Clean-energy bond proceeds get an 18-month expenditure extension

Plain-English summary

A municipal authority issued new clean renewable energy bonds to finance solar and battery systems at a police facility and a public school. It expected to spend all available proceeds within the original three-year period. After issuance, the grid operator required design changes for the police project, while unrelated school construction required redesign and rescheduling of the school project. The authority requested relief before the original deadline and represented that it would continue spending the proceeds diligently. The IRS found that the delays arose from unexpected circumstances beyond the authority's control and therefore constituted reasonable cause. It extended the expenditure period for 18 months, through the redacted date by which the authority expected to finish spending the proceeds.

Ruling snapshot

• Question: May the authority extend the three-year period for spending the clean-energy bond proceeds on the two solar projects?
• Outcome: Approved, with an 18-month extension
• Key authorities: IRC §§ 54A(d)(1), 54A(d)(2)(B), 54A(e)(4), 54C(a)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201903015                                              Third Party Communication: None
Release Date: 1/18/2019                                        Date of Communication: Not Applicable
Index Number: 54A.00-00
                                                               Person To Contact:
------------------                                             -----------------, ID No. --------------
-------------------------------                                Telephone Number:
------------------------------------------------------------   ----------------------
----------------------------------------                       Refer Reply To:
-------------------------------------                          CC:FIP:B05
-----------------------------------                            PLR-119667-18
                                                               Date:
                                                               October 16, 2018




LEGEND:

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

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

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

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

Project A         =        -----------------------------------------------------------------------

Project B         =        ----------------------------------------------------------

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

Authority is an enterprise of City and issues debt on behalf of City. Authority issued the
Bonds on Date 1 and designated the Bonds as new clean renewable energy bonds
within the meaning of § 54C(a). At the time the Bonds were issued, Authority expected
all available project proceeds of the Bonds would be spent not later than Date 2 on two
solar energy facilities, Project A and Project B (together the “Projects”).

Project A consists of the design and installation of a solar-powered electric system with
storage batteries on carport structures and other areas in the parking lot of a City police
facility. Project B consists of the design and installation of a solar-powered electric
system with storage batteries on the roof of a City public school.

The original three-year expenditure period for the Bonds under § 54A(d)(2)(B)(i) (the
“Original Expenditure Period”) will expire on Date 2. However, unexpected events have
resulted in an unforeseen delay in the expenditure of the available project proceeds of
the Bonds. As a result of these unexpected events, which are described below,
Authority was required to make certain design changes to the Projects and incurred
delays as a result. Authority seeks an extension of the Original Expenditure Period.

Upgrades to Project A and construction time estimates were, as of Date 1, based in part
on the technical requirements then imposed by the electrical grid system operator (the
“Operator”). Sometime after Date 1, Operator raised concerns regarding the timing of
electricity input to the grid by the Project A solar system. Taking into account the
concerns of Operator, Authority determined that design updates were necessary to
Project A to meet the energy timing demands for the police facility and Operator’s power
grid. Authority adapted the redesign of Project A to include Operator’s requirements
and expects to spend the Bond proceeds diligently to complete Project A.

Regarding Project B, Authority had planned as of Date 1 to construct the solar
improvements based on the existing school facilities. However, subsequent to Date 1,
the City school district (the “District”) issued general obligation bonds, the proceeds of
which will be used to make capital improvements, including new construction, to schools
across its jurisdiction, including the Project B school. District and Authority are
separate, unrelated governmental entities and Authority was not part of the process of
selecting the new improvements to the Project B school. Authority has adjusted the
design of Project B to account for new energy load and structural changes to the Project
B school and updated its construction schedule to reflect delays caused by the timing of
District’s upgrades.

Authority submitted this request for a ruling prior to Date 2. Authority expects to spend
all available project proceeds of the Bonds not later than Date 3, which is 18 months
after the Original Expenditure Period expires.

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 Projects
with due diligence. Authority expects to spend all available project proceeds of the
Bonds not later than Date 3, which is 18 months after the Original Expenditure Period
expires.

Conclusion

Under the facts and circumstances of this case, we conclude that Authority’s failure to
expend the available project proceeds of the Bonds by Date 2 was due to reasonable
cause based on unexpected circumstances 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 representatives.

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)

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