Instructions for Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate

• Legal Form Number: 8038-T
• Year: 2021
• Issuer: Treasury Department
• Section: Treasury Department

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Instructions for Form 8038-T

(Rev. October 2021)

Arbitrage Rebate, Yield Reduction, and Penalty in Lieu of Arbitrage Rebate

Department of the Treasury

Internal Revenue Service

Section references are to the Internal Revenue

Code unless otherwise noted.

Future Developments

For the latest information about

developments related to Form 8038-T and

its instructions, such as legislation

enacted after they were published, go to

IRS.gov/Form8038T.

General Instructions

Purpose of Form

Under section 148(f), interest on a state or

local bond is not tax-exempt unless the

issuer of the bond rebates to the United

States arbitrage profits earned from

investing proceeds of the bond in higher

yielding nonpurpose investments. Issuers

of tax-exempt bonds and any other bonds

subject to the provisions of section 148

must use this form to make arbitrage

rebate and related payments.

Mortgage revenue bonds. Section

143(g)(3) provides special arbitrage

rebate rules for qualified mortgage bonds

and qualified veterans' mortgage bonds.

Under these special rules, issuers may

pay the rebate either to mortgagors, or if

an election is made before issuance of the

bond, to the United States. Use this form

only if you have elected to pay the rebate

to the United States.

Qualified Zone Academy Bonds

(QZABs) issued under section 1397E.

A QZAB is a bond issued by a state or

local government to finance certain

eligible public school purposes. An issuer

of QZABs issued under section 1397E or

section 54E, if applicable, may establish a

defeasance escrow to cure a failure to

properly use QZAB proceeds. An issuer

must pay any investment earnings on

amounts in the defeasance escrow that

are in excess of the yield on the issue. In

determining the yield on the issue, the

credit allowed is disregarded. Use this

form to make payments of investment

earnings on amounts in defeasance

escrows. See Regulations section

1.1397E-1(h)(8)(ii)(C).

Note. Use a separate Form 8038-T for

each issue.

Who Must File

Issuers of tax-exempt bonds and any

other bonds subject to the provisions of

section 148 must file Form 8038-T to pay:

1. Arbitrage rebate.

2. Yield reduction payments.

3. The penalty:

•In lieu of arbitrage rebate; or

•To terminate the election to pay a

penalty in lieu of arbitrage rebate.

4. Penalties and interest on the failure to

pay on time any amounts in 1-3

above.

Issuers of QZABs issued under section

1397E or section 54E, as applicable, that

establish a defeasance escrow under the

Regulations must file Form 8038-T to pay

100% of the investment earnings on

amounts in the defeasance escrow.

Applicable Regulations

General

Unless otherwise stated, regulation

sections referenced in these instructions

are to the 1993 regulations, as amended.

Generally, an issuer may apply these

regulations to bonds that are outstanding

on July 8, 1997. For the 1993 regulations,

see T.D. 8476, 1993-2 C.B. 13, and T.D.

8538, 1994-1 C.B. 26. For the 1997

amendments to the 1993 regulations, see

T.D. 8718, 1997-1 C.B. 47. The 1992

regulations generally apply to bonds

issued before July 1, 1993. For the 1992

regulations, see T.D. 8418, 1992-1 C.B.

29.

Special Rules

For rules on computing the arbitrage

rebate for mortgage revenue bonds, see

Temporary Regulations section

6a.103A-2(i)(4).

For rules on computing the arbitrage

rebate for bonds subject to section 103(c)

(6)(D) of the 1954 Code, see Temporary

Regulations section 1.103-15AT, T.D.

8005, 1985-1 C.B. 39, if the issuer has not

applied the later regulations.

For QZABs issued under section

1397E and section 54E, see Regulations

T.D. 9495.

Arbitrage Rebate

Computation of Arbitrage Rebate

The rebate amount for an issue is based

on the difference between the amount

actually earned on nonpurpose

investments and the amount that would

have been earned if those investments

had a yield equal to the yield on the issue.

Note. Regulations section 1.148-3(b)

provides that as of any date, the rebate

amount for an issue is the excess of the

future value, as of that date, of all receipts

on nonpurpose investments over the

future value, as of that date, of all

payments on nonpurpose investments.

The definitions of payments and receipts

in Regulations section 1.148-3(d), in part,

require inclusion of transactions

(including, but not limited to, acquisition,

earnings, and return of principal) on a date

for each nonpurpose investment. Any

cash flow representation to the contrary

may result in the understatement of rebate

amount. Yield reduction payments are

determined using payments and receipts

as described in Regulations section

1.148-5(b)(1).

Exceptions

A number of exceptions may relieve an

issuer of the rebate requirement for all or a

part of an issue of bonds.

Note. The following exceptions may

apply only to a portion of an issue. In such

cases, the rebate requirement continues

to apply to the portion of the issue not

covered by the exception.

Small issuer exception. The rebate

requirement does not apply to certain

bonds issued by governmental units

issuing no more than $5 million of bonds in

a calendar year.

The exception is modified as follows: a

governmental unit may issue up to $10

million in bonds after 1997 ($15 million

after 2001) per calendar year, provided no

more than $5 million of proceeds are used

to finance expenditures other than public

school capital expenditures. See section

148(f)(4)(D) and Regulations section

1.148-8.

6-month exception. The rebate

requirement is considered to be met for

gross proceeds of an issue (as defined in

Regulations section 1.148-7(c)(3)) if those

gross proceeds are spent within 6 months

of the issue date. The 6-month exception

is the only exception available for

refunding issues.

See section 148(f)(4)(B) and

Regulations section 1.148-7(a)–(c).

18-month exception. The rebate

requirement is considered to be met for

gross proceeds of an issue if those gross

proceeds are spent according to an

Oct 06, 2021 Cat. No. 30066E