Regulatory priorities for the Treasury Department and Internal Revenue Service this year and next include proposing guidance for Build America Bonds and other direct-pay bonds, according to plans they recently released.

The two agencies also plan to finalize public approval rules for private-activity bonds, as well as to propose arbitrage investment rules and long-promised reissuance rules.

They already completed two other projects on the list: finalizing rules for tax-exempt financed solid-waste facilities and providing guidance on when so-called draw-down bonds are considered issued for purposes of determining volume-cap limitations for private-activity bonds.

Draw-down bonds are privately placed with banks and the issuer draws down the proceeds in periodic amounts on an as-needed basis to finance construction projects.

The guidance on direct-pay bonds would come after 2,355 BAB issues totaling $181.82 billion have been issued since they were created by the American Recovery and Reinvestment Act of 2009, according to Thomson Reuters.

Build America Bonds are taxable bonds for which the Treasury makes subsidy payments to issuers equal to 35% of their interest costs.

The Hiring Incentives to Restore Employment Act, or HIRE, which was enacted in 2010, allowed muni issuers to also issue in direct-pay mode for other types of debt: qualified school construction bonds, clean renewable energy bonds, qualified energy bonds, and qualified zone academy bonds. These previously had only been issued as tax-credit bonds.

Market participants expect the Treasury Department to issue procedural guidance that will address such issues as what happens if issuers are late in filing forms for their subsidy payments and what happens if they miscalculate the subsidies they are owed.

A big issue they hope the IRS and Treasury will also address is what happens if a direct-pay bond issue violates tax laws. Would the subsidy payments be reduced on a pro-rated basis in line with the violation? What are the rights of an issuer in an enforcement proceeding?

Market participants are hoping Treasury officials will finalize most of the public approval rules for private-activity bonds that it proposed on Sept. 8, 2008.

Those rules addressed several practical problems and took into account technology advances in proposing how issuers must provide information and hold public hearings before issuing PABs under the Tax Equity and Fiscal Responsibility Act of 1982, or TEFRA.

Rules on whether variable-rate bonds and other tender-option bonds are considered reissued and potentially subject to new tax-law restrictions are expected to be issued 23 years after Treasury promised them.

Way back in 1988, the Treasury issued a notice on tender-option bonds, saying it would soon write rules. The department issued a notice addressing reissuance issues with auction-rate securities during the financial crisis, but it still must issue broader rules.

Some of the arbitrage investment rules will be technical, but they are expected to address the use of tax-exempts for long-term working capital or deficit financings. This is a growing area of finance because many governmental issuers are still under fiscal stress dating back to the financial meltdown.

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