ORLANDO - The Treasury Department is hoping to release guidance within the next 30 days on how the direct payment option of the Build America Bonds program will work, as well as the amount of tax-credit bonds that each state will be able to issue under the economic stimulus law, a department official told attorneys meeting here yesterday.

Speaking at a general session at the National Association of Bond Lawyers' Tax and Securities Law Institute, John J. Cross 3d, tax legislative counsel for the Treasury's office of tax policy, said the department hopes the guidance will also provide the first date that cash payments can be made to issuers.

However, Cross emphasized that Congress intended the Build America Bonds program to stimulate new projects, seeming to throw cold water on the hopes of some market participants that the BABs could be used to refund illiquid auction rate securities.

"We think Congress really intended that for new-money financing," he said. "I don't think the BABs involving direct payments can just be open season for refunding capital projects."

The program allows muni issuers in 2009 and 2010 to offer an unlimited amount of taxable debt and elect to either receive a cash subsidy from the federal government or have it provide bondholders with a tax credit.

Bond lawyers have said that issuers would get a better deal with the cash subsidy but are reluctant to move forward with such transactions until they can see the mechanics of how the program would work and how the payment would be made.

Cross indicated that issuers who want to issue bonds under the program will probably have to disclose this in their bond documents, and possibly also on Form 8038, the annual information return filed by tax-exempt bond issuers. He also attempted to assuage concerns that Congress may fail to appropriate funds for the subsidy in the future, saying issuers should be comfortable that this will not happen.

At the same session, NABL president William A. Holby announced that the group will host a teleconference on March 17 to further discuss the stimulus package. Cross, as well as John Buckley, chief tax counsel for the House Ways and Means Committee, will answer questions about the law, he said.

Cross' comments come on the heels of a letter sent to the Treasury Department this week by NABL outlining what areas of the stimulus package require guidance, clarification, or confirmation.

The five-page letter, containing 34 recommendations, was primarily drafted by Frederic J. Ballard Jr., a partner at Ballard Spahr Andrews & Ingersoll LLP, Scott Lilienthal, a partner at Hogan & Hartson LLP, and Perry Israel, who has his own Sacramento firm.

Ballard, who also sat on the panel, queried Cross about some of the requests in the letter, such as whether 501(c)(3) issuers can participate in the BAB program. Cross said the legislation indicates it is intended strictly for governmental bond issuers. But he said another NABL request that the BAB program include bonds issued to reimburse the costs of capital project expenditures incurred since the law was enacted is "eminently reasonable."

Fellow panel member Lilienthal also asked Cross about the stimulus provision that exempts from the alternative minimum tax all tax-exempt bonds issued in 2009 and 2010, as well as refunding bonds issued during that time to refund bonds issued since 2004.

Lilienthal said there are questions about whether issuers can refund old bonds that refunded original debt issued before 2004, and also whether bonds issued after 2010 that refund AMT-exempt new-money debt would be exempt.

Cross said issuers should focus on issuing new-money bonds and also on refunding bonds issued since 2004, until Treasury has had time to put together comprehensive guidance on the provision.

He emphasized that Treasury and the Internal Revenue Service are attempting to get guidance out as soon as possible, but face "tremendous implementation challenges." Officials do not have the answers to all market participants' questions yet, but want to get guidance out as soon as possible so issuers can begin taking advantage of the provisions, most of which are temporary, he said.

In addition to questions on BABs and the AMT, the NABL letter contains a number of additional suggestions and requests for guidance on provisions spanning the stimulus law.

In situations where issuers are receiving direct payments for their BABs, NABL asked that the Treasury confirm that the issuer will have the rights of taxpayers during IRS audits and other enforcement actions, including the ability to take disputes to court or to sue the agency for a refund.

For BABs where the issuer opts for the bondholder tax credit, the issuer does not have to meet the capital expenditure requirements. NABL asked Treasury to clarify that these bonds can be used for any purpose for which tax-exempt governmental purpose bonds could have been issued.

NABL also asked Treasury for guidance on how an issuer should handle the "stripping" of a tax credit. The law currently permits issuers or holders of tax-credit bonds to "strip" the tax credits and sell them separately.

A number of NABL's requests also targeted new provisions of the law that allow financial institutions to buy and hold more tax-exempt bonds. Banks can now deduct 80% of the cost of buying and carrying the tax-exempt bonds issued by issuers who sell less than $30 million of debt in each of 2009 and 2010. They also can deduct 80% of their interest expense to the extent that their tax-exempt holdings do not exceed 2% of their total assets.

NABL asked the Treasury to confirm that the small issuer bank-qualified bonds and tax-credit bonds do not count against that 2% de minimis limit, as well as clarify that private-activity bonds are eligible for the de minimis provision. Issuers should also be able to count refundings toward the $30 million limit, NABL said.

Regarding allocations for the new tax-credit bonds, NABL said the Treasury's guidance should dictate that states can establish deadlines for use of the amounts allocated to municipalities and should allow the states to take back and redistribute any unused bond capacity.

For the new Recovery Zone bond program, NABL asked Treasury to confirm that the direct payment option for the $10 billion of taxable tax-credit economic development bonds is not limited to bonds exclusively financing capital expenditures, as it is in the Build America program.

Also, issuers should be able to use the $15 billion of private-activity Recovery Zone facility bonds to finance the acquisition of existing buildings within recovery zones, if this would be the first time the property was bought since being declared in a recovery zone, NABL said.

Current law states that the $2 billion of tax-exempt tribal government economic development bonds authorized by the stimulus cannot be used to finance gaming facilities. But NABL asked Treasury to provide guidance stating the bonds can be used to fund part of a facility containing gaming, as long as the financed portions do not include any gambling activity.

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