The Internal Revenue Service granted a state agency a one-year extension so that a city could spend all of its proceeds of qualified school construction bonds, according to a recent private letter ruling.
The IRS published the PLR on December 3, but it wasn’t made public until last week. The PLR does not identify any of the parties involved.
Bond attorneys said the letter-ruling is helpful and that school districts in other pooled financings could easily find themselves in similar circumstances.
The letter said a state authority was created to facilitate and reduce the cost of financing the construction of public schools. The authority issued qualified school construction bonds. The bonds were pooled and the authority applied the proceeds to purchase the school bonds issued by seven different localities.
QSCBs are taxable, tax credit bonds, which can be issued by states and large, local educational agencies to finance school construction or rehabilitation. They can be issued as traditional tax credit bonds, where investors receive tax credits, or as direct-pay bonds, where issuers receive subsidy payments from the Treasury Department equal to the actual interest rate on the bonds or the tax credit rate.
Under federal tax law, tax-credit bonds are given a three-year spending period “upon submission of a request.”
As of a certain date, six of the seven localities had spent all of their available bond proceeds.
However, one city had not spent all of the proceeds allocated to it. In this case, the city determined, before issuing the bonds, that the proceeds would not be enough to fund both of its school projects. The city opted to move forward with one project it felt was higher priority before spending any bond proceeds on the second project.
The higher priority project was redesigned, favorable construction bids were obtained, and it was completed with additional bond proceeds still remaining.
The city decided to proceed with a scaled down version of the second project. It obtained an acceptable bid for the project and wanted to move forward, but completion of the project would not occur within the three-year project.
It asked the IRS, before the three-year spending period ended, for an extension to spend the bond proceeds.
“Completion of this addition will require at least six months,” the IRS said the city told it. “This unexpected series of events has resulted in an unforeseen delay in the spend-down of the available project proceeds.”
The IRS agreed to the extension. The “city’s failure to expend its allocable portion of the available proceeds of the bonds was due to reasonable cause and that city’s expenditures of the proceeds for qualified purposes will proceed with due diligence,” the IRS wrote in the PLR.
David Caprera, a partner at Kutak Rock in Denver, said, “This is just another example of where the borrower was well intentioned, ‘stuff happened’ and the IRS Chief Counsel’s office was there to help.”
Caprera said he would expect in similar circumstances other issuers would receive similar results.
Linda Schakel, partner with Ballard Spahr, also said that the facts cited in the PLR seem typical and appear to justify the extension of time.
“With the economic downturn, many schools did find that bids came in lower than expected and they had unexpected unspent proceeds,” Schakel said.
It was “helpful” that the IRS was willing to deal with one borrower separate from the others in a pooled financing for this purpose, as “many states did find pooled issuances to be the most cost-effective for the smaller school districts,” Schakel said.
“In those cases, all borrowers were expecting that expenditures for their projects would not affect the projects of the other borrowers if one borrower was unable to spend all of its proceeds within the three-year period,” she said.
The IRS notes that the PLR was only directed to the taxpayer who requested it and that it may not be used or cited as a precedent. But market participants often look to them for guidance in areas where it has not been given.