or more of
the net proceeds are to be used to provide an exempt facility. Under section 1.142-2(d),
a failure to properly use proceeds occurs on the date when the issuer reasonably
determines that unspent proceeds will not be used to complete the financed facility or
for spent proceeds, when such proceeds are not used for a qualifying purpose.

The Issuer represents that all of the available project proceeds except the Unspent
Proceeds and amounts in a reasonably required reserve have been spent for capital
expenditures. The Issuer continues to expect that the Unspent Proceeds and the
earnings thereon will be spent for capital expenditures after issuance of the Refunding
Bonds.

CONCLUSION

Based on the above representations, we conclude that the existence of the Unspent
Proceeds on the redemption date of the Bonds will not retroactively cause the Bonds to
lose their status as “qualified bonds” within the meaning of section 54AA(g)(2) and,
consequently, will not cause the Issuer to lose any credit under section 6431 for the
Bonds for the period prior to the date of redemption. This conclusion is based on the
condition that the Issuer does not spend any of the Unspent Proceeds for other than
capital expenditures.
PLR-112574-16 4

Except as provided herein, no opinion is expressed or implied about the tax
consequences of any transaction or item discussed in this letter. We specifically
express no opinion about whether the Bonds remain qualified bonds if at any point, the
Issuer no longer expects to spend remaining Unspent Proceeds on capital
expenditures. We specifically express no opinion about whether the Bonds will be
reissued upon the deposit of proceeds of the Refunding Bonds into an escrow fund to
pay principal of and interest on the Bonds at redemption.

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 the authorized representative of the Issuer.

The ruling contained in this letter is based upon information and representations
submitted by the Issuer 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, such materials are subject to verification upon
examination.

                                               Sincerely,

                                               Associate Chief Counsel (Financial
                                               Institutions and Products)

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