SECTION 2. BACKGROUND

.01 Under § 103(a) and (b)(2), the exclusion from gross income of interest on any State or local bond does not apply to interest on an arbitrage bond within the meaning of § 148.

.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 arbitrage rebate amounts described in

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

.03 Section 148(f)(3) provides, in part, that, except to the extent provided by the Secretary, rebate 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 discharged.

.04 Sections 148(f)(4)(C)(vii) and (viii) permit issuers of certain construction issues to elect to pay a penalty in lieu of rebate ( penalty ) in the manner and amount described in § 148(f)(4)(C)(vii) and (viii).

.05 Section 1.148–5(c)(1) permits issuers to pay yield reduction payments that may be taken into account in determining the yield on an issue for arbitrage purposes under § 148 ( yield reduction ) in the circumstances and manner described in § 1.148–5(c).

.06 Section 1.148–13T of the 1992 regulations provides rules for recovering an overpayment of rebate or penalty in lieu of rebate with respect to certain bonds issued before July 1, 1993. Under § 1.148–13T(a) and (c)(1) of the 1992 regulations, an issuer may recover an overpayment of rebate or penalty to the extent that recovery on the date requested would not result in an additional rebate amount as of the date requested if the issuer proves to the satisfaction of the Commissioner that the overpayment occurred and was paid as a result of a mistake.

.07 Section 1.148–3(i)(1) provides that, in general, an issuer may recover an overpayment of rebate by establishing to the satisfaction of the Commissioner that the overpayment occurred. An overpayment is the excess of the amount paid over the sum of the “rebate amount” (as defined in § 1.148–3(b)), as of the most recent “computation date” (as defined in § 1.148–3(e)) and all amounts that are otherwise required to be paid under § 148 as of the date the recovery is requested.

.08 In general, overpayments of penalty and yield reduction are treated in the same manner as overpayments of rebate. See generally §§ 1.148–3(i)(1), 1.148–7(k)(3), and 1.148–5(c)(1) and (2).

.09 In Rev. Proc. 92–83, 1992–2 C.B. 487, the Internal Revenue Service (the Ser- vice ) sets forth procedures for claims for recovery of overpayments of rebate.

.10 In Announcement 2001–115, 2001–2 C.B. 539, the Service announced

July 21, 2008 137 2008–29 I.R.B.

by certified or registered mail, and the issuer may not refile the refund claim thereafter.

.04 Appeals. An issuer is entitled to appeal a Refund Claim Denial to the Office of Appeals pursuant to section 3.01 of Rev. Proc. 2006–40, as subsequently amended, supplemented, or superseded.