rp-05-40.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.201: Rulings and determination letters.
(Also Part I, §§ 148; 1.148-3)

Revenue Procedure 2005-40, 2005-28 I.R.B. (July 11, 2005)

SECTION 1. PURPOSE

This revenue procedure provides issuers of State or local bonds described in § 103(a)
of the Internal Revenue Code and subject to § 148(f)(3) and § 1.148-3(g) of the Income
Tax Regulations with procedures for correcting a failure to timely pay the proper amount of
arbitrage rebate as required by the regulations. This revenue procedure also modifies
Rev. Proc. 90-11, 1990-1 C.B. 469, which provides similar procedures for State or local
bonds subject to § 1.148-1T of the temporary Income Tax Regulations initially published
on May 12, 1989 as part of T.D. 8252. The modification provides a new address for filing
late rebate payments and related requests.

SECTION 2. BACKGROUND

.01 Section 103(a) generally provides that gross income does not include interest on
any State or local bond. Under § 103(b)(2), however, interest on an arbitrage bond (within
the meaning of §148) is includable in gross income.

.02 Section 148(f)(1) generally provides that a bond that is part of an issue shall be
treated as an arbitrage bond unless the issuer pays to the United States the amounts

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described in § 148(f)(2) for the issue (rebate amounts) in accordance with § 148(f)(3).

.03 Section 148(f)(3) provides that, except to the extent provided by the Secretary,
rebate amounts must be paid in installments that are made at least once every five years.
The last installment must be made no later than 60 days after the day on which the last
bond of the issue is redeemed.

.04 Section 1.148-3(f) provides in part that the first rebate installment payment must be
made for a computation date (as determined under § 1.148-3(f)) that is not later than five
years after the issue date. Subsequent rebate installment payments must be made for a
computation date that is not later than five years after the previous computation date for
which an installment payment was made.

.05 Section 1.148-3(g) provides that each rebate payment must be paid no later than 60
days after the computation date to which the payment relates. Any rebate payment paid
within this 60-day period may be treated as paid on the computation date to which it
relates. A rebate payment is paid when it is filed with the Internal Revenue Service at the
place or places designated by the Commissioner. See § 7502(a) for the treatment of
certain payments made by U.S. mail.

.06 Section 148(f)(7) provides that if an issue would, but for § 148(f)(7), fail to meet the
requirements of § 148(f)(2) or (3), the Secretary may treat the issue as not failing to meet
those requirements if: (1) no bond of the issue is a private activity bond, as defined in
§ 141 (other than a qualified 501(c)(3) bond within the meaning of § 145); (2) the failure to
meet those requirements is not due to willful neglect; and (3) the issuer pays to the United
States a penalty in an amount equal to the sum of (i) 50 percent of the amount that was
not paid in accordance with § 148(f)(2) and (3), plus (ii) interest (at the underpayment rate
established under section 6621) on the portion of the amount that was not paid on the date
required under § 148(f)(3) for the period beginning on that date. Section 148(f)(7) further
provides that the Secretary may waive all or any portion of the penalty under
§ 148(f)(7).

.07 Section 1.148-3(h)(1) provides that the failure to pay the correct rebate amount
when required will cause the bonds of an issue to be arbitrage bonds unless the
Commissioner determines that the failure was not caused by willful neglect and the issuer
promptly pays a penalty to the United States. If no bond of the issue is a private activity
bond (other than a qualified 501(c)(3) bond), the penalty equals 50 percent of the rebate
amount not paid when required to be paid, plus interest on the rebate amount not paid
when required to be paid. Otherwise, the penalty equals 100 percent of the rebate amount

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not paid when required to be paid, plus interest on the rebate amount not paid when
required to be paid.

.08 Section 1.148-3(h)(2) provides that interest accrues at the underpayment rate under
§ 6621 beginning on the date the correct rebate amount is due and ending on the date ten
days before it is paid.

.09 Section 1.148-3(h)(3) provides that the penalty is automatically waived if the rebate
amount that the issuer failed to pay is paid with interest within 180 days after discovery of
the failure, unless the Commissioner determines that the failure was due to willful neglect,
or the issue is under examination by the Commissioner at any time during the period
beginning on the date the failure first occurred and ending on the date 90 days after the
receipt of the rebate amount. Generally, extensions of this 180-day period and waivers of
the penalty in other cases will be granted by the Commissioner only in unusual
circumstances.

.10 Rev. Proc. 90-11 provides issuers of State or local bonds subject to § 1.148-1T,
initially published on May 12, 1989 as part of T.D. 8252, with guidance for filing (1) a
request for an extension of time to pay a correction amount of arbitrage rebate, (2) an
explanation of an innocent failure to meet a requirement for payment of arbitrage rebate, or
(3) a request for a ruling regarding a failure (other than an innocent failure or one that is so
treated) to meet a requirement for payment of arbitrage rebate.

SECTION 3. PROCEDURES FOR CORRECTING A FAILURE TO PAY REBATE

.01 In general. A failure to pay the correct rebate amount when required by § 148(f)(3)
and § 1.148-3(g) will not cause the bonds of an issue to be arbitrage bonds if the
requirements of section 3.01(1) or 3.01(2) are met.

(1) Payment within 180-day period. The requirements of this section 3.01(1) are met if,
within 180 days after the issuer discovers the failure to pay the correct rebate amount
when required (the 180-day period
), the rebate amount that the issuer failed to pay, plus
interest, is paid to the United States in accordance with section 3.04, unless--

(a) The Commissioner determines that the failure was due to willful neglect, or

(b) The issue is under examination by the Service at any time during the period
beginning on the date the failure first occurred and ending on the date 90 days after the
Service receives the rebate amount.

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(2) Payment after 180-day period. The requirements of this section 3.01(2) are met if,
after the expiration of the 180-day period--

(a) The rebate amount that the issuer failed to pay, plus interest, plus the penalty
determined under section 3.02, is paid to the United States in accordance with section
3.04, and

(b) The Commissioner determines that the failure was not caused by willful neglect.

.02 Penalty.

(1) Governmental and qualified 501(c)(3) bonds. If no bond of the issue is a private
activity bond (other than a qualified 501(c)(3) bond), the penalty equals 50 percent of the
rebate amount not paid when required to be paid.

(2) Private activity bonds (other than qualified 501(c)(3) bonds). If the issue consists of
private activity bonds (other than qualified 501(c)(3) bonds), the penalty equals 100
percent of the rebate amount not paid when required to be paid.

.03 Extensions of 180-day period and waivers of penalty. An issuer may apply for an
extension of the 180-day period for purposes of section 3.01(1), or a waiver of the penalty
for purposes of section 3.01(2), in accordance with the procedures set forth in section 5.
Under § 1.148-3(h)(3), extensions of the 180-day period and waivers of the penalty
generally will be granted only in unusual circumstances.

.04 Payment and explanation of why the late payment was not due to willful neglect.
The amount described in section 3.01(1) or (2) must be mailed to the Internal Revenue
Service, Ogden Submission Processing Center, Ogden, Utah 84201, together with Form
8038-T (Arbitrage Rebate and Penalty in Lieu of Arbitrage Rebate) and a detailed
explanation addressing why the failure to timely pay the correct rebate amount was not
due to willful neglect. The explanation must include the following declaration signed by an
individual who has personal knowledge of the relevant facts and circumstances: “Under
penalties of perjury, I declare that I have examined this explanation, including
accompanying documents, and, to the best of my knowledge and belief, the explanation
contains all the relevant facts relating to the explanation, and such facts are true, correct,
and complete.” The explanation must include all relevant information, including when the
rebate amount was required to be paid, why the rebate amount was not timely paid and a
description of the events that led up to both the failure to timely pay and discovery of the

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failure. The explanation should also discuss the factors set forth in section 4.01 and
should indicate whether the bond issue in question is under examination by the Service.
Acceptance and processing of the payment by the Ogden Submission Processing Center
does not constitute a determination by the Commissioner that the failure was not caused
by willful neglect. The determination of whether a failure was due to willful neglect is made
in accordance with the procedures set forth in section 4.

.05 Interest. For purposes of section 3.01, interest accrues at the underpayment rate
under § 6621 beginning on the date the correct rebate amount is due and ending on the
date ten days before it is paid. For this purpose, a rebate amount is due on the date that is
60 days after the computation date to which the rebate amount relates.

.06 Issue under examination. For purposes of this revenue procedure, an issue is
under examination by the Service on the date a letter opening an examination of the issue
is sent.

SECTION 4. PROCEDURES FOR ESTABLISHING LACK OF WILLFUL NEGLECT

.01 In determining whether a failure to timely pay the correct rebate amount was due to
willful neglect, the Service will consider the following factors:

(1) The unpaid rebate amount;
(2) The sophistication of the issuer;
(3) The length of the delay;
(4) The steps taken to comply, including the steps taken after the discovery of the
failure to pay;
(5) The steps taken to prevent recurrence of a failure to pay;
(6) The nature of the failure;
(7) Any history of timely or late payments by the issuer; and
(8) Any other relevant information.

.02 If the Service does not notify the issuer in writing within 90 days after receiving the
explanation submitted in accordance with section 3.04, the explanation is accepted, and
the issuer’s failure to timely pay the rebate amount will be treated as not due to willful
neglect.

.03 If, based on the explanation submitted by the issuer, the Service is unable to make
a determination that the failure to timely pay the rebate amount was not due to willful
neglect, the Service will notify the issuer in writing within 90 days after the Service’s receipt

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of the explanation and late payment. The written notice will describe any additional
information needed, identify a contact person who is handling the matter, and provide the
issuer with a reasonable period of not less than 21 days to provide additional information.

.04 Generally, within 90 days of receiving the additional information requested, the
Service will notify the issuer in writing that either (1) the Service has determined that the
failure to timely pay the rebate amount was not due to willful neglect or (2) the Service is
unable to make a determination that the failure to timely pay the rebate amount was not
due to willful neglect.

.05 If the Service notifies the issuer under section 4.04 that the Service is unable to
make a determination that the failure to timely pay the rebate amount was not due to willful
neglect, the issuer will be entitled, upon request, to a conference with the Service.

.06 After conducting the conference and reviewing any additional submissions by the
issuer, the Service will notify the issuer in writing that either (1) the Service has determined
that the failure to timely pay the rebate amount was not due to willful neglect or (2) the
information available to the Service is insufficient for the Service to find a lack of willful
neglect. If the Service is unable to find a lack of willful neglect, an examination of the bond
issue may be opened. If, however, an examination of the bond issue is not opened within
180 days after the date the Service's notification described in this section 4.06 is sent, then
the issuer’s failure to timely pay the rebate amount will be treated as not due to willful
neglect.

.07 For purposes of this section 4, a notification in writing is made on the date the
written notification is sent.

SECTION 5. PROCEDURES CONCERNING REQUESTS FOR AN EXTENSION OF
TIME OR A WAIVER OF PENALTY

.01 Extension of time to pay the late payment amount. Prior to the expiration of the
180-day period described in section 3.01(1), an issuer may request that the Service grant it
an extension of 180 days to pay the late payment amount determined under section
3.01(1). The request should be submitted to Internal Revenue Service, ATTENTION:
SE:T:GE:TEB:O, 1111 Constitution Avenue N.W., PE-5T2, Washington, D.C. 20224. The
request should include the explanation required by section 3.04 and should address the
unusual circumstances upon which the extension should be granted. Within 90 days after
receiving a request for extension, the Service will notify the issuer in writing whether the
extension is approved. If the Service does not notify the issuer in writing within that 90-day

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period, the issuer’s request for extension is approved. If a request for extension is
approved, and payment is made within 180 days after the expiration of the 180-day period,
then the late payment amount is the rebate amount that the issuer failed to pay, plus
interest, as determined under section 3.01(1). If a request for extension is not approved,
the issuer must pay either: (1) if within the 180-day period, the amount determined under
section 3.01(1); or (2) if after the 180-day period, the amount determined under section
3.01(2).

.02 Waiver of penalty. Within 180 days after the expiration of the 180-day period
described in section 3.01(1), an issuer may request that the Service grant it a waiver of the
penalty described in section 3.02. The request for a waiver of penalty must be submitted
to the Internal Revenue Service, Ogden Submission Processing Center, Ogden, Utah
84201, and must be accompanied by payment of the amount determined under section
3.01(2), together with Form 8038-T (Arbitrage Rebate and Penalty in Lieu of Arbitrage
Rebate). The request for a waiver of penalty should include the explanation required by
section 3.04 and should address the unusual circumstances that justify waiver of the
penalty. The Ogden Submission Processing Center will process the payment and
immediately forward the request to SE:T:GE:TEB:O. Within 90 days after receiving a
request for a waiver of penalty, the Service will notify the issuer in writing whether any
portion of the penalty is waived and, if applicable, will promptly thereafter refund to the
issuer any amount so waived. If the Service does not approve a waiver request with
respect to any portion of the penalty, the issuer will be entitled, upon request, to a
conference with the Service. If a conference is held, then, within 30 days after the
conference, the Service will notify the issuer in writing whether any portion of the penalty is
waived and, if applicable, will promptly thereafter refund to the issuer any amount so
waived.

.03 Date of notification or refund. For purposes of this section 5, a notification in writing
(or a refund) is made on the date the written notification (or refund) is sent.

SECTION 6. EFFECT OF CORRECTING A FAILURE TO PAY REBATE

If an issuer satisfies the requirements of this revenue procedure for correcting a failure
to timely pay a rebate amount under § 148(f)(3) and § 1.148-3(g), the rebate amount will
be treated as paid on the computation date to which it relates. Any interest or penalty
amounts paid under this revenue procedure are not treated as payments under § 1.148-
3(d) for purposes of computing the rebate amount. Acceptance by the Service of a late
payment amount under this revenue procedure does not constitute a determination by the
Service that the issuer paid a correct rebate amount as required by § 148(f) and § 1.148-3.

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SECTION 7. MODIFICATION OF REV. PROC. 90-11

Rev. Proc. 90-11 is modified by changing all references to the Internal Revenue Service
Center, Philadelphia, Pennsylvania in sections 3.02(5), 4.02(1)(c), 4.02(3), and 5.02 of the
revenue procedure to:

Internal Revenue Service
Ogden Submission Processing Center
Ogden, Utah 84201

SECTION 8. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 90-11, 1990-1 C.B. 469, is modified in part.

SECTION 9. EFFECTIVE DATE

This revenue procedure applies to discoveries after July 11, 2005, of a failure to timely
pay the correct rebate amount under § 148(f)(3) and §1.148-3(g) (or, with respect to the
modification of Rev. Proc. 90-11 made by section 7 of this revenue procedure, § 1.148-1T
initially published on May 12, 1989 as part of T.D. 8252).

SECTION 10. PAPERWORK REDUCTION ACT

The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of Management and Budget (OMB) in accordance
with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1880.

An agency may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the collection of information displays a valid OMB control
number.

This revenue procedure contains a collection of information requirement in sections
5.01 and 5.02. The purpose of the collection of information is to enable the Service to
evaluate an issuer’s request for a waiver of a penalty, or an extension of time to make a
late payment, in the case of a failure by the issuer to timely pay the correct rebate amount:
The likely respondents are state and local governments.
The estimated total annual reporting burden is: 3 hours.
The estimated annual burden per respondent: 30 minutes.

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The estimated number of respondents: 6.
The estimated annual frequency of responses: on occasion.

The collection of information contained in section 3.04 of this revenue procedure
has been previously reviewed and approved by OMB under control number 1545-1219.

Books or records relating to a collection of information must be retained as long as
their contents may become material in the administration of any internal revenue law.
Generally tax returns and tax return information are confidential, as required by 26 U.S.C.
6103.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Lynn Kawecki of the Tax Exempt
Bond office of the Tax Exempt and Government Entities (TE/GE) Division and David White
of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). For further information regarding this revenue procedure contact Mr. Kawecki on
(202) 283-9782 (not a toll-free call).