WASHINGTON — The Treasury Department and Internal Revenue Service have released final regulations on the process for recovering overpayments of arbitrage rebate on tax-exempt and tax-advantaged bonds.
The final regulations will be published in the Federal Register on Thursday, only a little over a year after proposed regulations were released. The final rules are similar to the proposed ones and are a follow-up to a 2008 Revenue Procedure.
Arbitrage occurs when tax-exempt bond proceeds are used to purchase investments with higher yields than the bonds. Under federal tax law, arbitrage profits generally have to be rebated to the U.S. Treasury in order for the bonds to remain tax exempt. Rebate is generally supposed to be paid in installments made at least once every five years. The last rebate installment has to be made no later than 60 days after the last bond in the issue is redeemed.
Tax-credit and direct-pay bonds for the most part are subject to the arbitrage rules that apply to tax-exempt bonds, said Tom Vander Molen, a partner at Dorsey & Whitney LLP in Minneapolis.
Under the existing income tax regulations, an issuer can recover overpayment of arbitrage rebate if it establishes to the satisfaction of the IRS commissioner that the overpayment happened.
Richard Chirls, an attorney at Orrick, Herrington and Sutcliffe LLP in New York, said that there has been a significant increase in recent years in issuers filing claims to have previously paid arbitrage rebate refunded. "This is a result of the current very low investment rates which can have the effect of reversing the positive arbitrage that was earned in earlier years," he said.
An issuer also may request a refund of an overpayment if it discovered it made a computation error or if it reallocated expenditures in a way that reduced the rebate amount, Vander Molen said.
The new regulations codify guidance released earlier that said an issuer must make a claim for a refund of an overpayment no later than two years after the final rebate computation date for the bond issue.
The new rules also provide that the commissioner can request additional information from the issuer to support its request. That information must be submitted by the date requested, which will be at least 21 calendar days after the commissioner initially made the request. . The commissioner can extend the response time. The 21-day minimum was added to the regulations after the regulators received a comment on the proposed rules requesting a minimum response time, Treasury and the IRS said.
If a request to recover an overpayment is denied either because it was filed after the deadline or the issuer missed the deadline for filing additional information, the issuer can appeal the denial under the new rules.
The two-year deadline is applicable to claims that stem from bonds whose final computation date is after June 24, 2008. The parts of the new regulations that are about additional information and appeals apply for claims stemming from bonds whose final computation date is after Sept. 16, 2013.
The two-year deadline was in the 2008 guidance, so is not new. But Matthias Edrich, a shareholder at Greenberg Traurig LLP, said he would have preferred a later or no deadline because he's had experiences where the issuer had passed the deadline and as a result couldn't get a refund.
David Cholst, a partner at Chapman and Cutler LLP, said that a three-year deadline may have made more sense because there are other areas with statutes of limitation of three years, but that most issuers applying for a refund are unlikely to have a problem with the two-year deadline.
Antonio Martini, a partner at Edwards Wildman Palmer LLP in Boston and president of the National Association of Bond Lawyers, pointed out that by releasing the final rules, Treasury and the IRS will be able to say they've completed another item on their guidance plan. The IRS released interim guidance on management contracts and accountable care organizations less than a month ago, and it's positive that two guidance projects have been released in a short period of time, he said.