This issue snapshot discusses the use of interim computation dates to determine the amount of rebate or yield reduction payment due when the payment is being made more than 60 days after the required computation date.
IRC Section and Treas. Regulations
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.
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.
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. 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).
A "computation date" is each date on which the issuer computes the rebate amount under Treas. Reg. Section 1.148-3(e). For a fixed yield issue, an issuer may treat any date as a computation date. For a variable yield issue, each computation date must be the end of a bond year, and after the first required payment date, must be either the end of every bond year or the end of every fifth bond year.
Each rebate payment must be paid not 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 more than one computation date is used in a period for which a rebate payment is made, the rebate payment "relates" to the latest computation date in the period. For purposes of this issue snapshot, each computation date used in the calculation that is earlier than the latest permitted permissible computation date allowed for the period is referred to as an "interim computation date."
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. Interest accrues at the underpayment rate under IRC Section 6621. The penalty may be waived in certain circumstances.
An issuer's failure to pay rebate timely for a computation period (the period between computation dates) does not affect the issuer's ability to select permitted interim computation dates when it computes the rebate amount for that period.
Issue Indicators or Audit Tips
During examinations, if the issuer has not computed rebate within the time periods required to make a timely payment of the rebate amount under Treas. Reg. Section 1.148-3(f)(1) (and the issue is not eligible for an exception to the rebate requirement), examiners generally will allow issuers a reasonable amount of time to compute the rebate amount. In computing the rebate amount, the issuer may use interim computation dates. If the issuer does not compute rebate within the period allowed, the examiner will generally compute the rebate amount as of the applicable required computation date (the latest permissible computation date for the computation period in question), without the use of any interim computation dates, and determine interest due on the late payment and penalty, as applicable. The examiner will communicate the resulting rebate amount to the issuer and, if the amount is positive, notify the issuer that a failure to pay the amount will result in the issuance of a proposed adverse determination relating to the tax-advantaged status of the bonds.