WASHINGTON — The Internal Revenue Service has extended by two years the period in which an educational nonprofit organization can spend the proceeds of qualified school construction bonds.
The IRS granted the extension in a private-letter ruling that was dated Feb. 3 but was not made available to the public until May 16. It did not identify the issuer or the borrower, and was signed by Timothy Jones, senior counsel in the tax-exempt bond branch of the chief counsel's office.
QSCBs are taxable, tax-credit bonds whose proceeds can finance the construction, rehabilitation or repair of public school facilities, as well as the acquisition of land where the facilities will be constructed.
Under federal tax law, 100% of QSCB proceeds have to be spent within three years, and any proceeds unspent in that time period have to be used to redeem bonds. However, an extension of the expenditure period can be granted if the issuer submits a request for an extension before the period expires and establishes that the proceeds will not be spent within the original time period due to "reasonable cause" and that "the expenditures for qualified purposes will continue to proceed with due diligence."
The issuer mentioned in the PLR was an authority that was organized in part to assist in financing programs and loans to political subdivisions and nonprofits. The borrower was a nonprofit educational organization. The authority issued the QSCBs for the nonprofit, and the proceeds were to be spent on acquiring a site for a school and building a new facility.
The nonprofit began looking for a location for the new facility about two years before the bonds were issued, and it found a site that it planned to acquire about a month after the bonds were issued. During the two-year period prior to issuance, the nonprofit also had been making plans for financing and constructing the facility, the IRS said.
"However, progress toward completion of both phases of the project within the original schedule was delayed significantly by unanticipated events which arose before issuance of the bonds," the IRS said. One of these events was that there was a prolonged search for a new site for the facility after a court determined that the initial location needed to be changed because a school at the original site was not expected to achieve federal desegregation goals in the area.
The nonprofit began searching for a new site immediately after the court's ruling, and it entered into an agreement to purchase a substitute site about eight months after the QSCBs were issued. But after the nonprofit completed development plans for that location, town engineers determined that the town couldn't furnish sewer services to that site because of the high cost of sewer treatment facilities, according to the IRS ruling.
The nonprofit then conducted another search for a school site and settled on and acquired that property. The nonprofit organization expects construction of the new facility to be finished about six months after the original expenditure period expired. It anticipates that it will spend all the proceeds no later than two years after the original expenditure period expired, the IRS said.
The IRS granted a two-year extension because it decided that the issuer met the criteria to be eligible for one.
"The expected failure to spend all the available project proceeds of the bonds by the expiration of the three-year period ... has been caused by events that were not reasonably expected at the time the bonds were issued and were beyond the control of borrower," the IRS wrote. "However, [the] borrower, to the extent possible considering the described unexpected external events that resulted in unforeseen delays, has and will continue to exercise due diligence in spending the remaining available project proceeds on the project."
Bond lawyers said the IRS made the correct ruling in this case.
"To me, this is the right answer. It's a reasonable ruling," said Kimberly Betterton, a partner at Ballard Spahr in Baltimore. She noted that the borrower had reasonable expectations that it would spend the proceeds within three years, and there was a good reason why the proceeds were not spent in that period.
Matthias Edrich, an attorney at Kutak Rock in Denver, said that this ruling is similar to a few others that have been issued during the past two years. He added that issuers of QSCBs and other types of tax-credit bonds with requirements to spend proceeds in three years should track their expenditures and make sure that, if they need extensions, they request them early enough.
