Rebate & Yield Reduction: Next Required Computation Date

Issuers must compute and pay rebate in installments at least once every five years. An issuer may determine the date of the next required computation date by reference to an interim rebate computation date for which the issuer makes a rebate payment. This issue snapshot discusses the determination of the next required computation date following use of an interim computation date to determine the amount of rebate or yield reduction payment.

IRC Section and Treas. Regulation

IRC Section 148(f) -- Required rebate to the United States

Regulations Section 1.148-3 -- General Arbitrage Rebate Rules

Regulations Section 1.148-4 -- Yield on an Issue of Bonds

Regulations Section 1.148-5(c) -- Yield reduction payments to the United States

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

Rev. Proc. 2005-40, 2005-2 C.B. 83, provides guidance on penalties and interest to be paid so that a late rebate payment does not result in bonds being arbitrage bonds.

Issue snapshot: Rebate & Yield Reduction: Required Payment Dates for Interim Computation Dates

Analysis

IRC Section 148(f) provides that a bond is an arbitrage bond if it is part of an issue that fails to meet the requirement to pay rebate in installments at least once every five years. Treas. Reg. Section 1.148-3(h) provides that the failure to pay the correct rebate amount when required will cause the bonds of the issue to be arbitrage bonds, unless the Commissioner determines that the failure was not caused by willful neglect and the issuer promptly pays a penalty and interest on the late payment to the United States. In certain circumstances, issuers can make yield reduction payments. Yield reduction payments are to be paid in the same time and manner as the payment of rebate amounts. Treas. Reg. Section 1.148-5(c).

The first rebate installment payment must be made for a computation date that is not later than five years after the issue date (the "first required payment date"), and subsequent rebate installment payments must be made for a computation date that is not later than five years after the previous computation date for which an installment payment was made. Treas. Reg. Section 1.148-3(f)(1). Treas. Reg. Section 1.148-3(e)(2) describes the final computation date for which the rebate amount must be paid with respect to an issue.

A "computation date" is each date on which the issuer computes the rebate amount under Treas. Reg. Section 1.148-3(e). Issuers of a fixed yield issue may treat any date as a computation date. For a variable yield issue, an issuer may treat the last day of any bond year ending on or before the first required payment date as a computation date, but the issuer may not change that treatment after the first payment date. After the first required payment date, the issuer of a variable yield issue must consistently treat either the end of each bond year or the end of each fifth bond year as computation dates and may not change these computation dates. A "bond year" is each one-year period that ends on the day selected by the issuer, and the first and last bond years may be short periods. If the issuer does not select a bond year before the earlier of the final maturity date of the issue or the date that is five years after the issue date, bond years end on each anniversary of the issue date and on the final maturity date. Treas. Reg. Section 1.148-1(b).

Each rebate payment must be paid no later than 60 days after the computation date to which the payment relates. Treas. Reg. Section 1.148-3(g). An issuer may use more than one computation date in computing the rebate amount for a period. When an issuer uses more than one computation date in a period for which a rebate payment is made, the rebate payment "relates" to the latest computation date the issuer used in the period. The latest permissible computation date for the first rebate installment payment is not later than five years after the issue date and, for subsequent rebate installment payments, is not later than five years after the previous computation date for which an installment payment was made. For purposes of this issue snapshot, each computation date used in the calculation that is earlier than the latest computation date allowed under the regulations for the period is referred to as an "interim computation date," and the latest computation date allowed under the regulations for the period is referred to as a "required computation date."

Unless the final computation date is earlier, the first payment of rebate is timely when made for a computation date that is not later than five years after the issue date. If an issuer computes rebate with respect to a computation date that is earlier than the fifth anniversary of the issue date and pays at least the minimum required amount of rebate within 60 days of that computation date, the issuer has timely made the first rebate installment. The issuer then is not required to compute rebate at the end of the fifth bond year or on the fifth anniversary of the issue date unless it chooses to do so. The issuer may use the computation date in connection with which it made the rebate payment to determine the next required computation date. When the issuer does this, the next required computation date is not later than five years after the interim computation date for which the rebate was paid.

An interim computation date in connection with which the issuer does not make a payment, even if the rebate amount is $0 for such interim computation date, may not be the date from which the next required computation date is determined. IRC Section 148(f) requires issuers to pay rebate in installments at least once every five years, and Treas. Reg. Section 1.148-3(f)(1) requires that the first rebate installment payment be made for a computation date that is not later than five years after the issue date, and that subsequent rebate installment payments be made for a computation date that is not later than five years after the previous computation date for which an installment payment was made. In contrast, a required computation date will be the date from which the next required computation date is determined unless a rebate payment is made with respect to an interim computation date occurring prior to such next required computation date.