Best Practices for Arbitrage Rebate Compliance

Tax-exempt debt issuers must have a written post issuance compliance program as part of their debt management function, including using written practices for arbitrage rebate compliance. Failure to do so jeopardizes the issuer’s ability to access the tax-exempt capital markets! Infrequent issuers need to have similar procedures and practices. This article addresses some basic principles for an effective post issuance compliance program.

Yes – Written Procedures ARE Required

One of the documents signed at closing is the IRS Form 8038-G. On the second page, Line 44 says “If the Issuer has established written procedures to monitor the requirements of Section 148, check the box.” Many issuers do not examine the form that closely.  Are you certifying there is a written program for compliance? This is too easy for the IRS to check! Do you want to risk sending a flag? While arbitrage rebate calculation can be complex, a written post issuance compliance program IS NOT COMPLEX!

The essentials of a written post issuance compliance program will include:

♦ Procedures are written (are you seeing a theme?)
♦ Educate staff for their responsibilities
♦ Place procedures where they are easily accessed
♦ Assign someone to be responsible
♦ Include documents covered and records retention
♦ Plan for succession

The last one is important!  Why? Because many of you will retire or change jobs before the bonds being issued are paid off upon final maturity!

What Are Best Practices for Arbitrage Rebate Compliance?

The Internal Revenue Code was not written to be read easily. Honestly, some lawyers might admit they have trouble following and understanding it completely. That is why the interpretations of tax law are sometimes challenged and the Tax Court rules and clarifies their decisions. The following points will help a tax-exempt debt issuer prepare to meet the complexity of post-issuance compliance and arbitrage rebate compliance.

• Inform your Arbitrage Rebate Firm of changes to the Issue, such as a Refunding (Evaluation dates are sometimes affected)
• Maintain good records! Keep investment records, general ledger expenditure bond project transactions, trust statements for bond-related accounts (reserve funds, debt service funds), bond transcript, past arbitrage rebate calculations and reports
• Keep all records of tax-exempt issues at least 3-6 years after the bonds are paid in full (this is an IRS requirement)
• Conduct annual arbitrage compliance reviews

o On bond anniversary, or
o Right before or right after annual audit

Benefits include:

♣ Implement any changes timely
♣ Book liability if needed
♣ Less costly to make changes
♣ Records more accessible
♣ Minimal disruption to staff’s many other responsibilities

Compliance with arbitrage rebate and Internal Revenue Code Section 148 can be complicated.  Even so, having written procedures is a simple and direct practice, and essential to good debt and financial management. If you are an issuer of tax-exempt debt, or an obligated party in a tax-exempt issue (from a conduit authority), consider the value of conferring with a professional outside agency that has demonstrated expertise with the complexities of arbitrage rebate compliance.