Part III

Rebate Requirements and Exceptions

Under IRC Section 148(f), bonds are arbitrage bonds if an issuer does not make rebate payments to the U.S. Treasury in the amounts and at the times required. The issuer must rebate the amount by which the yield on investment property acquired with proceeds of the issue exceeds the yield on the bonds. The rebate requirements apply only to nonpurpose investments. Purpose investments are not subject to the rebate rules.

The rebate rules generally provide that issuers must periodically calculate arbitrage earnings and, unless an exception applies, pay those earnings to the U.S. Treasury within 60 days after the computation date for the period. While issuers have flexibility in determining the computation periods, an issuer must compute and pay any required rebate at least once every five years. Payments must be made by filing Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate. Parts IV and VI include more information about the rebate calculation and examples of this calculation.

Exceptions to the Rebate Requirements

Exceptions to the rebate requirements may apply based on how quickly the issuer spends the bond proceeds, the size of the issuer and the category of proceeds being invested. Some of these exceptions apply only to certain types of bonds (for example, governmental bonds) and some of these exceptions apply only to proceeds in certain funds. For exceptions applying to specific types of funds, the issuer’s allocation of proceeds to these funds is important to determine whether a particular exception’s requirements are met. The purposes and uses of the proceeds in a fund and the purpose of the bond issue control whether an exception applies, regardless of the label of the fund.

The two general exception categories to the rebate requirements are the spending exceptions and the special exceptions.

The following chart illustrates certain funds and exceptions that may be available for proceeds held in those funds.

a ^{Or Working Capital Fund}

b ^{Proceeds used for issuance costs are eligible for the 2-year spending exception if they meet the}

requirements under Treas. Reg. Section 1.148-7(i)(4).

c ^{A reasonably required reserve or replacement fund can only be excluded from the rebate requirement under}

the two-year spending exception through the earlier of the close of the two year period or the date the construction is substantially completed under IRC Section 148(f)(4)(C)(vi)(II).

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Spending Exceptions

The three spending exceptions are the:

• 6-month spending exception,

• 18-month spending exception, and

• 2-year spending exception.

If an issuer satisfies a spending exception, proceeds in the eligible funds will be exempt from the rebate requirements.

The spending exceptions depend on an issuer allocating certain proceeds to expenditures within specified time periods. To determine whether these exceptions apply, it is necessary to identify:

• Which proceeds the issuer allocated to expenditures, and

• When the issuer allocated those proceeds.