IRS Grants Issuer Three-Year Extension to Spend QSCB Proceeds

WASHINGTON — The Internal Revenue Service has continued its pattern of granting issuers more time to spend the proceeds of their qualified school construction bonds, ruling that one authority can have an additional three years to spend its QSCB proceeds.

The IRS gave the authority, which wasn't identified by name, an extension in a private-letter ruling dated April 2 and made available to the public until June 27. The letter 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 must be spent within three years, and any proceeds unspent in that time period have to be used to redeem bonds. However, issuers can have their expenditure periods extended.

To get an extension to spend QSCB proceeds, an issuer has to submit a request for an extension before the period expires. The issuer has to establish that there's a "reasonable cause" that the proceeds won't be spent within the original time period and that "the expenditures for qualified purposes will continue to proceed with due diligence."

In the past couple of years, the IRS has granted several issuers extensions. The recently released ruling "follows the general trend of all the prior rulings," said Matthias Edrich, a tax partner at Kutak Rock in Denver.

The PLR says the "authority" in questionis an instrumentality of a state. The authority's main function is to design and construct buildings — such as schools, shops, and health facilities — that can be leased to the state or any of its agencies or municipalities.

The proceeds of the bonds were to be used to pay some of the costs of constructing, renovating and improving about 100 public school facilities. As a result of unexpected events, the IRS said, some of the proceeds won't be spent within three years of issuance.

For 12 of the school facilities, the construction and rehabilitation work is expected to be completed within the original three-year period. The delay in spending some of proceeds has occurred because work was delayed due to the contractor's poor performance and there have been disputes over contract claims submitted by the contractor, the ruling said.

For four of the school facilities, the construction and rehabilitation work won't be completed within the three-year period. The delay occurred because of unforeseen situations including a default notice being issued to the contractor, the scope of the contracted work being revised, and the start of construction being delayed because the state hasn't yet granted land-use authorization.

Additionally, the proposed work on five of the school facilities that were originally going to be financed with the bond proceeds was canceled, while work on three new school facility projects has been added. Work on one of the added projects has been completed, and construction on the other two is expected to start soon.

The authority expects to spend all of the available proceeds of its QSCBs no later than three years after the original expenditure period expires.

In its ruling, the IRS said that "the expected failure to spend all the available project proceeds of the bonds by the expiration of the [original] 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 authority. However, authority 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."

The IRS mentioned that the added projects wouldn't cause a delay in spending all the proceeds any longer than it would be without those projects, which Edrich said suggests that just a good-faith effort to find alternative projects might not be enough to get an extension.

"I was surprised that the IRS pointed this out an additional fact," Edrich said. "The issuer's good-faith effort to spend the money should be enough."

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