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Penalty in Lieu of Arbitrage

Worldwide Express Plus, and UPS

the issuer pays a penalty to the United

Worldwide Express.

States.

Rebate

The private delivery service can tell

For governmental and qualified

Penalty

you how to get written proof of the mailing

501(c)(3) bonds, the penalty equals 50

date.

percent of the rebate amount not paid

An issuer may elect to pay a penalty in

when required to be paid, plus interest on

lieu of rebating arbitrage for the available

Private delivery services cannot

that amount. Otherwise the penalty

construction proceeds of an issue if the

deliver items to P.O. boxes. You

equals 100 percent of the rebate amount

spending requirements of the 2-year

must use the U.S. Postal Service

CAUTION

not paid when required to be paid, plus

exception are not satisfied. The penalty is

to mail any item to an IRS P.O. box

interest on that amount.

equal to 1

percent of the amount of the

address.

available construction proceeds that do

The penalty is generally waived if the

When To File

not meet the spending requirements.

rebate amount plus interest is paid within

180 days of discovery of the failure. See

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

Arbitrage Rebate

Regulations section 1.148-3(h) and Rev.

Regulations section 1.148-7(k).

Proc. 2005-40, 2005-2 C.B. 83.

An issuer must pay rebate in installments

Election To Terminate 1

Percent

for computation dates that occur at least

For issues to which the 1992

Penalty

once every 5 years. Rebate payments are

Regulations apply, see 1992 Regulations

due within 60 days after each

section 1.148-1(c) for rules relating to

An issuer may terminate the election to

computation date. The final rebate

innocent failure, willful neglect,

pay penalty in lieu of arbitrage rebate by

payment for an issue is due within 60

computation of the correction amount,

paying an amount equal to 3 percent of

days after the issue is discharged.

and penalty and interest. In general,

the unspent available construction

these rules also apply to the Penalty in

proceeds multiplied by the number of

See Regulations section 1.148-3(e)

Lieu of Arbitrage Rebate and the

years in the initial temporary period. The

through (g).

Termination Penalty. See 1992

termination election also requires other

Special rules. For an issue retired

Regulations section 1.148-6(n)(4).

actions, such as yield restricting the

within 3 years of issuance, the final rebate

unspent proceeds and using such

Recovery of Overpayment

payment need not occur before the end of

proceeds to redeem bonds.

8 months after the issue date or during

In general, an issuer may recover an

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

the period the issuer expects to meet any

overpayment for an issue of tax-exempt

(ix) and Regulations section 1.148-7(l).

of the spending exceptions under

bonds by establishing to the Internal

Regulations section 1.148-7.

Revenue Service that an overpayment

Yield Reduction Payments

occurred. Payments that may be

For rules concerning qualified

Bond proceeds may be invested in higher

recovered include:

mortgage bonds and qualified veterans’

yielding investments only during a

•

Arbitrage rebate,

mortgage bonds see section 143(g)(3).

temporary period described in

•

Yield reduction,

Regulations section 1.148-2(e). After

Penalty in Lieu of Arbitrage Rebate

•

Penalty in lieu of arbitrage rebate, and

expiration of an applicable temporary

and Termination Penalty

•

Penalty to terminate penalty in lieu of

period, proceeds must be yield restricted.

arbitrage rebate.

Penalty in lieu of arbitrage rebate

One method of complying with the

payments must be paid within 90 days of

See Regulations section 1.148-3(i) and

yield restriction requirement is to make

the end of the applicable spending period.

Form 8038-R, Request for Recovery of

“yield reduction payments.” For certain

Overpayments Under Arbitrage Rebate

Payment of the 3 percent penalty to

investments, a yield reduction payment is

Provisions.

terminate the penalty in lieu of arbitrage

taken into account in computing the yield

rebate election must be made within 90

on that investment. See Regulations

days of (a) the end of the initial temporary

Specific Instructions

section 1.148-5(c).

period if the termination election was

For investments with excess yield that

made under section 148(f)(4)(C)(viii), or

Part I—Reporting Authority

are not eligible for yield reduction

(b) the date of the termination election if it

payments (such as an incorrectly invested

was made under section 148(f)(4)(C)(ix).

Amended Return

advance refunding escrow fund), see

Yield Reduction Payments

Notice 2008-31, Voluntary Closing

An issuer may file an amended return to

Yield reduction payments are payable at

Agreement Program for Tax-Exempt

change or add to the information reported

the same time as arbitrage rebate

Bonds and Tax Credit Bonds.

on a previously filed return for the same

payments.

date of issue. If you are filing to correct

Where To File

errors or change a previously filed return,

See Regulations section 1.148-5(c)(2).

File Form 8038-T with the Internal

check the “Amended Return” box in the

Qualified Zone Academy Bonds

Revenue Service Center, Ogden, UT

heading of the form.

84201-0027.

The issuer must pay 100 percent of the

The amended return must provide all

investment earnings on amounts in a

Private delivery services. You can use

the information reported on the original

defeasance escrow established for an

certain private delivery services

return, in addition to the new or corrected

issue of QZABs under section 1397E or

designated by the IRS to meet the “timely

information. Attach an explanation of the

section 54E, as applicable, at the same

mailing as timely filing/paying” rule for tax

reason for the amended return.

time and in the same manner as arbitrage

returns and payments. These private

Lines 1-10

rebate payments.

delivery services include only the

General. Enter the same information

following:

Failure To Pay Timely

•

DHL Express (DHL): DHL Same Day

that was entered on Form 8038,

Service.

Information Return for Tax-Exempt

General

•

Federal Express (FedEx): FedEx

Private Activity Bond Issues; Form

A failure to pay the required amounts of

Priority Overnight, FedEx Standard

8038-B, Information Return for Build

arbitrage rebate, yield reduction, or

Overnight, FedEx 2Day, FedEx

America Bonds and Recovery Zone

penalty payments on time may cause

International Priority, and FedEx

Economic Development Bonds; Form

bonds to be treated as not being, and as

International First.

8038-G, Information Return for

never having been, tax-exempt.

•

United Parcel Service (UPS): UPS Next

Tax-Exempt Governmental Obligations;

Day Air, UPS Next Day Air Saver, UPS

If the failure is not due to willful

Form 8038-GC, Information Return for

2nd Day Air, UPS 2nd Day Air A.M., UPS

neglect, the failure will be disregarded if

Small Tax-Exempt Governmental Bond

-2-

Instructions For Form 8038-T - Arbitrage Rebate, Yield Reduction And Penalty In Lieu Of Arbitrage Rebate Page 2

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