Arbitrage Rebate and Penalty in Lieu of Arbitrage Rebate

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
Section references are to the Internal
Revenue Code unless otherwise noted.

100 percent of the investment earnings
on amounts in the defeasance escrow.

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. 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
Issued Under Section 1397E
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 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 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 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

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).
Cat. No. 30066E

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.
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)(vii) and
Regulations section 1.148-7(k).

Election To Terminate 11/2 Percent
Penalty
An issuer may terminate the election to
pay penalty in lieu of arbitrage 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 2008-31, Voluntary Closing
Agreement Program for Tax-Exempt
Bonds and Tax Credit Bonds.

Where To File
File Form 8038-T with the Internal
Revenue Service Center, Ogden, UT
84201-0027.
Private delivery services. You can use
certain private delivery services
designated by the IRS to meet the “timely
mailing as timely filing/paying” rule for tax
returns and payments. These private
delivery services include only the
following:
• DHL Express (DHL): DHL Same Day
Service.
• Federal Express (FedEx): FedEx
Priority Overnight, FedEx Standard
Overnight, FedEx 2Day, FedEx
International Priority, and FedEx
International First.
• United Parcel Service (UPS): UPS Next
Day Air, UPS Next Day Air Saver, UPS
2nd Day Air, UPS 2nd Day Air A.M., UPS

Worldwide Express Plus, and UPS
Worldwide Express.
The private delivery service can tell
you how to get written proof of the mailing
date.
Private delivery services cannot
deliver items to P.O. boxes. You
CAUTION
must use the U.S. Postal Service
to mail any item to an IRS P.O. box
address.

!

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).

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 under section 1397E or
section 54E, as applicable, 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

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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 generally waived if the
rebate amount plus interest is paid within
180 days of discovery of the failure. See
Regulations section 1.148-3(h) and Rev.
Proc. 2005-40, 2005-2 C.B. 83.
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
Overpayments Under Arbitrage Rebate
Provisions.

Specific Instructions
Part I—Reporting Authority
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,
Information Return for Tax-Exempt
Private Activity Bond Issues; Form
8038-B, Information Return for Build
America Bonds and Recovery Zone
Economic Development Bonds; Form
8038-G, Information Return for
Tax-Exempt Governmental Obligations;
Form 8038-GC, Information Return for
Small Tax-Exempt Governmental Bond

Issues, Leases, and Installment Sales; or
Form 8038-TC, Information Return for
Tax Credit Bonds and Specified Tax
Credit Bonds (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 a tax credit.
Line 4. This line is for IRS use only. Do
not make an entry.
Lines 9 and 10. Enter the name, title,
and telephone number of the officer or
other employee of the issuer whom the
IRS may call for more information. If the
issuer wishes to designate a person other
than an officer or other employee of the
issuer (including a legal representative or
paid preparer) whom the IRS may call for
more information about this return, enter
the name, title, and telephone number of
such person here.
Note. By authorizing a person other than
an authorized officer or other employee of
the issuer to communicate with the IRS
and whom the IRS may call for more
information about this return, the issuer
authorizes the IRS to communicate
directly with the individual listed on line 9
and consents to the disclosure of the
issuer’s return information to that
individual, as necessary to process this
return.
Line 11. Enter the same type of issue
that was entered on Form 8038, 8038-B,
8038-G, or 8038-TC. 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 issued under section 1397E or
section 54E, enter “qualified zone
academy bond — section 1397E” or
“qualified zone academy bond — section
54E” 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
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. For QZABs issued under
section 1397E or section 54E, if
applicable, enter the amount equal to 100
percent of the investment earnings in a
QZAB defeasance escrow.

States Treasury.” Include the issuer’s
name, address, EIN, “Form 8038-T,” and
the date on the check or money order.

Part III—Penalty in Lieu of
Arbitrage Rebate

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) provides special
rules for qualified administrative costs for
guaranteed investment contracts (GICs)
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.

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, earlier.

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.
See Rev. Proc. 2005-40 for more
information.
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.
Note. The calculation for late interest is
included under line 22 only, not under line
21.
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

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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 27. Under Regulations section
1.148-4(f)(1), 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)(1). 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
investments on two or more dates (for
example, a forward supply contract). See
Regulations section 1.148-1(b). 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 the issuer, indicate the
name of the entity or the individual
preparing the calculations.

Signature and Consent
An authorized representative of the issuer
must sign and date Form 8038-T and any
applicable certification. Also print the
name and title of the person signing Form
8038-T. The authorized representative of
the issuer signing this form must have the
authority to consent to the disclosure of
the issuer’s return information, as
necessary to process this return, to the
person(s) that has been designated in
Form 8038-T.
Note. If authority is granted in line 9 for
the IRS to communicate with a person
other than an officer or other employee of
the issuer, by signing this form, the
issuer’s authorized representative
consents to the disclosure of issuer’s
return information, as necessary to
process this return, to such person.

Paid Preparer
If an authorized officer of the issuer filled
in its return, the paid preparer’s space
should remain blank. Anyone who
prepares the return but does not charge
the organization should not sign the
return. Certain others who prepare the
return should not sign. For example, a

regular, full-time employee of the issuer,
such as a clerk, secretary, etc., should
not sign.
Generally, anyone who is paid to
prepare a return must sign it and fill in the
other blanks in the Paid Preparer Use
Only area of the return.
The paid preparer must:
• Sign the return in the space provided
for the preparer’s signature (a facsimile
signature is acceptable),
• Enter the preparer information, and
• Give a copy of the return to 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

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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 . . . . . . . . . 10 hr., 16 min.
Learning about the law or the
form . . . . . . . . . . . . . . . . . 5 hr., 37 min.
Preparing, copying,
assembling, and sending the
form to the IRS . . . . . . . . . . 7 hr., 14 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-6526, Washington, DC
20224. Do not send the form to this
address. Instead, see Where To File
earlier.