ARBITRAGE REBATE SERVICES

Do the Arbitrage Rebate Requirements Apply to Me?

The Arbitrage Rebate requirements apply to virtually all issuers of tax-exempt obligations, requiring issuers to "rebate" any excess earned from the investment of tax-exempt bond proceeds in taxable securities. Issuers must pay any liabilities due to the Internal Revenue Service at least every five years and at the final maturity date of each issue.

Failure to comply with the arbitrage rebate requirements may result in the loss of the tax-exempt status of the obligations, or the issue may be subjected to severe penalties and interest

The arbitrage requirements provide several exceptions, which, if met, will exempt a portion or an entire issue from the mandate to rebate excess earnings. However, these exceptions can be extremely complex and detailed in their application. Issuers who believe that a rebate exception has been met often learn that the detailed requirements of the exceptions have not been properly satisfied, subjecting the issue to rebate. It is important therefore, for issuers to consult an arbitrage rebate expert to determine proper compliance with the hundreds of pages of federal regulations.

First Southwest's Arbitrage Expertise

Since the arbitrage services were established in 1987, First Southwest has emerged as one of the largest providers of arbitrage rebate services in the nation. Our practice, managed by Certified Public Accountants, was successful in recommending changes to the arbitrage regulations that eased the requirements for all issuers. We were the only firm to provide testimony at all three IRS public hearings during the development of the regulations.

First Southwest represents hundreds of issuers throughout the country and has extensive experience with a variety of complex issue structures, including commingled funds, reserve fund allocations and transferred proceeds computations. We are one of the largest and most experience providers of arbitrage rebate services nationwide, providing computations on over two thousand bond issues annually.

Proprietary Calculation Software

Our proprietary Arbitrage Rebate Compliance ("ARC") system was developed internally, utilizing the expertise of our Certified Public Accountants. Our system, designed to provide comprehensive arbitrage calculations, required over 5,000 man-hours and a cost exceeding $300,000 to develop. This commitment has resulted in an integrated system with many unique capabilities, including:

  • a deadline tracking module that automates the determination of reporting dates for all issues;
  • a future value calculation module, necessary to compute the rebate liability amount;
  • a module that allocates commingled funds using a variety of methodologies based upon each issuer's unique accounting practices;
  • a reserve fund module that allocates a commingled reserve fund to multiple issues, in accordance with allocation methods required under the regulations; and
  • a module that analyzes the most beneficial application of permitted elections, resulting in the lowest permitted rebate amount.

    • Our system is superior to spreadsheet applications used by most arbitrage providers, as it reduces the likelihood of computational errors. First Southwest's database program includes all formulas necessary for calculation of yield and future value as part of a program that cannot be accidentally edited.

    Assistance with IRS Audits and Overpayments Requests

    First Southwest assists clients in the event of an IRS examination, supporting the mathematical accuracy of the calculations we have performed, and any interpretations of the Code or Treasury regulations that have been used in performing the computations. Additionally, we have been engaged to assist issuers during an IRS examination on matters other than the rebate calculations. Our knowledge of the arbitrage regulations makes us especially qualified to attend various meetings with the IRS agent to assist in explaining provisions in the legal documents and responding to written requests by the IRS.

    First Southwest also assists clients in filing for refunds from the IRS for the overpayment of rebate amounts, generally due to a decline in interest rates. We prepare the necessary computations of the current rebate liability amount as well as a formal report in accordance with the appropriate IRS Revenue Procedures. The report includes a detailed explanation as to the nature of the overpayment and a computation of the refund due, along with all necessary transmittal letters to accompany the overpayment request.

    Scope of Services

    The comprehensive arbitrage rebate services provided by First Southwest encompass all aspects of the rebate requirements. We are committed to providing our clients with a full service approach to arbitrage compliance. In fact, we are commonly called upon to assist early in the bond issuance process to answer questions related to permitted elections, spending exceptions, accounting methods and investment alternatives. A partial list of our services includes the following:

  • perform computations of rebatable arbitrage at least once every five years and on the final maturity date of the issue;
  • complete the Internal Revenue Service Form 8038-T so that only a signature is required prior to filing;
  • provide an opinion that the rebate calculation results are accurate and consistent with the arbitrage regulations;
  • determine the correction amount and penalties associated with any late filings as required by the regulations;
  • determine whether an issue or portion of an issue has met a spending exception under the rebate requirements; and
  • assist with Internal Revenue Service audits and overpayment requests.

    • The complex and changing regulations make it difficult for issuers to stay abreast of the many requirements. Proper compliance with arbitrage rebate and yield restriction requirements demands a thorough knowledge of the regulations and Internal Revenue Code, as well as experience in both the history and application of the relevant tax law. First Southwest provides this knowledge and experience, by offering a team of professionals dedicated to providing comprehensive arbitrage service in a timely manner.

    Click here to download a copy of First Southwest's Arbitrage Rebate brochure or contact Shelley Weiske to get more detail information on arbitrage regulations and the Arbitrage Rebate Services provided by First Southwest.