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Ice Miller's Rebate Practice Ice Miller's Rebate Practice

Ice Miller's Rebate Practice

In the context of tax-exempt municipal bonds, the Internal Revenue Code of 1986, as amended (the "Code") and Treasury Regulations promulgated thereunder (the "Regulations") provide that an "arbitrage bond" is not a tax-exempt bond. Governmental issuers are permitted only in certain instances to earn profit from the interest rate differences between the taxable and tax-exempt market. Further, in certain circumstances, an issuer must pay back (or rebate) such profits (or arbitrage) to the federal government within 60 days of the computation date. Issuers and conduit borrowers of tax-exempt bonds have flexibility in the timing of such of computations, but the rules require rebate be computed and paid to the IRS at least once every five years while the bonds are outstanding until a final calculation is completed. A misstep under these rules could lead to a tax-exempt bond becoming an "arbitrage bond" and thus losing its tax-exempt status.  As noted above, the two sets of rules that exist under the arbitrage regulations are "yield restriction" (when a profit, or arbitrage, can be earned) and "rebate" (when arbitrage must be returned to the Treasury Department).
Since 1986, Ice Miller has provided legal opinions to ensure compliance by issuers with the rebate requirements of Section 148(f) of the Code and the Regulations. The Firm also provides IRS rebate audit services and has successfully represented governmental units that were the subject of random IRS rebate audits. In addition, our municipal tax attorneys have also discovered rebate recovery opportunities during the past five years that generated over $7,800,000 in IRS refunds for our rebate clients.

Ice Miller has extensive experience in providing arbitrage rebate compliance and computation services for any type of tax-exempt bonds or tax-advantaged bonds that require arbitrage rebate calculations. In addition, we have provided rebate calculations for Build America Bonds. Ice Miller’s rebate practice spans the gamut of issues faced by issuers, and includes the following: 

Commingled Fund Expertise
The municipal tax lawyers at Ice Miller have significant experience in dealing with commingled debt service reserve funds and project funds. For example, we represented a rebate client with respect to an IRS rebate audit where the central issue involved a parity debt service reserve fund securing numerous bond issues. We prepared the calculations and described the methodology to the IRS for the commingled fund allocation in a straightforward and concise manner based on the provisions in the arbitrage regulations, which resulted in a no-change letter within a few weeks of our submission to the IRS. We are also familiar with allocation methods relating to commingled project funds and have used beneficial allocations under the regulations to provide rebate savings.

Transferred Proceeds Expertise
Ice Miller has vast experience dealing with transferred proceeds when preparing rebate/yield restriction calculations for our rebate clients. In that capacity, we review the different valuation methods associated with certain types of transferred proceeds (e.g., yield restricted transferred proceeds transferring from an escrow and non-yield restricted transferred proceeds transferring from a debt service reserve fund) to achieve savings for issuers. We are also familiar with cost saving strategies involving unavoidable negative arbitrage generated by transferred proceeds, which could allow an issuer to restructure an escrow relating to advance refunding bonds to recoup such negative arbitrage.

Variable Rate Bonds
Ice Miller municipal tax lawyers have reviewed and supervised hundreds of calculations involving variable rate bond issues and are familiar with all strategies to reduce rebate in variable rate deals, including, but not limited to, the use of bond year elections to create the most advantageous yield periods for computing rebate. We have also developed strategies to reallocate the specific tracing of bond proceeds to meet rebate exceptions by making timely reallocations to accelerate expenditures. The reallocations are time sensitive and due to the potential arbitrage in variable rate deals, we strongly encourage issuers to have annual calculations in order to monitor compliance with rebate exceptions and take advantage of reallocation opportunities, if necessary.

Interest Rate Swaps and Similar Hedging Instruments         
We have performed rebate and yield restriction calculations that involved swaps ("hedges") and routinely analyze the effects on bond yield relating to payments made or received with respect to a hedge (including whether there is simple or super integration of the hedge). We have performed numerous calculations where a swap was either actually terminated or deemed terminated under section 1.148-4(h) of the regulations. In particular, we have analyzed the effect of swap terminations on bond yield involving deemed terminations for the refunded bonds and re-integration of existing swaps for the refunding bonds. During a complicated rebate calculation involving numerous simple integrated swaps, we were able to significantly reduce a rebate liability by taking advantage of an early redemption of hedged bonds, which enabled us to increase the bond yield by treating the entire deemed termination payment (that was deemed terminated due to post issuance changes in the original swap) related to the hedged bonds as interest on the hedged bonds during the first yield period.

We are also consulted by our clients when a deemed termination of a swap will occur as a result of a refunding to analyze the impact of the deemed termination on the refunding. Because the lawyers who are involved in our rebate practice are also experienced bond lawyers who have structured sophisticated transactions involving hedge instruments, we believe we have unique experience in handling calculations affected by a hedge, including providing certificates to integrate or re-integrate the on-market portion of a hedge where the fixed rate under the hedge is off-market.

For further information about our services or a review of the rebate requirements with respect to outstanding bonds, please contact Susan Price, Amy Corsaro, Tyler KalachnikPhil Genetos or another member of the Ice Miller Municipal Finance Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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