[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.148-3]
[Page 667-671]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.148-3 General arbitrage rebate rules.
(a) In general. Section 148(f) requires that certain earnings on
nonpurpose investments allocable to the gross proceeds of an issue be
paid to the United States to prevent the bonds in the issue from being
arbitrage bonds. The arbitrage that must be rebated 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.
(b) Definition of rebate amount. 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.
(c) Computation of future value of a payment or receipt. The future
value of a payment or receipt at the end of any period is determined
using the economic accrual method and equals the value of that payment
or receipt when it is paid or received (or treated as paid or received),
plus interest assumed to be earned and compounded over the period at a
rate equal to the yield on the issue, using the same compounding
interval and financial conventions used to compute that yield.
(d) Payments and receipts-- (1) Definition of payments. For purposes
of this section, payments are--
(i) Amounts actually or constructively paid to acquire a nonpurpose
investment (or treated as paid to a commingled fund);
(ii) For a nonpurpose investment that is first allocated to an issue
on a date after it is actually acquired (e.g., an investment that
becomes allocable to transferred proceeds or to replacement proceeds) or
that becomes subject to the rebate requirement on a date after it is
actually acquired (e.g., an investment allocated to a reasonably
required reserve or replacement fund for a construction issue at the end
of the 2-year spending period), the value of that investment on that
date;
(iii) For a nonpurpose investment that was allocated to an issue at
the end of the preceding computation period, the value of that
investment at the beginning of the computation period;
(iv) On the last day of each bond year during which there are
amounts allocated to gross proceeds of an issue that are subject to the
rebate requirement, and on the final maturity date, a computation credit
of $1,000; and
(v) Yield reduction payments on nonpurpose investments made pursuant
to Sec. 1.148-5(c).
(2) Definition of receipts. For purposes of this section, receipts
are--
(i) Amounts actually or constructively received from a nonpurpose
investment (including amounts treated as received from a commingled
fund), such as earnings and return of principal;
(ii) For a nonpurpose investment that ceases to be allocated to an
issue before its disposition or redemption date (e.g., an investment
that becomes allocable to transferred proceeds of another issue or that
ceases to be allocable to the issue pursuant to the universal cap under
Sec. 1.148-6) or that ceases to be subject to the rebate requirement on
a date earlier than its disposition or redemption date (e.g., an
investment allocated to a fund initially subject to the rebate
requirement but that subsequently qualifies
[[Page 668]]
as a bona fide debt service fund), the value of that nonpurpose
investment on that date; and
(iii) For a nonpurpose investment that is held at the end of a
computation period, the value of that investment at the end of that
period.
(3) Special rules for commingled funds. Section 1.148-6(e) provides
special rules to limit certain of the required determinations of
payments and receipts for investments of a commingled fund.
(e) Computation dates--(1) In general. For a fixed yield issue, an
issuer may treat any date as a computation date. For a variable yield
issue, an issuer:
(i) May treat the last day of any bond year ending on or before the
latest date on which the first rebate amount is required to be paid
under paragraph (f) of this section (the first required payment date) as
a computation date but may not change that treatment after the first
payment date; and
(ii) After the first required payment date, must consistently treat
either the end of each bond year or the end of each fifth bond year as
computation dates and may not change these computation dates after the
first required payment date.
(2) Final computation date. The date that an issue is discharged is
the final computation date. For an issue retired within 3 years of the
issue date, however, the final computation date need not occur before
the end of 8 months after the issue date or during the period in which
the issuer reasonably expects that any of the spending exceptions under
Sec. 1.148-7 will apply to the issue.
(f) Amount of required rebate installment payment--(1) Amount of
interim rebate payments. The first rebate installment payment must be
made for a computation date that is not later than 5 years after the
issue date. Subsequent rebate installment payments must be made for a
computation date that is not later than 5 years after the previous
computation date for which an installment payment was made. A rebate
installment payment must be in an amount that, when added to the future
value, as of the computation date, of previous rebate payments made for
the issue, equals at least 90 percent of the rebate amount as of that
date.
(2) Amount of final rebate payment. For the final computation date,
a final rebate payment must be paid in an amount that, when added to the
future value of previous rebate payments made for the issue, equals 100
percent of the rebate amount as of that date.
(3) Future value of rebate payments. The future value of a rebate
payment is determined under paragraph (c) of this section. This value is
computed by taking into account recoveries of overpayments.
(g) Time and manner of payment. Each rebate payment must be paid no
later than 60 days after the computation date to which the payment
relates. Any rebate payment paid within this 60-day period may be
treated as paid on the computation date to which it relates. A rebate
payment is paid when it is filed with the Internal Revenue Service at
the place or places designated by the Commissioner. A payment must be
accompanied by the form provided by the Commissioner for this purpose.
(h) Penalty in lieu of loss of tax exemption--(1) In general. The
failure to pay the correct rebate amount when required will cause the
bonds of the issue to be arbitrage bonds, unless the Commissioner
determines that the failure was not caused by willful neglect and the
issuer promptly pays a penalty to the United States. If no bond of the
issue is a private activity bond (other than a qualified 501(c)(3)
bond), the penalty equals 50 percent of the rebate amount not paid when
required to be paid, plus interest on that amount. Otherwise, the
penalty equals 100 percent of the rebate amount not paid when required
to be paid, plus interest on that amount.
(2) Interest on underpayments. Interest accrues at the underpayment
rate under section 6621, beginning on the date the correct rebate amount
is due and ending on the date 10 days before it is paid.
(3) Waivers of the penalty. The penalty is automatically waived if
the rebate amount that the issuer failed to pay plus interest is paid
within 180 days after discovery of the failure, unless, the Commissioner
determines that the failure was due to willful neglect, or the issue is
under examination by the Commissioner at any time during the
[[Page 669]]
period beginning on the date the failure first occurred and ending on
the date 90 days after the receipt of the rebate amount. Generally,
extensions of this 180-day period and waivers of the penalty in other
cases will be granted by the Commissioner only in unusual circumstances.
For purposes of this paragraph (h)(3), willful neglect does not include
a failure that is attributable solely to the permissible retroactive
selection of a short first bond year if the rebate amount that the
issuer failed to pay is paid within 60 days of the selection of that
bond year.
(4) Application to alternative penalty under Sec. 1.148-7.
Paragraphs (h) (1), (2), and (3) of this section apply to failures to
pay penalty payments under Sec. 1.148-7 (alternative penalty amounts) by
substituting alternative penalty amounts for rebate amount and the last
day of each spending period for computation date.
(i) Recovery of overpayment of rebate-- (1) In general. An issuer
may recover an overpayment for an issue of tax-exempt bonds by
establishing to the satisfaction of the Commissioner that the
overpayment occurred. An overpayment is the excess of the amount paid to
the United States for an issue under section 148 over the sum of the
rebate amount for the issue as of the most recent computation date and
all amounts that are otherwise required to be paid under section 148 as
of the date the recovery is requested.
(2) Limitations on recovery. (i) An overpayment may be recovered
only to the extent that a recovery on the date that it is first
requested would not result in an additional rebate amount if that date
were treated as a computation date.
(ii) Except for overpayments of penalty in lieu of rebate under
section 148(f)(4)(C)(vii) and Sec. 1.148-7(k), an overpayment of less
than $5,000 may not be recovered before the final computation date.
(j) Examples. The provisions of this section may be illustrated by
the following examples.
Example 1. Calculation and payment of rebate for a fixed yield
issue. (i) Facts. On January 1, 1994, City A issues a fixed yield issue
and invests all the sale proceeds of the issue ($49 million). There are
no other gross proceeds. The issue has a yield of 7.0000 percent per
year compounded semiannually (computed on a 30 day month/360 day year
basis). City A receives amounts from the investment and immediately
expends them for the governmental purpose of the issue as follows:
------------------------------------------------------------------------
Date Amount
------------------------------------------------------------------------
2/1/94.................................................. $3,000,000
5/1/94.................................................. 5,000,000
1/1/95.................................................. 5,000,000
9/1/95.................................................. 20,000,000
3/1/96.................................................. 22,000,000
------------------------------------------------------------------------
(ii) First computation date. (A) City A chooses January 1, 1999, as
its first computation date. This date is the latest date that may be
used to compute the first required rebate installment payment. The
rebate amount as of this date is computed by determining the future
value of the receipts and the payments for the investment. The
compounding interval is each 6-month (or shorter) period and the 30 day
month/360 day year basis is used because these conventions were used to
compute yield on the issue. The future value of these amounts, plus the
computation credit, as of January 1, 1999, is:
------------------------------------------------------------------------
Receipts FV (7.0000
Date (payments) percent)
------------------------------------------------------------------------
1/1/94................................ ($49,000,000) ($69,119,339)
2/1/94................................ 3,000,000 4,207,602
5/1/94................................ 5,000,000 6,893,079
1/1/95................................ 5,000,000 6,584,045
1/1/95................................ (1,000) (1,317)
9/1/95................................ 20,000,000 25,155,464
1/1/96................................ (1,000) 1,229)
3/1/96................................ 22,000,000 26,735,275
1/1/97................................ (1,000) (1,148)
---------------------------------
Rebate amount (1/01/99)............... ............... 452,432
------------------------------------------------------------------------
(B) City A pays 90 percent of the rebate amount ($407,189) to the
United States within 60 days of January 1, 1999.
(iii) Second computation date. (A) On the next required computation
date, January 1, 2004, the future value of the payments and receipts is:
------------------------------------------------------------------------
Receipts FV (7.0000
Date (payments) percent)
------------------------------------------------------------------------
1/1/99........................................ $452,432 $638,200
-------------------------
Rebate amount (1/01/04)....................... ........... 638,200
------------------------------------------------------------------------
(B) As of this computation date, the future value of the payment
treated as made on January 1, 1999, is $574,380, which equals at least
90 percent of the rebate amount as of this computation date ($638,200 x
0.9), and thus no additional rebate payment is due as of this date.
(iv) Final computation date. (A) On January 1, 2009, City A redeems
all the bonds, and thus this date is the final computation date. The
future value of the receipts and payments as of this date is:
[[Page 670]]
------------------------------------------------------------------------
Receipts FV (7.0000
Date (payments) percent)
------------------------------------------------------------------------
1/1/04...................................... $638,200 $900,244
1/1/09...................................... (1,000) (1,000)
---------------------------
Rebate amount (1/01/09)..................... ............ 899,244
------------------------------------------------------------------------
(B) As of this computation date, the future value of the payment
made on January 1, 1999, is $810,220 and thus an additional rebate
payment of $89,024 is due. This payment reflects the future value of the
10 percent unpaid portion, and thus would not be owed had the issuer
paid the full rebate amount as of any prior computation date.
Example 2. Calculation and payment of rebate for a variable yield
issue. (i) Facts. On July 1, 1994, City B issues a variable yield issue
and invests all of the sale proceeds of the issue ($30 million). There
are no other gross proceeds. As of July 1, 1999, there are nonpurpose
investments allocated to the issue. Prior to July 1, 1999, City B
receives amounts from nonpurpose investments and immediately expends
them for the governmental purpose of the issue as follows:
------------------------------------------------------------------------
Date Amount
------------------------------------------------------------------------
8/1/1994.................................................. $5,000,000
7/1/1995.................................................. 8,000,000
12/1/1995................................................. 17,000,000
7/1/1999.................................................. 650,000
------------------------------------------------------------------------
(ii) First computation date. (A) City B treats the last day of the
fifth bond year (July 1, 1999) as a computation date. The yield on the
variable yield issue during the first computation period (the period
beginning on the issue date and ending on the first computation date) is
6.0000 percent per year compounded semiannually. The value of the
nonpurpose investments allocated to the issue as of July 1, 1999, is $3
million. The rebate amount as of July 1, 1999, is computed by
determining the future value of the receipts and the payments for the
nonpurpose investments. The compounding interval is each 6-month (or
shorter) period and the 30 day month/360 day year basis is used because
these conventions were used to compute yield on the issue. The future
value of these amounts and of the computation date credits as of July 1,
1999, is:
------------------------------------------------------------------------
Receipts FV (6.0000
Date (payments) percent)
------------------------------------------------------------------------
7/1/1994............................. ($30,000,000) ($40,317,491)
8/1/1994............................. 5,000,000 6,686,560
7/1/1995............................. (1,000) (1,267)
7/1/1995............................. 8,000,000 10,134,161
12/1/1995............................ 17,000,000 21,011,112
7/1/1996............................. (1,000) (1,194)
7/1/1997............................. (1,000) (1,126)
7/1/1998............................. (1,000) (1,061)
7/1/1999............................. 3,000,000 3,000,000
7/1/1999............................. 650,000 650,000
7/1/1999............................. (1,000) (1,000)
----------------------------------
Rebate amount (7/01/1999)............ 1,158,694
------------------------------------------------------------------------
(B) City B pays 90 percent of the rebate amount ($1,042,824.60) to
the United States within 60 days of July 1, 1999.
(iii) Next computation date. (A) On July 1, 2004, City B redeems all
of the bonds. Thus, the next computation date is July 1, 2004. On July
30, 1999, City B chose to compute rebate for periods following the first
computation period by treating the end of each fifth bond year as a
computation date. The yield during the second computation period is
5.0000 percent per year compounded semiannually. The computation of the
rebate amount as of this date reflects the value of the nonpurpose
investments allocated to the issue at the end of the prior computation
period. On July 1, 2004, City B sells those nonpurpose investments for
$3,925,000 and expends that amount for the governmental purpose of the
issue.
(B) As of July 1, 2004, the future value of the rebate amount
computed as of July 1, 1999, and of all other payments and receipts is:
------------------------------------------------------------------------
Receipts FV (5.0000
Date (payments) percent)
------------------------------------------------------------------------
7/1/1999..................................... $1,158,694 $1,483,226
7/1/1999..................................... (3,000,000) (3,840,254)
7/1/2000..................................... (1,000) (1,218)
7/1/2001..................................... (1,000) (1,160)
7/1/2002..................................... (1,000) (1,104)
7/1/2003..................................... (1,000) (1,051)
7/1/2004..................................... (2,000) (2,000)
7/1/2004..................................... 3,925,000 3,925,000
--------------------------
1,561,439
------------------------------------------------------------------------
(C) As of this computation date, the future value of the payment
made on July 1, 1999, is $1,334,904 and thus an additional rebate
payment of $226,535 is due.
(D) If the yield during the second computation period were, instead,
7.0000 percent, the rebate amount computed as of July 1, 1999, would be
$1,320,891. The future value of the payment made on July 1, 1999, would
be $1,471,007, and, therefore, City B would have overpaid the rebate
amount by $150,116.
(k) Bona fide debt service fund exception. Under section
148(f)(4)(A), the rebate requirement does not apply to amounts in
certain bona fide debt service funds. An issue with an average annual
debt service that is not in excess
[[Page 671]]
of $2,500,000 may be treated as satisfying the $100,000 limitation in
section 148(f)(4)(A)(ii).
[T.D. 8476, 58 FR 33522, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24042, May 10, 1994; T.D. 8476, 59 FR 24350,
May 11, 1994; T.D. 8718, 62 FR 25507, May 9, 1997]