WASHINGTON — A city authority can have additional time to spend proceeds of its new clean renewable energy bonds after unanticipated events caused a "significant delay" in the commitment and spending of proceeds, the Internal Revenue Service ruled.
The IRS reached its conclusion in a private-letter ruling that was dated April 28 but not released until recently. The PLR did not identify the issuer or other parties and did not give specific dates. It was signed by James Polfer, head of the tax-exempt bond branch of the IRS chief counsel's office.
New CREBs are a type of tax-credit bond. The proceeds of tax-credit bonds are supposed to be spent within three years of issuance, but the IRS chief counsel's office has granted a number of extensions to spend the proceeds of these types of bonds.
Past extensions have been given to issuers of qualified zone academy bonds and qualified school construction bonds. Matthias Edrich, an attorney at Kutak Rock in Denver, said this is the first ruling he's seen where the IRS has granted an extension to spend new CREB proceeds.
The issuer in the ruling is an authority that is a department of a city and issues debt on the city's behalf. The authority issued new CREBs to finance two solar energy facilities and a renewable hydroelectric plant.
At the time that the bonds were issued, the authority expected to spend all the available project proceeds within three years. But "several unexpected events" led to a delay in spending a certain amount of the proceeds, Polfer wrote.
Two private labor unions had a jurisdictional dispute over which organization had the right to participate in the construction of the solar energy facilities. The authority and the city worked on a resolution for the dispute that involved requesting clarification from the state, but the state didn't provide clear direction, so final contract approval with a private contractor became impractical.
The dispute contributed to construction delays of the solar energy facilities. About 10 months after the bonds were issued, the authority developed a new relationship with the city under which the solar electric systems were designed by authority engineers and the facilities were constructed by city work crews, according to the ruling.
Construction of the renewable hydroelectric plant and one of the solar energy facilities has been completed. For the other solar energy facility, phase 1 of the construction has been finished, but this phase took longer than initially expected "due to site constraints and unforeseen site conditions," Polfer wrote. The authority and the city will now start working on phase 2 of constructing the facility, and the remaining amount of unspent bond proceeds are allocated to phase 2.
The authority requested that the expenditure period be extended to 18 months after the original expenditure period expires. It requested an extension before the three-year period ends.
Under federal tax law, 100% of available project proceeds new CREBs and other tax-credit bonds must be spent within three years of issuance, and any proceeds unspent in that time period must be used to redeem the bonds.
Before the original expenditure period expires, issuers can request additional time to spend the proceeds. An extension can be granted if the issuer establishes that there's a reasonable explanation for why the proceeds can't be spent within the original time period and that "the expenditures for qualified purposes will continue to proceed with due diligence."
The IRS chief counsel's office concluded in the ruling that the district met the criteria for an extension, and it granted the district an 18-month extension.
Ed Oswald, a partner at Orrick Herrington and Sutcliffe in Washington, said the ruling is helpful but is also "indicative of a larger problem with the statutory provisions governing tax-credit bonds."
Despite the fact that issuers reasonably expect to spend all their bond proceeds within three years, delays in projects, particularly those relating to renewable energy, are common. And it's expensive and time-consuming for issuers to request private-letter rulings that grant them extensions, Oswald said.
"The portion of the Internal Revenue Code, which currently requires that 100% of the bond proceeds be spent within three years of the issue date, should be amended to provide for a longer spending period," Oswald said. "In the alternative, the tax credit bond rules could be amended to mirror the tax-exempt expenditure rules, which generally require a reasonable expectation that 85% of the bond proceeds be spent within three years of the issue date."
Edrich agrees that ruling requests are expensive and suggested that perhaps there should be a less burdensome process for requesting extensions. However, he said he doesn't think the three-year limit to spend proceeds is unreasonable. One of the reasons the limit was set was so that proceeds would be spent quickly, spurring economic growth, he said.
