Arbitrage Rebate and Penalty in Lieu of Arbitrage Rebate

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Instructions for Form 8038-T

13:50 - 18-JAN-2005

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Department of the Treasury
Internal Revenue Service

Instructions for Form 8038-T
(Rev. January 2005)

Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate
Section references are to the Internal Revenue Code of 1986 unless otherwise noted.

General Instructions

Applicable Regulations

Purpose of Form

General

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. Use
this form to make arbitrage rebate and
related payments.

Mortgage Revenue Bonds
Section 143(g)(3) and section 103A(i)(4)
of the Internal Revenue Code of 1954
(1954 Code) provide 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
A qualified zone academy bond (QZAB) is
a bond issued by a state or local
government to finance certain eligible
public school purposes. An issuer may
establish a defeasance escrow to cure a
failure to properly use QZAB proceeds.
An issuer must pay 100 percent of the
investment earnings on amounts in the
defeasance escrow. Use this form to
make payments of investment earnings
on amounts in defeasance escrows. See
Proposed Regulations section
1.1397E-1(h)(7)(ii)(C), 2004-16 I.R.B.
793.
Note. Use a separate Form 8038-T for
each issue.

Who Must File
Issuers of tax-exempt bonds 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.

Qualified Zone Academy Bonds
Issuers of QZABs that establish a
defeasance escrow under the Proposed
Regulations must file Form 8038-T to pay
100 percent of the investment earnings
on amounts in the defeasance escrow.

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 qualified zone academy bonds,
see Proposed Regulations section
1.1397E-1. For rules on the effective
dates of regulations for QZABs, see
Proposed Regulations 1.1397E-1(k).

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.

Exceptions
General. 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.
Cat. No. 30066E

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 18
month expenditure schedule measured
from the issue date.
See Regulations section 1.148-7(a),
(b) and (d).
2-Year Exception. The “available
construction proceeds” of a construction
issue are treated as meeting the rebate
requirement if those proceeds are spent
in accordance with a 2 year expenditure
schedule measured from the issue date.
See section 148(f)(4)(C) and
Regulations section 1.148-7(a), (b) and
(e) – (j).
Exception for Certain Investments.
The rebate requirement generally does
not apply to gross proceeds that are
invested in certain tax-exempt bonds,
certain tax-exempt mutual funds or
certain demand deposit securities
purchased directly from the United States
Treasury.

Penalty in Lieu of Arbitrage
Rebate
Penalty
An issuer may elect to pay a penalty in
lieu of rebating arbitrage for the available
construction proceeds of an issue if the
spending requirements of the 2-year
exception are not satisfied. The penalty is
equal to 11/2 percent of the amount of the
available construction proceeds that do
not meet the spending requirements.
See section 148(f)(4)(C) and
Regulations section 1.148-7(a), (b) and
(e) – (k).

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Instructions for Form 8038-T

13:50 - 18-JAN-2005

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Election to Terminate 11/2 Percent
Penalty
An issuer may terminate the election to
pay penalty in lieu of rebate by paying an
amount equal to 3 percent of the unspent
available construction proceeds multiplied
by the number of years in the initial
temporary period. The termination
election also requires other actions, such
as yield restricting the unspent proceeds
and using such proceeds to redeem
bonds.
See Code section 148(f)(4)(C)(viii) and
(ix) and Regulations section 1.148-7(l).

Yield Reduction Payments
Bond proceeds may be invested in higher
yielding investments only during a
temporary period described in
Regulations section 1.148-2(e). After
expiration of an applicable temporary
period, proceeds must be yield restricted.
One method of complying with the
yield restriction requirement is to make
“yield reduction payments.” For certain
investments, a yield reduction payment is
taken into account in computing the yield
on that investment. See Regulations
section 1.148-5(c).
For investments with excess yield that
are not eligible for yield reduction
payments (such as an incorrectly invested
advance refunding escrow fund), see
Notice 2001-60, Voluntary Closing
Agreement Program for Tax-Exempt
Bonds.

Where to File
File Form 8038-T with the Internal
Revenue Service Center, Ogden, UT
84201 – 0027.

When to File
Arbitrage Rebate
An issuer must pay rebate in installments
for computation dates that occur at least
once every 5 years. Rebate payments are
due within 60 days after each
computation date. The final rebate
payment for an issue is due within 60
days after the issue is discharged.
See Regulations section 1.148-3(e)
through (g).
Special rules. For an issue retired
within 3 years of issuance, the final rebate
payment need not occur before the end of
8 months after the issue date or during
the period the issuer expects to meet any
of the spending exceptions under
Regulations section 1.148-7.
For rules concerning qualified
mortgage bonds and qualified veterans’
mortgage bonds see section 143(g)(3)
and section 103A(i)(4) of the 1954 Code.

Penalty in Lieu of Arbitrage Rebate
and Termination Penalty
Penalty in lieu of arbitrage rebate
payments must be paid within 90 days of
the end of the applicable spending period.

Payment of the 3 percent penalty to
terminate the penalty in lieu of arbitrage
rebate election must be made within 90
days of (a) the end of the initial temporary
period if the termination election was
made under section 148(f)(4)(C)(viii), or
(b) the date of the termination election if it
was made under section 148(f)(4)(C)(ix).

Yield Reduction Payments
Yield reduction payments are payable at
the same time as arbitrage rebate
payments.
See Regulations section 1.148-5(c)(2).

Qualified Zone Academy Bonds
The issuer must pay 100 percent of the
investment earnings on amounts in a
defeasance escrow established for an
issue of QZABs at the same time and in
the same manner as arbitrage rebate
payments.

Failure to Pay Timely
General
A failure to pay the required amounts of
arbitrage rebate, yield reduction, or
penalty payments on time may cause
bonds to be treated as not being, and as
never having been, tax exempt.
If the failure is not due to willful
neglect, the failure will be disregarded if
the issuer pays a penalty to the United
States.
For governmental and qualified
501(c)(3) bonds, 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.
The penalty is automatically waived if
the rebate amount plus interest is paid
within 180 days of discovery of the failure.
See Regulations section 1.148-3(h).
For issues to which the 1992
Regulations apply, see 1992 Regulations
section 1.148-1(c) for rules relating to
innocent failure, willful neglect,
computation of the correction amount and
penalty and interest. In general, these
rules also apply to the Penalty in Lieu of
Arbitrage Rebate and the Termination
Penalty. See 1992 Regulations section
1.148-6(n)(4).

Recovery of Overpayment
In general, an issuer may recover an
overpayment for an issue of tax-exempt
bonds by establishing to the Internal
Revenue Service that an overpayment
occurred. Payments that may be
recovered include:
• Arbitrage rebate,
• Yield reduction,
• Penalty in lieu of arbitrage rebate, and
• Penalty to terminate penalty in lieu of
arbitrage rebate.
See Regulations section 1.148-3(i) and
Form 8038-R, Request for Recovery of

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Overpayments Under Arbitrage Rebate
Provisions.

Specific Instructions
Part I—Reporting Authority and
Filing Information
Amended Return
An issuer may file an amended return to
change or add to the information reported
on a previously filed return for the same
date of issue. If you are filing to correct
errors or change a previously filed return,
check the “Amended Return” box in the
heading of the form.
The amended return must provide all
the information reported on the original
return, in addition to the new or corrected
information. Attach an explanation of the
reason for the amended return.

Lines 1-10
General. Enter the same information that
was entered on Form 8038, 8038-G or
8038-GC (the “initial filing”), making any
necessary changes, for example, a
change of address.
Line 1. Enter the name of the
governmental entity that issued the
bonds, not the name of the entity
receiving the benefit of the financing or
the eligible taxpayer claiming the QZAB
credit.
Line 4. After the preprinted “7”, enter the
last two digits of the year corresponding
with the computation date to which this
filing relates. For example, for a payment
made for a computation date in 2001,
enter a report number of 701.
Alternatively, an issuer may consistently
use any system of assigning report
numbers so long as a number is not
duplicated for an issue over its life.
Line 11. Enter the same type of issue
that was entered on Form 8038 or
8038-G. For bonds previously reported on
Form 8038-GC, enter “Small
Governmental Bond.” Also enter the total
issue price that was listed on the initial
filing for this issue. For QZABs enter
“qualified zone academy bond” and the
total issue price.

Part II—Arbitrage Rebate and
Yield Reduction Payments
Line 12. Enter the computation date to
which this payment relates. 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.
Line 13. Enter the amount of the rebate
payment. A rebate installment payment
must be in an amount that, when added
to the future value, as of the computation

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Instructions for Form 8038-T

13:50 - 18-JAN-2005

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

date, of previous rebate payments made
for the issue, equals at least 90 percent of
the rebate amount as of that 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.
See Regulations section 1.148-3(f).
For issues to which the 1992
Regulations apply, see 1992 Regulations
section 1.148-1(b)(3).
Line 14. For investments covered by the
special yield reduction rule, rebate and
yield reduction payments are included in
the computation of yield for that
investment.
See Regulations section 1.148-5(c).
Line 15. Enter the amount equal to 100
percent of the investment earnings in a
QZAB defeasance escrow.

Part III—Penalty in Lieu of
Arbitrage Rebate
Complete this section only if, on or before
the issue date of the bonds, an election
was made under section 148(f)(4)(C)(vii).
Line 16. Check the appropriate box for
the number of months between the issue
date of the bonds and the end of the
spending period for which this Form
8038-T is being filed. For periods greater
than 24 months, check the box marked
“Other” and fill in the number of months
since the date of issue.
Note. File a separate Form 8038-T for
each 6-month spending period.
Lines 17 – 19. See Penalty in Lieu of
Arbitrage Rebate on page 1.

Part IV— Late Payments
Line 20. Under the current regulations, in
order to qualify for a waiver of penalty, a
failure to pay must not be due to willful
neglect. Attach an explanation of the
failure and the basis for concluding that
the failure is not due to willful neglect.
Line 21. For a failure that does not
qualify for a waiver of penalty, the failure
will be disregarded if the issuer pays a
penalty to the United States. For
governmental and qualified 501(c)(3)
bonds, the penalty equals 50 percent of
the rebate amount not paid timely plus
interest on that amount. For other bonds,
the penalty is 100 percent of the rebate
amount not paid timely plus interest on
that amount.
Line 22. Compute interest 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.
For issues to which the 1992
Regulations apply, see 1992 Regulations

section 1.148-1(c)(2) for computation of
the correction amount.

Part V—Total Payment
Line 23. Combine all payment amounts
on lines 13, 14, 15, 17, 19, 21, and 22.
Enclose a check or money order for the
total amount made payable to the “United
States Treasury.” Include the issuer’s
name, address, EIN, “Form 8038-T”, and
the date on the payment.

Part VI—Miscellaneous
Line 24. Enter the amount of proceeds
(consisting of sale, investment and
transferred proceeds) not allocated to
expenditures for a governmental purpose
of the issue.
Line 25. Enter the amount of proceeds
used to pay principal of and call
premiums on the bonds for which this
form is being filed.
Line 26. Under Regulations section
1.148-5(e)(2), qualified administrative
costs are taken into account in
determining payments and receipts on
nonpurpose investments. Regulations
section 1.148-5(e)(2)(iii) and (iv) provide
special rules for qualified administrative
costs for guaranteed investment contracts
and yield restricted defeasance escrows.
Enter the amount of any qualified
administrative costs taken into account in
computing the rebate amount under these
special rules.
Line 27. Under Regulations section
1.148-4(f), fees properly allocable to
payments for a qualified guarantee for an
issue are treated as additional interest in
computing the yield on that issue. Enter
the amount of such fees.
Line 28. A variable rate issue is an issue
that contains a bond that has a yield that
is not fixed and determinable on the issue
date.
Line 29. In general, payments made or
received by an issuer under a qualified
hedge are taken into account to
determine the yield on the issue. A hedge
may be entered into before, at the same
time as, or after the date of issue. See
Regulations section 1.148-4(h). Enter the
name of the provider of the hedge and
term of the hedge to the nearest tenth of
a year (for example, 2.4 years). Attach
additional sheets if necessary.
Line 30. Enter “yes” if any gross
proceeds of the issue were invested in a
guaranteed investment contract (“GIC”). A
GIC includes any nonpurpose investment
that has specifically negotiated withdrawal
or reinvestment provisions and a
specifically negotiated interest rate, and
also includes any agreement to supply

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investments on two or more dates (for
example, a forward supply contract).
Enter the name of the provider of the GIC
and term of the GIC to the nearest tenth
of a year. Attach additional sheets if
necessary.
Line 31. Indicate if any gross proceeds
were invested beyond the temporary
periods set forth in Regulations section
1.148-2(e) or 1.148-9(d).
Line 32. Indicate who prepared the
calculations necessary for the filing of this
form. If other than “Issuer”, indicate the
name of the entity or individual preparing
the calculations.

Signature
Form 8038-T must be signed by an
authorized representative of the issuer.
Paperwork Reduction Act Notice. We
ask for the information on this form to
carry out the Internal Revenue laws of the
United States. You are required to give us
the information. We need it to ensure that
you are complying with these laws and to
allow us to collect the right amount of
arbitrage rebate, yield reduction
payments, and penalties.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records relating
to a form or its instructions must be
retained as long as their contents may
become material in the administration of
any Internal Revenue law. Generally, tax
returns and return information are
confidential, as required by section 6103.
The time needed to complete and file
this form will vary depending on individual
circumstances. The estimated average
time is:
Recordkeeping . . . . . . . . .
Learning about the law or the
form . . . . . . . . . . . . . . . . .
Preparing, copying,
assembling, and sending the
form to the IRS . . . . . . . . . .

10 hr., 2 min.
5 hr., 51 min.

6 hr., 16 min.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler,
we would be happy to hear from you. You
can write to the Internal Revenue Service,
Tax Products Coordinating Committee,
SE:W:CAR:MP:T:T:SP, 1111 Constitution
Ave. NW, IR-6406, Washington, DC
20224. Do not send the form to this
address. Instead, see Where to File on
page 2.