Arbitrage Rebate


Arbitrage refers to the taxable interest income that issuers of tax-advantaged bonds may earn through investing the proceeds from the sale of tax-advantaged bonds in higher yielding taxable securities. Section 148 of the Internal Revenue Code of 1986, referred to as the Arbitrage Regulations, permits a municipality to earn arbitrage in specified circumstances and in most cases requires arbitrage profits to be paid as a rebate to the Federal government.

The purpose of the Federal Arbitrage Regulations is to prohibit the excessive and premature issuance of tax-advantaged bonds so that municipal bond issuers do not benefit from the investment of the bond proceeds in higher yielding taxable securities. An issuer must look to Section 148(f) to determine whether it can retain the arbitrage or must rebate it to the Federal government.

The federal arbitrage restrictions are among the most complex aspects of the U.S. tax code and the arbitrage rebate requirement is perhaps the most costly provision of the 1986 Tax Reform Act for state and local governments. To comply with various arbitrage rebate rules, municipal bond issuers are required to perform numerous tests and calculations for each of their outstanding bond issues. Staff resources may be diverted from important governmental activities. Municipalities often undertake significant ongoing expenditures for legal and investment advice, computer and accounting support, records storage, and management oversight. AMTEC can help!

AMTEC developed proprietary software, internal processes and practices for arbitrage rebate computations. We have tested and refined the best practices for our clients and AMTEC personnel to follow to ensure the accuracy of the rebate determination and compliance with Section 148 of the Tax Code and the Regulations.

We employ these practices daily as they form the basis of our computational methodology and checks and balances. We share our practices and procedures through educational training seminars we present to our clients and their professional trade organization.

Each new client of AMTEC’s receives

  • Complete legal review and 100% restatement of all prior calculations;
  • Delivery of annual rebate computations on bond anniversary dates or at your fiscal year-end. All reports are complete with supporting documentation and AMTEC’s opinion. Reports are delivered within 15 days of receiving requisite data for each bond issue;
  • Delivery of Computation Date (fifth anniversary date) reports complete with supporting documentation and AMTEC’s opinion within 15 days of receiving requisite data, for each bond issue;
  • Preparation of IRS Form 8038-T and a comprehensive letter of instruction for the payment of rebate;
  • Provide updated information on any Regulatory changes to the arbitrage rules;
  • Provide procedural recommendations, if warranted;
  • Provide support and recommendations on the testing and selection of qualified investments that include pro-forma rebate and spending tests, if requested; and
  • Comprehensive and unlimited support in the event of an IRS review.