Filing Form 8038-T for Arbitrage Rebate

Form 8038-T is a tax document used by issuers of tax-exempt bonds to remit certain payments to the U.S. government. These payments relate to arbitrage profits, which are earnings from investing bond proceeds at a higher yield than the bond’s interest rate. The form’s purpose is to ensure that the benefit of tax-exempt financing is used for public projects rather than to generate investment gains for the issuer, thereby maintaining the integrity of the municipal bond market.

This form addresses obligations under section 148 of the Internal Revenue Code, which governs arbitrage rules for state and local bonds. It is the official vehicle for transmitting arbitrage rebate, yield reduction payments, or specific penalties to the IRS. Filing Form 8038-T is a compliance step for governmental entities and other qualifying organizations that issue tax-exempt debt.

Understanding Arbitrage and Rebate Requirements

Arbitrage, in the context of municipal bonds, occurs when funds from a tax-exempt bond issuance are invested in higher-yielding taxable securities. This creates a profit for the issuer derived from the difference in interest rates. The IRS restricts this practice to prevent entities from issuing bonds simply to capitalize on this spread, rather than for their stated public purpose. To enforce this, the IRS requires that these excess earnings be returned to the federal government through a process known as arbitrage rebate.

Certain exceptions can relieve an issuer from the obligation to pay arbitrage rebate. A common exemption is the “small issuer exception,” which applies to governmental units with general taxing powers that issue a limited amount of tax-exempt bonds during a calendar year. To qualify, the issuer and all its subordinate entities must not expect to issue more than $5 million in tax-exempt bonds during that year, though this limit can increase to $15 million if at least $10 million of the bonds are used to finance public school construction.

Spending exceptions provide another path to avoid the rebate requirement, contingent on the timely expenditure of bond proceeds. For instance, one exception applies if all gross proceeds and investment earnings are spent on the intended project within six months of the issue date. Another widely used exception involves a tiered spending schedule: at least 15% of proceeds must be spent within six months, 60% within one year, and 100% within 18 months.

Information and Calculations for Form 8038-T

Preparing to file Form 8038-T requires gathering specific details about the bond issue and the nature of the payment. Part I of the form requires basic identification details of the bond issuer, including the legal name, employer identification number (EIN), and mailing address. It is important that this information matches the records on file with the IRS to prevent processing delays.

Part II delves into the specifics of the bond issue itself. You must provide the issue date, the total issue price, the name of the bond issue, and the CUSIP number, which is the unique nine-character alphanumeric code used to identify the specific bond security. Part III asks the filer to specify the type of payment being made, indicating whether the payment is for arbitrage rebate, a yield reduction payment, or a penalty.

Part IV is where the calculation of the payment amount is reported. While the form itself does not require a full display of the complex mathematical formulas, it does require the final computed amount. The underlying calculation involves determining the future value of all investment receipts from the bond proceeds and comparing it to the future value of what those proceeds would have earned at the bond’s yield. This technical analysis often necessitates the engagement of a specialized arbitrage rebate consultant to ensure accuracy.

Filing Form 8038-T

The timing for filing Form 8038-T is dictated by specific milestones in the life of the bond issue. An installment payment of the calculated rebate is due to the IRS at least once every five years from the bond’s issue date. The first payment must be sent no later than 60 days after the end of the fifth bond year, with subsequent payments due every five years thereafter. A final payment is required within 60 days of the date the last bond in the issue is retired or redeemed.

Once the form is completed, the physical Form 8038-T and the accompanying payment must be mailed to the Department of the Treasury, Internal Revenue Service Center, Ogden, UT 84201-0027. Payment must be included with the filed form, using a check or money order made payable to the “United States Treasury.” The issuer’s name, address, EIN, and the form number (8038-T) should be written on the payment. Issuers can also use the Electronic Federal Tax Payment System (EFTPS) to remit the funds.

After mailing the form and payment, issuers should not expect to receive a confirmation of receipt from the IRS. The filed form and proof of payment should be retained as part of the official records for the bond issue. If no rebate payment is due on a particular installment date, there is no requirement to file Form 8038-T for that period.

Penalties and Post-Filing Considerations

Failure to comply with arbitrage rebate requirements can lead to significant financial consequences. If an issuer does not pay the required rebate amount on time, the IRS can impose a penalty equal to 50% of the unpaid rebate, in addition to interest charges on the late amount. A separate penalty may apply for filing Form 8038-T after its due date.

The most severe consequence of non-compliance is the potential loss of the tax-exempt status of the bonds. If the IRS determines that the failure to pay the rebate is due to willful neglect, it can declare the interest paid to bondholders to be taxable income retroactively to the date of issuance. This action would have serious negative repercussions for both the issuer and its investors.

Issuers must maintain all documentation that supports their arbitrage rebate calculations and compliance with spending exceptions. This includes records of all investments made with bond proceeds, documentation of all expenditures on the financed project, and copies of the filed Form 8038-T and proof of payment.

These records must be kept for the entire life of the bond issue, plus an additional period after the bonds are fully retired. According to regulations under Section 6001 of the Internal Revenue Code, all supporting documents should be retained for at least three years after the final redemption of the bonds. If the bonds are refinanced through a refunding issue, this retention period extends to three years after the refunding bonds are retired.