In a private letter ruling (the “Ruling”) dated December 18 and released on Friday, April 17, 2015, the IRS ruled that an authority could have additional time to spend the proceeds of its Qualified Zone Academy Bonds (“QZABs”) when “unforeseen circumstances” such as contractor disputes, permit acquisition delays and development plan changes occurred. Despite being devoid of the identity of the issuer and specific dates, the Ruling did identify the issuer as an authority that is the instrumentality of a state and constructs facilities for lease to the state and its municipalities. The authority issued QZABS, intending to use the proceeds to rehabilitate and repair public schools within the state where the authority is located. The authority expected to spend the QZAB proceeds within three years.
Due to unforeseen circumstances, such as contractor disputes, permit acquisition delays and altered development plans, the authority did not spend the proceeds of it QZABs within three years. The authority did, however, represent to the IRS that it expected to spend the QZAB proceeds within 10 months after the original three year expenditure period. Federal law dictates that 100% of available project proceeds for QZABs, qualified school construction bonds and other tax-credit bonds, must be spent within three years of issuance. Unspent proceeds must be used to redeem the bonds. Prior to the expiration of the original three year expenditure period, an issuer may request additional time to spend the proceeds. This extension will be granted if the issuer provides a reasonable explanation as for why the proceeds will not be spent within the original three year expenditure period and represents that expenditures for qualified purposes will continue with due diligence. Utilizing this framework, the IRS concluded that the authority met the criteria for an extension and granted the authority a ten month extension to spend the proceeds of the QZABs.
Issuers, authorities, and clients interested in obtaining more information regarding the Ruling and its effect on their particular bond issues should contact us directly. The lawyers at McKennon Shelton & Henn LLP are well versed in IRS Regulations as they pertain to bond issues and post issuance compliance matters. We are available to assist you with any bond financing and related tax issues you may have.