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Instructions for Form 8038-T

Department of the Treasury

Internal Revenue Service

(Rev. April 2011)

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

Exceptions

Section references are to the Internal

100 percent of the investment earnings

on amounts in the defeasance escrow.

Revenue Code unless otherwise noted.

General. A number of exceptions

may relieve an issuer of the rebate

General Instructions

Applicable Regulations

requirement for all or a part of an issue of

bonds.

General

Purpose of Form

Unless otherwise stated, regulation

Note. The following exceptions may

Under section 148(f), interest on a state

sections referenced in these instructions

apply only to a portion of an issue. In

or local bond is not tax-exempt unless the

are to the 1993 regulations, as amended.

such cases, the rebate requirement

issuer of the bond rebates to the United

Generally, an issuer may apply these

continues to apply to the portion of the

States arbitrage profits earned from

regulations to bonds that are outstanding

issue not covered by the exception.

investing proceeds of the bond in higher

on July 8, 1997. For the 1993 regulations,

yielding nonpurpose investments. Issuers

Small issuer exception. The rebate

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

of tax-exempt bonds and any other bonds

requirement does not apply to certain

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

subject to the provisions of section 148

bonds issued by governmental units

amendments to the 1993 regulations, see

must use this form to make arbitrage

issuing no more than $5 million of bonds

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

rebate and related payments.

in a calendar year.

regulations generally apply to bonds

Mortgage Revenue Bonds

issued before July 1, 1993. For the 1992

The exception is modified as follows: a

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

Section 143(g)(3) provides special

governmental unit may issue up to $10

29.

arbitrage rebate rules for qualified

million in bonds after 1997 ($15 million

mortgage bonds and qualified veterans’

after 2001) per calendar year, provided

Special Rules

mortgage bonds. Under these special

no more than $5 million of proceeds are

For rules on computing the arbitrage

rules, issuers may pay the rebate either to

used to finance expenditures other than

rebate for mortgage revenue bonds, see

mortgagors, or if an election is made

public school capital expenditures. See

Temporary Regulations section

before issuance of the bond, to the United

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

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

States. Use this form only if you have

section 1.148-8.

elected to pay the rebate to the United

For rules on computing the arbitrage

6-month exception. The rebate

States.

rebate for bonds subject to section

requirement is considered to be met for

103(c)(6)(D) of the 1954 Code, see

Qualified Zone Academy Bonds

gross proceeds of an issue (as defined in

Temporary Regulations section

Issued Under Section 1397E

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

1.103-15AT, T.D. 8005, 1985-1 C.B. 39, if

gross proceeds are spent within 6 months

A qualified zone academy bond (QZAB) is

the issuer has not applied the later

of the issue date. The 6-month exception

a bond issued by a state or local

regulations.

is the only exception available for

government to finance certain eligible

For QZABs issued under section

refunding issues.

public school purposes. An issuer of

1397E and section 54E, see Regulations

QZABs issued under section 1397E or

T.D. 9495.

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

section 54E, if applicable, may establish a

Regulations section 1.148-7(a) – (c).

Arbitrage Rebate

defeasance escrow to cure a failure to

properly use QZAB proceeds. An issuer

18-month exception. The rebate

Computation of Arbitrage Rebate

must pay 100 percent of the investment

requirement is considered to be met for

earnings on amounts in the defeasance

gross proceeds of an issue if those gross

The rebate amount for an issue is based

escrow. Use this form to make payments

proceeds are spent according to an

on the difference between the amount

of investment earnings on amounts in

18-month expenditure schedule

actually earned on nonpurpose

defeasance escrows. See Regulations

measured from the issue date.

investments and the amount that would

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

have been earned if those investments

See Regulations section 1.148-7(a),

had a yield equal to the yield on the issue.

Note. Use a separate Form 8038-T for

(b), and (d).

each issue.

Note. Regulations section 1.148-3(b)

2-year exception. The “available

provides that as of any date, the rebate

Who Must File

construction proceeds” of a construction

amount for an issue is the excess of the

issue are treated as meeting the rebate

Issuers of tax-exempt bonds and any

future value, as of that date, of all receipts

requirement if those proceeds are spent

other bonds subject to the provisions of

on nonpurpose investments over the

in accordance with a 2-year expenditure

section 148 must file Form 8038-T to pay:

future value, as of that date, of all

schedule measured from the issue date.

payments on nonpurpose investments.

1. Arbitrage rebate.

The definitions of payments and receipts

2. Yield reduction payments.

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

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

3. The penalty:

Regulations section 1.148-7(a), (b), and

•

require inclusion of transactions

In lieu of arbitrage rebate; or

(e)-(j).

•

(including, but not limited to, acquisition,

To terminate the election to pay a

Exception for certain investments.

earnings and return of principal) on a date

penalty in lieu of arbitrage rebate.

for each nonpurpose investment. Any

The rebate requirement generally does

4. Penalties and interest on the failure

cash flow representation to the contrary

not apply to gross proceeds that are

to pay on time any amounts in 1-3 above.

may result in the understatement of

invested in certain tax-exempt bonds,

Issuers of QZABs issued under section

rebate amount. Yield reduction payments

certain tax-exempt mutual funds, or

1397E or section 54E, as applicable, that

are determined using payments and

certain demand deposit securities

establish a defeasance escrow under the

receipts as described in Regulations

purchased directly from the United States

Regulations must file Form 8038-T to pay

section 1.148-5(b)(1).

Treasury.

Cat. No. 30066E

Instructions For Form 8038-T - Arbitrage Rebate, Yield Reduction And Penalty In Lieu Of Arbitrage Rebate

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