Instructions for Form 8038-T

Instructions for Form 8038-T

Department of the Treasury

Internal Revenue Service

(Rev. October 2021)

Arbitrage Rebate, Yield Reduction, and Penalty in Lieu of Arbitrage Rebate

Section references are to the Internal Revenue

Code unless otherwise noted.

Future Developments

For the latest information about

developments related to Form 8038-T and

its instructions, such as legislation

enacted after they were published, go to

IRS.gov/Form8038T.

General Instructions

Purpose of Form

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

(QZABs) issued under section 1397E.

A 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 any investment earnings on

amounts in the defeasance escrow that

are in excess of the yield on the issue. In

determining the yield on the issue, the

credit allowed is disregarded. 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:

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

100% of the investment earnings on

amounts in the defeasance escrow.

Applicable Regulations

General

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.

1. Arbitrage rebate.

Oct 06, 2021

Cat. No. 30066E

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).

Exceptions

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% 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% penalty. An

issuer may terminate the election to pay

penalty in lieu of arbitrage rebate by

paying an amount equal to 3% 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).

Agreement Program for Tax-Exempt

Bonds and Tax Credit Bonds.

Where To File

File Form 8038-T and any attachments at

the following address.

Department of the Treasury

Internal Revenue Service Center

Ogden, UT 84201–0027

Failure To Pay Timely

Private delivery services. You can use

certain private delivery services (PDS)

designated by the IRS to meet the “timely

mailing as timely filing/paying” rule for tax

returns and payments. Go to IRS.gov/PDS

for the current list of designated services.

The PDS can tell you how to get written

proof of the mailing date.

For the IRS mailing address to use if

you’re using PDS, go to IRS.gov/

PDSstreetAddresses.

PDS can’t deliver items to P.O.

boxes. You must use the U.S.

CAUTION 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).

Yield Reduction Payments

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).

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).

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% 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).

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.

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

Yield reduction payments. Yield

reduction payments are payable at the

same time as arbitrage rebate payments.

See Regulations section 1.148-5(c)(2).

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QZABs. The issuer must pay 100% 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.

In 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

promptly pays a penalty to the United

States.

For governmental and qualified 501(c)

(3) bonds, the penalty equals 50% of the

rebate amount not paid when required to

be paid, plus interest on that amount.

Otherwise, the penalty equals 100% 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 IRS 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

Instructions for Form 8038-T (Rev. 10-2021)

Part IV— Late Payments

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.

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 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.

Lines 1–10

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 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% of the rebate amount not paid

timely plus interest on that amount. For

other bonds, the penalty is 100% of the

rebate amount not paid timely plus interest

on that amount.

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% 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% 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).

Note. The calculation for late interest is

included under line 22 only, not under

line 21.

General. Enter the same information that

was entered on the “initial filing” of the

following forms. Make any necessary

changes, for example, a change of

address.

• 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 Bonds;

• 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.

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

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% 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, earlier.

Instructions for Form 8038-T (Rev. 10-2021)

-3-

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 check or money order.

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) 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.

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. Enter “Yes” if the issue is a

variable rate issue. 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. Enter “Yes” if the issuer entered

into a qualified hedge. 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. Enter “Yes” 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 Part I, lines

9 and 10, 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 the issuer's return information, as

necessary to process this return, to such

person.

Paid Preparer

If an authorized officer of the issuer filled in

this 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.

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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 burden for

tax-exempt organizations filing this form is

approved under OMB control number

1545-0047 and is included in the

estimates shown in the instructions for

their information return.

If you have suggestions for making this

form simpler, we would be happy to hear

from you. You can send us comments

through IRS.gov/FormComments. Or you

can write to:

Internal Revenue Service

Tax Forms and Publications

1111 Constitution Ave. NW, IR-6526

Washington, DC 20224

Do not send Form 8038-T to this address.

Instead, see Where To File, earlier.

Instructions for Form 8038-T (Rev. 10-2021)