ATLANTA — A Treasury Department official Monday said that federal regulators already have attempted to assuage muni market participants’ worries about how to determine issue price for Build America Bonds in guidance issued in April, even though issuers continue to air concerns about the lack of guidance.
John Cross 3d, the Treasury’s associate tax legislative counsel, emphasized “as strongly as possible” a sentence in recent guidance that instructs issuers to rely on current regulations on issue price, and that any future changes would be strictly prospective.
Notice 2010-35, which outlined how issuers could opt to receive direct payments on tax-credit bonds, included a statement from the Treasury saying it and the Internal Revenue Service were looking into the definition of issue price for BABs to determine whether additional rules or limitations were needed. It also said any changes would only affect bonds going forward, and would not retroactively alter requirements.
“We’re not going to change the rules in midstream without making [them] prospective,” Cross said, adding the phrasing was a bid to “calm the waters on this.”
“We appreciate that it’s a significant issue, and that’s one of the main reasons we put it” in the notice, he said.
Cross’s comments came in response to an assertion by Ben Watkins, Florida’s bond finance director, that the federal government wants to change how issuers should handle issue price for BABs without providing clear guidance on what should be done differently.
“It’s incumbent on the Treasury that if they are going to change the standards and market practices that we’ve all relied on, it’s their responsibility to be very clear about what the rules are,” Watkins said. “If we don’t know what the rules are, it’s very hard to follow them.”
Watkins’s comments came as part of a panel discussion of BABs at the Government Finance Officers Association’s 104th annual conference here.
How issue price should be determined for BABs has been a hot topic of discussion in recent months, driven largely by a questionnaire the IRS is sending to every BAB issuer asking if they are tracking the secondary market trading of their bonds. Issuers have complained they typically rely on the underwriter for certifications that the bonds were priced appropriately. The IRS has maintained it is asking simply for informational purposes.
Determining issue price is of particular importance for BABs due to a tax law requirement that BABs cannot be sold at more than a de minimis amount of premium, implying that if the premium is too high, the bonds would not qualify as BABs and the IRS would not send the subsidy payments equal to 35% of interest costs.
The debate reached a fever pitch after Steve Chamberlin, manager of the IRS tax-exempt bond office’s compliance and program management section, told bond lawyers during a teleconference in May that up to 50% of BABs could be audited.
Last week, Steven Miller, the IRS deputy commissioner for services and enforcement — effectively the individual overseeing all the agency’s enforcement activities— said it was far too premature to know how many BABs might be audited.
“Right now, to say exactly that we have the percentage or that we have a target in mind, I think that’s inaccurate,” he said in an interview.
The IRS has also unveiled a draft of a revised questionnaire it ultimately plans to send to BAB issuers with more specific questions, which Watkins said “gets worse, not better, from an issuer perspective.”
The IRS’ perceived aggressive stance on BABs has attracted attention among BAB proponents both within the Treasury and Congress, market sources said. The Treasury has repeatedly touted BABs as saving state and local issuers billions of dollars compared to selling tax-exempt debt, and Ways and Means Committee chairman Sander Levin, D-Mich., says the program has created thousands of jobs for infrastructure projects.
One market player yesterday noted the discussion comes after the IRS tax-exempt bond office nearly doubled in size last year and now has more than 100 employees. TEB now plans to close 1,200 examinations by the close of its fiscal year on Sept. 30, more than double the all-time high of 581.
