WASHINGTON, Nov 20 (Reuters) - U.S. tax lawyers are pressing the Internal Revenue Service to clarify whether issuers of Build America Bonds can use tax-exempt debt to refund the bonds, a move that could save issuers millions.
'We read the rules as allowing tax-exempt bonds to be used to refund BABs if the general tax-exempt bond requirements are met,' the American Bar Association's tax committee said in commentary released on Friday.
'Again, for the avoidance of doubt in the marketplace, we believe this result should be confirmed.'
The marketplace is eager to settle the question around the bonds, which were created in the economic stimulus plan passed in February, because issuers would get a 'deeper subsidy,' Jeremy Spector, chair of the committee, told Reuters.
BABs are taxable debt that give issuers federal subsidies equal to 35 percent of the interest costs. Taxable rates are generally higher than tax-exempt ones.
The bonds are largely credited with thawing the frozen municipal bond market this year, with the subsidy allowing cash-strapped states and cities to take out cheap credit.
An issuer could sell BABs, collect the subsidy and then issue tax-exempt bonds to advance refund the BABs. The interest they would pay on the refunding bonds would be lower, Spector said, and it would be further depressed by the subsidy.
Spector gave an example of a Build America Bond paying 5 percent interest that an issuer refunds with a tax-exempt bond that pays 4 percent interest.
'The issuer enjoys a 35 percent subsidy based on the 5 percent rate of the taxable rate,' while paying the 4 percent tax-exempt rate, he said, which translates into a 1.75 percent subsidy.
There is nothing in the American Recovery and Reinvestment Act barring issuers from refunding BABs, Spector said. Since the law was signed underwriters and issuers have pressed for guidance from the federal government. So far, they have not had any clarification and some have suggested that it is a matter for the U.S. Congress.
The committee also pressed the IRS to speed up its timeline for issuing guidance on stripping tax credits from some stimulus bonds.
The plan included a handful of new bonding programs where the debt buyer receives a credit against federal tax payments in lieu of an interest payment. The holder can sell the credit -- or 'strip' it -- while still holding on to the principal.
'Treasury hopes that a market will develop,' for the credits, said Spector, although it has yet to explain the mechanics of trading those credits.
(Reporting by Lisa Lambert; Editing by Leslie Adler) Keywords: MUNICIPALS/BABS TAXES (lisa.lambert@thomsonreuters.com; +1-202-898-8328; Reuters Messaging: lisa.lambert.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
'We read the rules as allowing tax-exempt bonds to be used to refund BABs if the general tax-exempt bond requirements are met,' the American Bar Association's tax committee said in commentary released on Friday.
'Again, for the avoidance of doubt in the marketplace, we believe this result should be confirmed.'
The marketplace is eager to settle the question around the bonds, which were created in the economic stimulus plan passed in February, because issuers would get a 'deeper subsidy,' Jeremy Spector, chair of the committee, told Reuters.
BABs are taxable debt that give issuers federal subsidies equal to 35 percent of the interest costs. Taxable rates are generally higher than tax-exempt ones.
The bonds are largely credited with thawing the frozen municipal bond market this year, with the subsidy allowing cash-strapped states and cities to take out cheap credit.
An issuer could sell BABs, collect the subsidy and then issue tax-exempt bonds to advance refund the BABs. The interest they would pay on the refunding bonds would be lower, Spector said, and it would be further depressed by the subsidy.
Spector gave an example of a Build America Bond paying 5 percent interest that an issuer refunds with a tax-exempt bond that pays 4 percent interest.
'The issuer enjoys a 35 percent subsidy based on the 5 percent rate of the taxable rate,' while paying the 4 percent tax-exempt rate, he said, which translates into a 1.75 percent subsidy.
There is nothing in the American Recovery and Reinvestment Act barring issuers from refunding BABs, Spector said. Since the law was signed underwriters and issuers have pressed for guidance from the federal government. So far, they have not had any clarification and some have suggested that it is a matter for the U.S. Congress.
The committee also pressed the IRS to speed up its timeline for issuing guidance on stripping tax credits from some stimulus bonds.
The plan included a handful of new bonding programs where the debt buyer receives a credit against federal tax payments in lieu of an interest payment. The holder can sell the credit -- or 'strip' it -- while still holding on to the principal.
'Treasury hopes that a market will develop,' for the credits, said Spector, although it has yet to explain the mechanics of trading those credits.
(Reporting by Lisa Lambert; Editing by Leslie Adler) Keywords: MUNICIPALS/BABS TAXES (lisa.lambert@thomsonreuters.com; +1-202-898-8328; Reuters Messaging: lisa.lambert.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.