Part IV
0919 Publ 5271 (PDF) · 2026-10-03 edition · updated 2026-10-04 · United States
Rebate Amounts and Payments
The rebate rules require that certain arbitrage earnings (rebate) be paid to the U.S. Treasury. Generally, an issuer must compute and pay rebate owed at least once every five years over the life of the bond issue. 55 Within that five-year period, issuers have some flexibility choosing the date they use to compute rebate. The final computation date, however, is the date the bond issue is fully discharged.
On a computation date, if the issuer determines that it owes rebate, it files a Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate, with the IRS and pays the required rebate amount generally within 60 days of the computation date. For computation dates other than the final computation date, the issuer must pay at least 90% of the rebate owed, taking into account previous rebate payments. The final payment for the final computation date must be 100% of the rebate amount less previous payments.
Computation of Rebate Amounts
The rebate payment is based on the “rebate amount” on the computation date. The rebate amount reflects the investment yield earned on nonpurpose investments in excess of the amount these would have earned if invested at the bond yield. Because payments for, and receipts on, an investment can happen at different times, an issuer must future value the receipts and payments to a single date in making a rebate computation. The rebate amount as of each computation date reflects a snapshot of actual and allowable investment earnings as of those computation dates over the life of the bonds. The past receipts on, and payments for, the investments are future valued at the bond yield to give their value as of the computation date, using the same compounding interval and financial conventions used to compute the yield on the issue. 56 The rebate amount is the amount by which the value of all the receipts exceeds the value of all the payments on the computation date. 57 The rebate payment is determined by reducing the rebate amount by any previous rebate the issuer paid, which is also future valued to that computation date. Amounts the issuer pays as yield reduction payments on nonpurpose investments are treated as payments for the investment that are considered in computing rebate. Other payments
that are considered in computing the rebate amount include:
Amounts paid to acquire a nonpurpose investment;
The value of a previously acquired investment that becomes allocated to an issue; and
A computation credit on the last day of each bond year during which there are nonpurpose
investments subject to the rebate requirements and on the final maturity date. 58
Receipts include:
Amounts received from a nonpurpose investment, such as earnings and return of principal;
The value of a nonpurpose investment that is no longer allocated to an issue, or is no longer
subject to the rebate requirement, before its disposition or redemption date; and
- The value of a nonpurpose investment held at the end of a computation period.
55 IRC Section 148(f)(3) and Treas. Reg. Section 1.148-3(f)(1).
56 Treas. Reg. Section 1.148-3(c).
57 Treas. Reg. Section 1.148-3(b).
58 Treas. Reg. Section 1.148-3(d)(1)(iv) and Treas. Reg. Section 1.148-3(d)(4). These regulations provide a computation credit of $1,400 for bond years ending in 2007, with annual adjustments for inflation thereafter, for bonds sold on or after October 17, 2016. An issuer may also apply these regulations to bonds sold before October 17, 2016, with the increased computation credit applying to bond years ending on or after July 18, 2016. A similar credit is available for bond years ending on or after September 26, 2007, under proposed regulations issued in 2007. REG-106143-07, 72 FR 54606, 54611, 2007-43 IRB 881, 887.
16
Recovering an Overpayment of Rebate
Because rebate is computed by looking at receipts and payments from issuance to the computation date, it’s possible that an issuer pays rebate for a computation date (because the value of the receipts exceeded the value of the payments as of that date), but finds that on a subsequent computation date, the value of the payments exceeds the value of the receipts so that the rebate amount is reduced or eliminated. In this case, the issuer’s earlier rebate payment exceeds the rebate amount as of the subsequent computation date because of investment results after the earlier computation date. An issuer can get a refund of the overpayment in certain circumstances. The issuer determines the amount of overpayment by using the future value method to calculate rebate amount (excluding any rebate payments). The overpayment is the excess of the amount of rebate the issuer paid over the sum of the rebate amount for the issue as of the most recent computation date and all amounts that the issuer is otherwise required to pay under IRC Section 148, as of the date the recovery is requested. 59
An issuer requests a refund by completing and filing Form 8038-R, Request for Recovery of Overpayments Under Arbitrage Rebate Provisions. An issuer must file the form no later than two years after the final computation date for the issue. 60
59 Treas. Reg. Section 1.148-3(i).
60 Treas. Reg. Section 1.148-3(i)(3)(i).
17
Get a plain-English answer with a citation back to this text.
Ask AI about this code