WASHINGTON - A new tax-credit bond program authorized by Congress in the recently enacted farm law is actually a disguised "earmark" for $250 million of federal funds that would be used to finance a massive conservation project in Senate Finance Committee Chairman Max Baucus' home state of Montana, according to statutory and regulatory provisions, as well as market participants.

The Internal Revenue Service issued a 21-page notice late Friday detailing the requirements, and soliciting applications, for the new qualified forest conservation bond program, under which the IRS is authorized to allocate up to $500 million of tax-credit bonds for conservation projects that meet certain criteria. The program is designed, ostensibly, to provide tax credit bonds to help finance the acquisition of forest land for conservation purposes.

Tax-credit bonds are taxable bonds that provide bondholders with tax credits in lieu of tax-exempt interest.

But the new law contains some unusual provisions that would allow two nonprofit conservation groups to obtain a $250 million check from the IRS, which they could then use to finance the acquisition of 320,000 acres of Montana forest from Plum Creek Timber Co. in what some say may be the largest conservation land deal of its kind. The two groups are The Nature Conservancy of Montana and the Trust for Public Land.

The QFCB provisions in the $370 billion farm bill, which were added at the urging of Baucus, stipulate that the program can only be issued for projects that are at least 40,000 acres of land that partially borders National Park land and that is subject to a native fish habitat conservation plan.

This specific criteria, which raised the eyebrows of several muni market participants, exactly mirror the project in Montana, which is called "The Montana Legacy Project."

In addition, the statute contains some unique provisions under the heading, "Election to Treat 50 Percent of Bond Allocation as Payment of Tax," that would allow any organization that applies for the tax-credit bonds to, alternatively, receive a "tax refund check" from the Treasury Department that equals 50 percent of the amount of bonds for which they applied. And the law makes clear that organizations, such as the nonprofit conservation groups, can receive such a refund check even if they do not pay substantial taxes.

"The qualified issuer (without regard to whether the issuer is subject to tax under this chapter) shall be treated as having made a payment against the tax imposed by this chapter, for the taxable year preceding the taxable year in which the allocation is received, in an amount equal to 50 percent of the amount of such allocation," the law states.

The IRS notice is even more explicit in a section entitled, "Election to receive cash instead of using the allocation to designate QFCBs." The notice makes clear that any group that seeks the full $500 million allocation of QFCBs can seek 50% of that amount in the form of a "tax refund check" and that the check does not have to have anything to do with tax liability.

"The [Treasury] shall not use the deemed payment of tax as an offset or credit against any tax liability of the issuer but shall refund the deemed payment to the issuer," the notice states.

In other words, market participants said, since the two conservation groups are both tax-exempt 501(c)(3) organizations and do not have any substantial tax liabilities to pay down, they could use the refund check for their financing needs.

The Nature Conservancy of Montana and the Trust for Public Land are currently prepping their application for the QFCBs, an official of one of the groups said yesterday. The groups plan to purchase 320,000 acres for a total of $510 million, $250 million of which is expected to come from public financing. The responsibility to conserve and develop the land will then be shared between the state and federal governments, as well as some private parties.

However, TPL officials say they plan to apply for all $500 million of bonding authority.

"We're going to apply for all of it, and hope we get all of it," said Eric Love, Northern Rockies Program Director for TPL.

While Love said its financing approach "depends on what the bond market looks like at the time," Deb Love, the Montana program director for the TPL and the wife of Eric, said the groups likely will opt for the refund check.

"At this point, I think we'll be doing the tax rebate option," she said. "That's the likely scenario."

The IRS notice said that potential applicants have until Oct. 21 to file an expression of interest for the QFCBs with the IRS. A preliminary application is due no later than Feb. 18, 2009, and a final application is due on April 1, 2010.

Beyond ensuring the applicants meet the requirements of the program, it is unclear what criteria will be used to determine how the funds will be allocated. And sources said that the IRS' Office of Chief Counsel will handle the applications.

But market participants and TPL officials said they were unaware of anyone else that would meet the program criteria. "I don't know how many others would be able to take advantage of this," said one lawyer who did not want to be identified.

While the provisions in the new law and IRS notice took many market participants by surprise, House Minority Leader John Boehner, R-Ohio, lambasted the program as targeted funds for a pet project disguised as a new tax credit bond program in May.

"Instead of being open and honest about their intentions to spend $250 million in taxpayer money, Democrats attempted to keep it secret by crafting the provision to ensure the funds go only to a federal forest project of a certain size that also has fish," he said. "In the whole country, only one tract fits the bill - and it happens to be located in Sen. Baucus' home state of Montana."

A spokesperson for Baucus did not return several calls for comment.

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