WASHINGTON – The Internal Revenue Service has granted a city more time to spend the proceeds of qualified zone academy bonds after determining that the failure of school districts to spend the proceeds within the required time frame was due to reasonable cause.
The IRS’ decision was detailed in a private letter ruling that was dated April 1 but not made public until late last week. The letter-ruling did not identify the city, the school districts, or the bonds and was signed by Timothy Jones, senior counsel in the IRS’ chief counsel’s office.
“We concluded that the district’s failure to expend its allocable portion of the available project proceeds of the bonds was due to reasonable cause and that district’s expenditures of the proceeds for qualified purposes will proceed with due diligence,” Jones said in the letter.
The bonds were issued by the city and designated as QZABs, according to the letter-ruling. The bond proceeds were allocated among 17 public school facilities and each of them was budgeted a specific amount of the bond proceeds. The original three-year expenditure period for the bonds was set to expire. Several unexpected events resulted in an unforeseen delay in the spend-down of the available project proceeds, the letter said. The city sent a request to the IRS for an extension to use the bonds for the project before the expenditure period expired.
“The project was identified prior to the issuance of the bonds and the district reasonably expected to spend all of its allocable available project proceeds within the three-year period,” the IRS said. “The failure to spend all of the available project proceeds of the bonds by the expiration of the three-year period…was caused by events that were not reasonably expected at the time the bonds were issued and were beyond the control of either the city of district.”
Under Section 54A(d)(1) of the Internal Revenue Code, a QZAB is treated as a qualified tax credit bond and that 100% of the available project proceeds need to be used by the close of the three-year expenditure period for one or more qualified purposes.
QZABs are taxable tax credit bonds that can only be issued by a state or local government within the jurisdiction of a qualified zone academy. A qualified zone academy is any public school or program established and run by an eligible local education agency to educate and train teachers and other education personnel.
QZABs can be issued to rehabilitate or repair public school facilities, purchase equipment, develop course materials, and to train teachers and other school personnel. They can’t be used for new construction.
The QZAB program was first authorized in 1997 and extended to 2013. A total of $400 million of QZABs can be issued in the 2013 calendar year, according to IRS allocations. Unused QZAB volume cap allocation can be carried forward for only two years and then it expires.