SAN ANTONIO — Legislation recently introduced in Congress suggests that traditional tax-credit bonds may be replaced by bonds offering Build America Bond-style direct subsidies to issuers, an Internal Revenue Service attorney said last week.

“I think this legislation that’s coming out … not only is very fascinating in and of itself, but when you take it in conjunction with the other legislative proposal to eliminate the stripping, I think it’s potentially pointing to a moving toward the ... 'BABification’ of tax-credit bonds,” said James Polfer, chief of the IRS’ tax-exempt bond branch in the associate chief counsel’s office.

Speaking at the American Bar Association’s tax-exempt ­financing committee meeting here Friday, Polfer also said he expects the IRS to issue guidance on stripping before the end of June.

He stressed that his remarks were personal and not necessarily those of the ­service.

The Jobs for Main Street Act of 2010 recently approved by the House that would allow issuers of some tax-credit bonds to receive a direct, BAB-style subsidy from the federal government is worth watching, Polfer said, particularly when viewed alongside bills introduced in the Senate that would prohibit tax-credit stripping for certain tax-credit bonds.

Sen. Charles Grassley, R-Iowa, the ranking minority member of the Senate Finance Committee, introduced two bills last month that would block tax-credit stripping for the three most popular tax-credit bond programs — qualified school construction bonds, qualified zone academy bonds, and clean renewable energy bonds. Those bills are still pending before the committee.

Polfer said the current menu for muni issuers of tax-exempt, tax-credit, and Build America Bonds “can be very weighty administratively.”

He also pointed out that there is concern in Washington — including from Grassley — that tax-credit bonds could be targeted for abuse by people attempting to claim tax credits they do not own.

When combining these issues with the near-immediate success of the BAB program, “there are some who are viewing these tax-credit proposals as potentially a move towards a BABs and tax-exempt bond regime,” he said.

But when asked whether this legislation is slowing IRS work on sought-after rules governing tax-credit stripping, Polfer said, “Not at all.”

He added: “If chief counsel stopped its operations or modified them whenever a bill was introduced, we’d get nothing done.”

As for when the muni market can expect that guidance, Polfer said the IRS plans to complete every item on its priority guidance plan, including stripping guidance, by the end of June.

Though the priority guidance plan is supposed to outline what projects the IRS will focus on over the next 12 months, some projects have lingered on the plan for several years. But no more, Polfer said.

“The directive was made from above that the guidance plan was going to be leaner and meaner, and truly represent those projects that have a likelihood of being published in the business year,” he said. The priority guidance plan released in November covers IRS work from July 2009 through June 2010.

In addition to tax-credit bond guidance, the plan also included additional guidance on BABs and QSCBs, as well as final public approval and solid-waste disposal facility regulations.

But the IRS’ next action will be to release additional allocations of QSCBs and QZABs, he said. Calling them an “uber-priority,” Polfer said his shop hopes to release allocations for $11 billion of QSCB authority and $1.4 billion of QZAB authority for 2010 in the very near future.

As for the future of BABs, Polfer said he thinks the program will be extended beyond this year, but at some reduced subsidy level.

“The billion-dollar question is, 'Are they going to allow BABs to refund?’ That’s the really interesting question,” he said.

On a separate panel, Carl Scott, the group manager in the IRS’ tax-exempt bond branch charged with processing BAB payments, said a new Form 8038-CP, which BAB issuers file to request payments from the IRS, will be out “hopefully [this] week.”

That form will include the option of having the payment sent directly to an account of the issuers’ choosing, an upgrade from the current system of mailing out paper checks.

Scott also said his team is processing payment requests within 48 hours, and is averaging less than 24 hours per request.

His agents are receiving the Form 8038-CPs, which BAB issuers file to request payments, “literally as they come off the truck.”

Though his team is charged with reviewing payment requests to sniff out any attempts at fraud or tax problems, no payments have been delayed because of potential problems, he said.

“We’ve seen some that raise questions, [but] we haven’t seen any that rise to the level of substantial qualification issue where we’re going to freeze the refund until we determine if the bonds are qualified or not,” he said.

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