SECTION 2. BACKGROUND

.01 Section 103(a) generally provides that gross income does not include interest on any State or local bond. Under § 103(b)(2), however, interest on an arbitrage bond (within the meaning of §148) is includable in gross income.

.02 Section 148(f)(1) generally provides that a bond that is part of an issue shall be treated as an arbitrage bond unless the issuer pays to the United States the

amounts described in § 148(f)(2) for the issue ( rebate amounts ) in accordance with § 148(f)(3).

.03 Section 148(f)(3) provides that, except to the extent provided by the Secretary, rebate amounts must be paid in installments that are made at least once every five years. The last installment must be made no later than 60 days after the day on which the last bond of the issue is redeemed.

.04 Section 1.148–3(f) provides in part that the first rebate installment payment must be made for a computation date (as determined under § 1.148–3(f)) that is not later than five years after the issue date. Subsequent rebate installment payments must be made for a computation date that is not later than five years after the previous computation date for which an installment payment was made.

.05 Section 1.148–3(g) provides that each rebate payment must be paid no later than 60 days after the computation date to which the payment relates. Any rebate payment paid within this 60-day period may be treated as paid on the computation date to which it relates. A rebate payment is paid when it is filed with the Internal Revenue Service at the place or places designated by the Commissioner. See § 7502(a) for the treatment of certain payments made by U.S. mail.

.06 Section 148(f)(7) provides that if an issue would, but for § 148(f)(7), fail to meet the requirements of § 148(f)(2) or (3), the Secretary may treat the issue as not failing to meet those requirements if: (1) no bond of the issue is a private activity bond, as defined in § 141 (other than a qualified 501(c)(3) bond within the meaning of § 145); (2) the failure to meet those requirements is not due to willful neglect; and (3) the issuer pays to the United States a penalty in an amount equal to the sum of (i) 50 percent of the amount that was not paid in accordance with § 148(f)(2) and (3), plus (ii) interest (at the underpayment rate established under section 6621) on the portion of the amount that was not paid on the date required under § 148(f)(3) for the period beginning on that date. Section 148(f)(7) further provides that the Secretary may waive all or any portion of the penalty under § 148(f)(7).

.07 Section 1.148–3(h)(1) provides that the failure to pay the correct rebate amount when required will cause the bonds of an

2005–28 I.R.B. 83 July 11, 2005

(2) The sophistication of the issuer; (3) The length of the delay; (4) The steps taken to comply, including the steps taken after the discovery of the failure to pay;

(5) The steps taken to prevent recurrence of a failure to pay;

(6) The nature of the failure; (7) Any history of timely or late payments by the issuer; and

(8) Any other relevant information. .02 If the Service does not notify the issuer in writing within 90 days after receiving the explanation submitted in accordance with section 3.04, the explanation is accepted, and the issuer’s failure to timely pay the rebate amount will be treated as not due to willful neglect.

.03 If, based on the explanation submitted by the issuer, the Service is unable to make a determination that the failure to timely pay the rebate amount was not due to willful neglect, the Service will notify the issuer in writing within 90 days after the Service’s receipt of the explanation and late payment. The written notice will describe any additional information needed, identify a contact person who is handling the matter, and provide the issuer with a reasonable period of not less than 21 days to provide additional information.

.04 Generally, within 90 days of receiving the additional information requested, the Service will notify the issuer in writing that either (1) the Service has determined that the failure to timely pay the rebate amount was not due to willful neglect or (2) the Service is unable to make a determination that the failure to timely pay the rebate amount was not due to willful neglect.

.05 If the Service notifies the issuer under section 4.04 that the Service is unable to make a determination that the failure to timely pay the rebate amount was not due to willful neglect, the issuer will be entitled, upon request, to a conference with the Service.

.06 After conducting the conference and reviewing any additional submissions by the issuer, the Service will notify the issuer in writing that either (1) the Service has determined that the failure to timely pay the rebate amount was not due to willful neglect or (2) the information available to the Service is insufficient for the Service to find a lack of willful neglect. If the Service is unable to find a lack of willful

if the requirements of section 3.01(1) or 3.01(2) are met. (1) Payment within 180-day period . The requirements of this section 3.01(1) are met if, within 180 days after the issuer discovers the failure to pay the correct rebate amount when required (the 180-day period ), the rebate amount that the issuer failed to pay, plus interest, is paid to the United States in accordance with section 3.04, unless— (a) The Commissioner determines that the failure was due to willful neglect, or

(b) The issue is under examination by the Service at any time during the period beginning on the date the failure first occurred and ending on the date 90 days after the Service receives the rebate amount.

(2) Payment after 180-day period . The requirements of this section 3.01(2) are met if, after the expiration of the 180-day period—

(a) The rebate amount that the issuer failed to pay, plus interest, plus the penalty determined under section 3.02, is paid to the United States in accordance with section 3.04, and

(b) The Commissioner determines that the failure was not caused by willful neglect.

.02 Penalty . (1) Governmental and qualified 501(c)(3) bonds . If no bond of the issue is a private activity bond (other than a qualified 501(c)(3) bond), the penalty equals 50 percent of the rebate amount not paid when required to be paid.

(2) Private activity bonds (other than qualified 501(c)(3) bonds) . If the issue consists of private activity bonds (other than qualified 501(c)(3) bonds), the penalty equals 100 percent of the rebate amount not paid when required to be paid.

.03 Extensions of 180-day period and waivers of penalty . An issuer may apply for an extension of the 180-day period for purposes of section 3.01(1), or a waiver of the penalty for purposes of section 3.01(2), in accordance with the procedures set forth in section 5. Under § 1.148–3(h)(3), extensions of the 180-day period and waivers of the penalty generally will be granted only in unusual circumstances.

.04 Payment and explanation of why the late payment was not due to willful ne- glect . The amount described in section 3.01(1) or (2) must be mailed to the Internal Revenue Service, Ogden Submission

Processing Center, Ogden, Utah 84201, together with Form 8038–T ( Arbitrage Re- bate and Penalty in Lieu of Arbitrage Re- bate ) and a detailed explanation addressing why the failure to timely pay the correct rebate amount was not due to willful neglect. The explanation must include the following declaration signed by an individual who has personal knowledge of the relevant facts and circumstances: “Under penalties of perjury, I declare that I have examined this explanation, including accompanying documents, and, to the best of my knowledge and belief, the explanation contains all the relevant facts relating to the explanation, and such facts are true, correct, and complete.” The explanation must include all relevant information, including when the rebate amount was required to be paid, why the rebate amount was not timely paid and a description of the events that led up to both the failure to timely pay and discovery of the failure. The explanation should also discuss the factors set forth in section 4.01 and should indicate whether the bond issue in question is under examination by the Service. Acceptance and processing of the payment by the Ogden Submission Processing Center does not constitute a determination by the Commissioner that the failure was not caused by willful neglect. The determination of whether a failure was due to willful neglect is made in accordance with the procedures set forth in section 4.

.05 Interest . For purposes of section 3.01, interest accrues at the underpayment rate under § 6621 beginning on the date the correct rebate amount is due and ending on the date ten days before it is paid. For this purpose, a rebate amount is due on the date that is 60 days after the computation date to which the rebate amount relates.

.06 Issue under examination . For purposes of this revenue procedure, an issue is under examination by the Service on the date a letter opening an examination of the issue is sent.