Rebate Exceptions
Even though the 3-year temporary period allows an issuer to invest proceeds in investments with a higher yield than that of the bonds , federal tax law generally requires the issuer to give back , or “ rebate ,” to the federal government any investment earnings that are in excess of what would have been earned if the issuer had invested the proceeds at the bond yield . However , the Code and Regulations provide that an issuer need not rebate amounts to the federal government if it meets one of the exceptions set forth below .
Construction Bond Exception In general , if at least 75 % of the proceeds of an issue will be allocated to construction expenditures ( excluding land ), an issuer may qualify for a rebate exception under section 148 ( f )( 4 ) of the Code if it meets the following spend-down schedule :
• 10 % of the construction proceeds ( including investment earnings , but excluding proceeds used for costs of issuance or a reserve fund ) spent within 6 months ;
• 45 % of such proceeds spent within 1 year ;
• 75 % of such proceeds spent within 18 months ; and
• 100 % of such proceeds spent within 2 years .
6-Month Exception An issuer may qualify for a rebate exception under section 148 ( f )( 4 ) of the Code if the issuer spends 100 % of the proceeds of the bonds with 6 months of issuance .
18-Month Exception An issuer may qualify for a rebate exception under section 1.148-7 ( d ) of the Regulations if the issuer meets the following spend-down schedule :
• 15 % of such proceeds spent within 6 months ;
• 60 % of such proceeds spent within 12 months ; and
• 100 % of such proceeds spent within 18 months .
The spend-down requirements set forth in the various exceptions above are based on actual facts and not reasonable expectations . If the issue does not meet the spend-down requirements , the issuer may be required to rebate excess earnings to the federal government .
Hedge Bond Rules ( section 149 ( g )( 2 ) of the Code )
To avoid an issue of bonds being classified as “ hedge bonds ,” the interest on which is not tax-exempt , an issuer must reasonably expect that 85 % of the spendable proceeds of the bonds will be used to carry out the governmental purposes of the issue within three years of the issuance of the bonds . If the issuer does not reasonably expect to meet this requirement , then tax counsel must review the facts and circumstances to determine whether the bonds will be classified as hedge bonds and , if so , meet a more detailed spend-down calendar .
IRS Enforcement Efforts
In the course of assisting issuers with response to IRS audits in recent years , we have observed that the IRS has routinely requested information regarding how quickly an issuer has spent proceeds of tax-exempt bonds . Additionally , when an issuer has had unspent proceeds , the IRS has closely scrutinized the stated cause of the unspent proceeds and the reasonableness of the issuer ’ s expectations on the issue date of the bonds to
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