In Revenue Procedure 2017-50, the IRS has extended by 60 days the deadline for issuers of tax-advantaged bonds to file claims for recovery of overpayments of arbitrage rebate, penalty in lieu of arbitrage rebate, or yield reduction payments for an issue of bonds.

Background

Section 148 imposes arbitrage investment restrictions on the investment of proceeds of tax-exempt bonds and requires issuers to rebate certain excess earnings above the yield on those tax-exempt bonds to the federal government. Under Treasury Reg. Section 1.148-3(i), issuers may recover overpayments of arbitrage rebate and similar payments on issues of tax-exempt bonds if the issuers establish, to the satisfaction of the IRS Commissioner, that the overpayment occurred.

In Revenue Procedure 2008-37, the IRS provided guidance on the procedures for claiming recovery of overpayments to the federal government made as arbitrage rebate, penalties under Section 148(f)(4) or yield reductions payments under Reg. Section 1.148-5(c). This guidance included a deadline for filing claims for refund of no later than two years after the final arbitrage computation date for the bond issue from which the claim arose. See Tax Alert 2008-928.

In 2014, the IRS issued final regulations (the 2014 final regulations) adopting the two-year deadline for filing claims included in Revenue Procedure 2008-37. See Tax Alert 2014-2067.

Extended deadline

Revenue Procedure 2017-50 extends the deadline for filing claims for recovery of overpayments of arbitrage rebate, penalty in lieu of arbitrage rebate, or yield reduction payments for an issue of bonds. Specifically, it extends the deadline for filing such claims to two years after: (1) the date that is 60 days after the final computation date of the issue to which the payment relates; or (2) with respect to the portion of the overpayment paid more than 60 days after the final computation date, the date that the payment was made.

The IRS explained that Treas. Reg. Section 1.148-10(g) gives the IRS Commissioner authority to waive regulatory limitations under certain circumstances. It added that the IRS was concerned that the existing deadline set forth in Revenue Procedure 2008-37 and the 2014 final regulations may not provide adequate opportunity for issuers to recover overpayments in certain circumstances. Accordingly, Revenue Procedure 2017-50 adds 60 days to the existing two-year deadline to give issuers a reasonable opportunity to recover overpayments.

Other than with respect to the change in the deadline, claims for refund must still be made in accordance with the procedures set forth in Revenue Procedure 2008-37 and Treas. Reg. Section 1.148-3(j).

Revenue Procedure 2017-50 applies to claims that are pending or filed with the IRS on or after August 25, 2017. For purposes of Revenue Procedure 2017-50, an issuer that has made a payment after the final computation date for the issue to which the overpayment relates, but before August 25, 2017, will be deemed to have made the payment on August 25, 2017.

Implications

With Revenue Procedure 2017-50, the IRS is not just allowing an additional 60 days for tax-exempt bond issuers to claim an overpayment of any arbitrage-related payment, but also allowing additional time to apply for a refund if a payment is made later than when the final calculation is due. Before this, issuers needed to file these claims by no later than two years after the final computation date of the issue, regardless of when a payment was actually made.

Because Treas. Reg. Section 1.148-10(g) allows the Commissioner to waive regulatory limitations under certain circumstances, there could be times when an arbitrage-related payment is made later than the date of the final computation date. Under prior guidance, there would be little to no time available to potentially apply for a refund.

The fling process, however, remains the same. Unless an exception applies, rebate payments are made in installments for computation dates that occur at least once every five years, including the final computation date, by filing Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate. Requests for a refund of any overpayment are made by filing form 8038-R, Request for Recovery of Overpayments Under Arbitrage Rebate Provisions.

Please contact your EY tax professional with any questions.

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— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg

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