Rev. Proc 2008-37

Lawrence Mack at (202) 622–4940 (not a
toll-free call).

26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 103; 148; 1.148–3, 1.148–13T.)

Rev. Proc. 2008–37
SECTION 1. PURPOSE
In general, this revenue procedure provides guidance to issuers of tax-exempt
bonds regarding the terms and procedures
for claims for recovery of overpayments
under § 1.148–3(i) of the Income Tax Regulations of amounts paid to the United
States with respect to the arbitrage rebate
requirement under § 148(f) of the Internal
Revenue Code, the penalty in lieu of rebate
provisions under § 148(f)(4)(C)(vii) and
(viii), or the yield reduction payment provision under § 1.148–5(c) for purposes of
the arbitrage investment restrictions generally under § 148. This revenue procedure
also establishes a deadline for claims for
these recoveries of overpayments which
requires that issuers file these claims by
no later than the date that is two years
after the final computation date with respect to the applicable issue of bonds under § 1.148–3(e)(2), or two years from July
1, 2008, for an issue of bonds whose final
computation date is on or before June 24,
2008. Further, this revenue procedure provides that claims for recovery of overpayments of rebate or penalty in lieu of rebate
with respect to bonds that are subject to
§ 1.148–13T of the temporary Income Tax
Regulations published in the Federal Register on May 18, 1992 (T.D. 8418, 1992–1
C.B. 29 [57 Fed. Reg. 20971]) (the 1992
regulations) will be treated in the same
manner as claims for recovery of overpayments made under § 1.148–3(i).
SECTION 2. BACKGROUND
.01 Under § 103(a) and (b)(2), the exclusion from gross income of interest on
any State or local bond does not apply to
interest on an arbitrage bond within the
meaning of § 148.
.02 Section 148(f)(1) generally provides that a bond that is part of an issue
shall be treated as an arbitrage bond unless the issuer pays to the United States
the arbitrage rebate amounts described in

July 21, 2008

§ 148(f)(2) for the issue (rebate) in accordance with § 148(f)(3).
.03 Section 148(f)(3) provides, in part,
that, except to the extent provided by the
Secretary, rebate must be paid in installments that are made at least once every five
years. The last installment must be made
no later than 60 days after the day on which
the last bond of the issue is discharged.
.04 Sections 148(f)(4)(C)(vii) and (viii)
permit issuers of certain construction issues to elect to pay a penalty in lieu of rebate (penalty) in the manner and amount
described in § 148(f)(4)(C)(vii) and (viii).
.05 Section 1.148–5(c)(1) permits issuers to pay yield reduction payments that
may be taken into account in determining
the yield on an issue for arbitrage purposes under § 148 (yield reduction) in the
circumstances and manner described in
§ 1.148–5(c).
.06 Section 1.148–13T of the 1992 regulations provides rules for recovering an
overpayment of rebate or penalty in lieu of
rebate with respect to certain bonds issued
before July 1, 1993. Under § 1.148–13T(a)
and (c)(1) of the 1992 regulations, an issuer may recover an overpayment of rebate or penalty to the extent that recovery
on the date requested would not result in
an additional rebate amount as of the date
requested if the issuer proves to the satisfaction of the Commissioner that the overpayment occurred and was paid as a result
of a mistake.
.07 Section 1.148–3(i)(1) provides that,
in general, an issuer may recover an overpayment of rebate by establishing to the
satisfaction of the Commissioner that the
overpayment occurred. An overpayment
is the excess of the amount paid over the
sum of the “rebate amount” (as defined in
§ 1.148–3(b)), as of the most recent “computation date” (as defined in § 1.148–3(e))
and all amounts that are otherwise required
to be paid under § 148 as of the date the recovery is requested.
.08 In general, overpayments of penalty
and yield reduction are treated in the same
manner as overpayments of rebate. See
generally §§ 1.148–3(i)(1), 1.148–7(k)(3),
and 1.148–5(c)(1) and (2).
.09 In Rev. Proc. 92–83, 1992–2 C.B.
487, the Internal Revenue Service (the Service) sets forth procedures for claims for
recovery of overpayments of rebate.
.10 In Announcement 2001–115,
2001–2 C.B. 539, the Service announced

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that Form 8038-R, Request for Recovery
of Overpayments Under Arbitrage Rebate
Provisions, replaces the procedures set
forth in Rev. Proc. 92–83.
.11 Under 26 U.S.C. § 7422, in general, a civil action may not be commenced
against the United States to recover any internal revenue tax, any applicable penalty
or “any sum alleged to have been excessive or in any manner wrongly collected”
until a claim for refund has been duly filed
according to the provisions of law in that
regard. The Service has determined that
this provision applies to claims with respect to overpayments of rebate, penalty,
and yield reduction because the amount of
any such overpayment is covered within
the “any sum” language of § 7422. Cf.
United States v. Clintwood Elkhorn Mining Co., 128 S. Ct. 1511 (2008).
SECTION 3. PROCEDURE FOR
FILING CLAIMS FOR RECOVERY
OF OVERPAYMENT OF REBATE,
PENALTY, AND YIELD REDUCTION
.01 Form 8038-R. This section sets forth
terms and procedures for filing claims for
recovery of an overpayment of rebate,
penalty, or yield reduction with respect
to an issue (an overpayment amount). In
order to receive any recovery of an overpayment amount, an issuer must duly file
a claim for recovery of an overpayment
amount (a refund claim) on the then-applicable form (form) and at the then-applicable place of filing, as announced by
the Service from time to time. Presently,
a refund claim shall be made by completing Form 8038–R and filing the form and
any attachments thereto with the Internal Revenue Service, Ogden Submission
Processing Center, Ogden, Utah, 84201
(Ogden Center).
.02 Filing Deadline for Refund Claims
on Overpayment Amounts. Except as provided in section 6.02, the form for making
a refund claim for an overpayment amount
must be filed by an issuer no later than the
date that is two years after the final computation date for the applicable issue of bonds
under § 1.148–3(e)(2).
.03 Processing a Refund Claim. This
section 3.03 describes the present procedures that the Service will employ in
processing refund claims on overpayment
amounts. These procedures may be refined or revised as necessary, without

2008–29 I.R.B.

affecting the issuer’s responsibilities under this revenue procedure, by publication
in the Internal Revenue Manual.
(1) The Ogden Center will determine
whether the issuer has satisfied the following initial processing requirements: (i)
that the form has been completed according to the instructions for the form and
includes the required attachments; (ii) that
the issuer has previously submitted rebate,
penalty, or yield reduction payments accompanied by one or more Forms 8038–T
(Arbitrage Rebate, Yield Reduction and
Penalty in Lieu of Arbitrage Rebate) with
respect to the issue in question; and (iii)
the amount previously submitted as rebate, penalty, or yield reduction payments
is greater than or equal to the overpayment amounts stated in the refund claim.
If the initial processing requirements are
satisfied, the Ogden Center will promptly
forward a copy of the refund claim to the
Service’s Office of Tax Exempt Bonds,
Compliance and Program Management
(TEB CPM) for further processing. If the
Ogden Center concludes that the initial
processing requirements are not satisfied,
the Ogden Center will notify the issuer
by telephone or letter (the Ogden Notification) describing any requirements that
have not been satisfied. If the issuer fails
to file a supplement satisfying the initial
processing requirements within 45 days
starting on the date of the Ogden Notification, the Ogden Center will forward the
refund claim to TEB CPM for issuance
of a Refund Claim Rejection letter. Any
refiling must be within the period for filing
the form in section 3.02 of this procedure.
(2) TEB CPM will review the processing requirements and determine whether
an overpayment occurred and the amount
of the overpayment that an issuer may recover as follows:
(a) Refund Claim Approval.
If
TEB CPM determines that the correct
amount of overpayment is equal to or
greater than the overpayment amounts on
the refund claim, TEB CPM will notify
the issuer in writing of the approval and
will authorize a refund for the entirety of
the requested overpayment amounts.
(b) Refund Claim Rejection. TEB CPM
may reject a refund claim based on an issuer’s failure to follow the procedures for
refund claims set forth in section 3.03(1) of
this revenue procedure or an issuer’s fail-

2008–29 I.R.B.

ure to provide sufficient information to enable TEB CPM to determine that an overpayment occurred. The issuer may resubmit a refund claim in compliance with the
initial processing requirements provided
that any such resubmission is made by the
filing deadlines set forth in sections 3.02
and 6.02 of this revenue procedure. A refund claim that is rejected on the basis of a
procedural deficiency or incomplete information is not a Refund Claim Denial under section 3.03(2)(c) of this revenue procedure.
(c) Refund Claim Denial. Excluding
rejections of refund claims for procedural
deficiencies or incomplete information,
as described in section 3.03(2)(b) of this
revenue procedure, TEB CPM may deny
a refund claim, in full or in part, on the
following grounds: (i) the correct amount
of overpayment is less than the requested
overpayment amounts, or (ii) no overpayment occurred. If TEB CPM makes
a preliminary determination that a refund
claim should be denied, TEB CPM will
notify the issuer in writing that it may
submit additional information to support the refund claim or participate in a
conference or both. Any additional information must be submitted within 21 days
of the later of either the notification to
allow additional information in support
of the refund claim or the conference.
If the issuer fails to submit additional
information within the 21-day period to
support the refund claim to the satisfaction of TEB CPM, or TEB CPM still
disagrees that an overpayment occurred,
TEB CPM will issue, by certified or
registered mail, a formal letter to the issuer
stating that the refund claim is denied (a
Refund Claim Denial), subject only to
the issuer’s appeal right, as described in
section 3.04 of this revenue procedure.
The Refund Claim Denial letter will
explain the reasons for the determination
to deny the refund claim and inform
the issuer of its right to request from
the Office of Appeals an administrative
appeal of the denial pursuant to Revenue
Procedure 2006–40, 2006–2 C.B. 694, as
subsequently amended, supplemented, or
superseded. If an appeal is not requested
within 30 days of the date of the Refund
Claim Denial letter, then the Refund Claim
Denial becomes final, as of the date of
issuance of the Refund Claim Denial letter

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by certified or registered mail, and the
issuer may not refile the refund claim
thereafter.
.04 Appeals. An issuer is entitled to
appeal a Refund Claim Denial to the Office
of Appeals pursuant to section 3.01 of Rev.
Proc. 2006–40, as subsequently amended,
supplemented, or superseded.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
This revenue procedure obsoletes Rev.
Proc. 92–83.
SECTION 5. AMENDMENT TO
REGULATIONS
The Service and the Department of the
Treasury expect to issue regulations under
§ 148 and § 1.148–3(i) to provide that a
claim for recovery of an overpayment of
rebate, penalty, or yield reduction must be
filed with the Commissioner by no later
than two years after the final computation
date of the issue of bonds to which the
refund claim relates.
SECTION 6. EFFECTIVE DATE
.01 In General. Except as provided in
Section 6.02, this revenue procedure applies to refund claims arising from an issue
of bonds for which the final computation
date is after June 24, 2008.
.02 Transition Rule. For refund claims
arising from an issue of bonds for which
the final computation date is on or before
June 24, 2008 the two year period in section 3.02 begins on July 1, 2008.
SECTION 7. PAPERWORK
REDUCTION ACT
The collection of information contained
in section 3 of this revenue procedure has
been previously reviewed and approved by
the Office of Management and Budget in
accordance with the Paperwork Reduction
Act (44 U.S.C. § 3507) under control number 1545–1750.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential as required by
26 U.S.C. § 6103.

July 21, 2008

SECTION 8. DRAFTING
INFORMATION
The principal authors of the revenue
procedure are Christopher C. Woodin,
Tax Exempt Bonds, Compliance and
Program Management, and Timothy L.
Jones, Office of Chief Counsel (Financial Institutions and Products), Internal
Revenue Service. For further information regarding this revenue procedure,
contact Mr. Woodin at 202–283–9780 or
Mr. Jones at 202–622–3980 (not toll-free
numbers).

26 CFR 301.7121–1: Closing agreements.
(Also Part I, §§ 7702, 7702A.)

Rev. Proc. 2008–38
SECTION 1. PURPOSE
This revenue procedure provides a procedure by which an issuer of a life insurance contract may remedy a failure to account for charges for qualified additional
benefits (QABs) under the expense charge
rule of § 7702(c)(3)(B)(ii) of the Internal
Revenue Code. Rev. Rul. 2005–6, 2005–1
C.B. 471, is amplified.
SECTION 2. BACKGROUND
.01 Definition of a life insurance contract.
(1) Section 7702(a) provides that, for a
contract to qualify as a life insurance contract for Federal income tax purposes, the
contract must be a life insurance contract
under the applicable law and must either—
(a) satisfy the cash value accumulation
test of § 7702(b), or
(b) both meet the guideline premium
requirements of § 7702(c) and fall within
the cash value corridor of § 7702(d).
(2) A contract meets the cash value accumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender
value of the contract may not at any time
exceed the net single premium that would
have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline premium requirements of § 7702(c) if the sum
of the premiums paid under the contract
does not at any time exceed the guideline
premium limitation as of that time. The

July 21, 2008

guideline premium limitation as of any
date is the greater of the guideline single
premium, or the sum of the guideline level
premiums to that date. The guideline single premium is the premium that would be
required on the date the contract is issued
to fund the future benefits under the contract.
(4) A contract falls within the cash
value corridor of § 7702(d) if the death
benefit under the contract at any time is
not less than the applicable percentage
of the cash surrender value, based on the
table set forth in § 7702(d)(2).
(5) Section 7702 is effective for contracts issued after December 31, 1984, in
tax years ending after that date.
.02 Definition of a modified endowment
contract (MEC).
(1) Section 7702A(a) provides that a
life insurance contract is a MEC if the contract—
(a) is entered into on or after June 21,
1988, and fails to meet the 7-pay test of
§ 7702A(b), or
(b) is received in exchange for a contract described in paragraph (a) of this section 2.02(1).
(2) A contract fails to meet the 7-pay
test if the accumulated amount paid under
the contract at any time during the first 7
contract years exceeds the sum of the net
level premiums that would have to be paid
on or before such time if the contract were
to provide for paid-up future benefits after
the payment of 7 level annual premiums.
(3) Section 72(e)(12) provides that, for
purposes of determining amounts includible in gross income, all MECs issued by
the same company to the same contract
holder during any calendar year are treated
as one MEC.
.03 Accounting for charges for QABs.
Section 7702(f)(5) identifies five categories of benefits as QABs: guaranteed
insurability; accidental death or disability
benefit; family term coverage; disability
waiver benefit; or other benefits prescribed under regulations. These benefits
are not treated as future benefits under
the contract, but charges for the benefits are treated as future benefits. For
purposes of the cash value accumulation test of § 7702(b), § 7702(b)(2)(B)
requires that charges for QABs be accounted for using the expense charge rule
of § 7702(c)(3)(B)(ii), rather than the mortality charge rule of § 7702(c)(3)(B)(i).

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Section 7702A(c)(1) requires that the same
rule be used for purposes of the 7-pay test
as well. Although § 7702 is silent on the
treatment of charges for QABs for purposes of applying the guideline premium
requirements, Rev. Rul. 2005–6 concludes that charges for such benefits are to
be taken into account under the expense
charge rule of § 7702(c)(3)(B)(ii) for that
purpose as well.
.04 Authority to enter into closing
agreements. Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liability of such person (or of the person
or estate for whom he acts) in respect of
any internal revenue tax for any period.
Such agreement is generally final and conclusive, except upon a showing of fraud,
malfeasance, or misrepresentation of a
material fact.
.05 Correction procedure for QABs.
Rev. Rul. 2005–6 sets forth three alternatives for issuers whose compliance systems do not currently account for charges
for QABs under the expense charge rule
of § 7702(c)(3)(B)(ii):
(1) Alternative A provides that, if an
issuer’s compliance system does not properly account for charges for QABs but
no contracts have failed to satisfy the requirements of § 7702(a) as a result of the
system’s deficiency, the issuer may correct
its compliance system to account for those
charges using the expense charge rule
without contacting the Internal Revenue
Service (Service).
(2) Alternative B provides a correction procedure for closing agreements that
were requested on or before February 7,
2006.
(3) Alternative C provides that an issuer
whose compliance system does not properly account for charges for QABs may
request a closing agreement under terms
and conditions that are enumerated in Rev.
Rul. 2005–6.
.06 Changes to correction procedure.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how various correction procedures — including
those for improper accounting for charges
for QABs under Rev. Rul. 2005–6 —
may be improved. This revenue procedure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Most significantly, this revenue
procedure sets forth a model closing agree-

2008–29 I.R.B.