WASHINGTON - A top House tax committee lawyer suggested that state and local issuers would be foolish to either avoid Build America Bonds or issue them with all sorts of special call or redemption features because they fear Congress will stop providing cash payments to them in the future.

"If an issuer gives up anything to avoid the risk of Congress terminating [the payments] midstream, they are wasting state and local assets, the risk is so negligible," John Buckley, the House Ways and Means Committee's chief tax counsel, said Saturday. "The risk is about the same as Congress terminating tax exemptions for existing issues."

Buckley's comments, delivered at the spring meeting of the American Bar Association's tax-exempt financing committee here, marked the latest attempt by government officials to assuage concerns that Congress may at some point revisit and put an end to direct-pay BABs, which are taxable bonds that permit issuers to receive cash payments equaling 35% of the interest costs.

Several market participants have expressed concern that the BAB subsidies could be potentially discontinued, but government officials have repeatedly stated that the payments are not in danger, and are more secure than some initiatives because they are not subject to the typical political pressures that come with traditional appropriations. Rather, the payments are treated like tax refunds.

If Congress decides to discontinue the program following its sunset at the end of 2010, it will be on a purely prospective basis, and the federal government will continue to make payments to issuers for BABs issued, Buckley said.

Meanwhile at a separate ABA panel Friday, an Internal Revenue Service official said that the tax-exempt bond branch is putting together a specific team to handle BABs.

Clifford J. Gannett, director of the IRS' bond branch, said the team will consist of about 10 agents and an experienced group manager and will focus on checking the validity of requests for payments under the program.

The team will check for validity mainly by comparing information on Form 8038-CP, which requests payment, with that on Form 8038-G, the annual information return filed by tax-exempt issuers. They'll be checking to ensure the claims are valid, and that there are no irregularities between the two forms.

"We may be seeing significant amounts of money being requested with a one-page return," Gannett said. "We're going to need to really try to get in before we issue the payment to figure out if there's something that suggests either this is not a valid issue ... or there's some other irregularity."

Although he wants issuers to following the regulations and timelines in place for requesting payments, he said his office's top priority will getting out payments promptly and consistently rather than enforcing strict deadlines.

"Our mandate has really been to get these payments out contemporaneously with the interest payment dates - that's been our plan," Gannett said.

"I don't want to indicate that you don't have to follow the kind of regime we have set up, but we are already finding with some of the initial issuances that there are quirky aspects of these bonds," he added. "There are instances where something inadvertently goes wrong and the issuer and the trustee haven't done exactly what they needed to do. I think there's going to be some flexibility."

Gannett said his office also plans to follow up with formal audits on two recently concluded research projects on tax increment financing projects and community development districts. The findings of the projects indicated that further examinations are needed, he said.

On the regulatory front, John J. Cross 3d, associate tax legislative counsel for the Treasury Department's office of tax policy, said his office hopes to get out two pieces of guidance by the end of May.

One would provide the allocations for the $25 billion of recovery zone bonds authorized by the stimulus law - $10 billion of recovery economic development bonds which Cross described as "a jazzed-up version of BABs" and $15 billion of recovery zone exempt facility bonds, which are private activity bonds.

BABs generally provide a 35% subsidy or credit, but RZEDBs provide a 45% benefit. Those bonds, which can be issued this year and next, will be allocated to areas nationwide that experienced large increases in unemployment in 2008. Cross said the Treasury plans to divide the allocations among states, and also large counties and cities.

The other guidance will detail how tribal governments should request the $2 billion of tax-exempt tribal government economic development bonds authorized by the stimulus.

Cross acknowledged that many market participants are eagerly awaiting guidance on "stripping" the tax credits from tax-credit bonds and selling them separately. Issuers and investors alike gained the ability to sell the credits separately last summer, and it became increasingly relevant after the stimulus law authorized tens of billions of dollars of tax-credit bonds.

Cross said stripping could broaden the market for tax-credit bonds, because it will allow issuers to sell the bonds to investors with no use for tax credits, and the credits to investors not interested in buying bonds. But even though his office has identified the stripping guidance as "a high-priority project," the complexity of the issue will mean that it will not come out until sometime this fall, he said.

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