IRS Form 8038 Matters


The issuer (or a person acting on behalf of the issuer) must make a good faith effort to complete the information reporting form (taking into account the instructions to the form).  The form must be completed on the basis of available information and reasonable expectations as of the date the issue is issued.  See section 1.149(e)-1(d)(1).

Filing Deadline:

IRS Form 8038 must be filed on or before the 15th day of the 2nd calendar month after the close of the calendar quarter in which the bond was issued.  A reference table showing filing deadlines is provided below.

Filing Deadline
Issue Quarter Filing Deadline
Quarter ending 12/31 2/15
Quarter ending 3/31 5/15
Quarter ending 6/30 8/15
Quarter ending 9/30 11/15

See Rev. Proc. 2002-48 for procedures regarding late filings of the information return.  See I.R.C. 7503 regarding filing information returns where the filing deadline is a Saturday, Sunday or legal holiday.

Number Conventions:

  1. You may round off to whole dollars.  Drop any amount less than 50 cents and increase any amount from 50 to 99 cents to the next higher dollar.
  2. Carry the yield out to four decimal places (for example, 5.3125%). Drop the decimals thereafter and do not round up.

Identification of the Reimbursement Amount (Starting in 2011):

In 2011, the IRS began requiring identification of the exact reimbursement amount of reimbursements from bond proceeds to the issuer in connection with the closing.  If the only reimbursement consists of preliminary expenditures, how should this new question be answered? One approach might be to state that no reimbursement is being made, because, for preliminary expenditures within the 20% limit, no official intent is required.  The better approach would likely be to include the amount of preliminary expenditures as the reimbursement amount, and then explain the reimbursement on an attachment to the IRS form.

Completing IRS Form 8038 For a Refinancing of Taxable Bank Indebtedness:

Issue: (1) Is the refinancing of taxable bank indebtedness considered a current or advance refunding of a “prior issue”? (2) Do you complete Part VI (of the June 2010 version of form 8038) for refinanced taxable bank indebtedness?

1.  What is a “prior issue” for purposes of lines 27 and 28? The instructions for line 27 and 28 require the insertion of the amount of bond proceeds used to pay principal, interest or call premium on any other “issue of bonds” within 90 days of the date of issue, or after 90 days of the date of issue, in the case of an advance refunding transaction. An entry in line 27 or 28 requires the completion of Part VI.

Generally, an “issue” is defined in section 1.150-1(c) as two or more “bonds” that meet certain requirements.  “Bond” is defined by section 1.150-1(b) as “any obligation of a State or political subdivision thereof under section 103(c)(1).”  This would lead to the conclusion that an issue, within the context of “prior issue,” must consist of obligations of a State or political subdivision. Therefore, obligations issued by a 501(c)(3) organization, for instance, would not be “bonds” within the meaning of the relevant tax provisions in title 26 of the Code.

“Prior issue” is directly defined in section 1.150-1(d)(5) as an “issue” of “obligations” all or a portion of the principal, interest or call premium on which is paid or provided for with proceeds of a refunding issue.  This definition is not helpful in that, while it refers to “issue” (which we now know is defined only as obligations of a State or political subdivision), it also refers to obligations, generally. “Obligation” is defined by section 1.150-1(b) as any valid evidence of indebtedness under general federal income tax principles.  Therefore, does “prior issue” include obligations issued by entities other than states or political subdivisions?

Frederic L. Ballard, Jr., in his book “ABCs of Arbitrage” explains that the “prior issue” does not have to be tax-exempt.  He points to a 1998 Technical Advice Memorandum in which the IRS explained that tax-exempt qualified 501(c)(3) bonds were a refunding issue if the proceeds were used by the 501(c)(3) borrower to redeem a taxable loan.  PLR/TAM 9831003.  See also section 1.148-6(d)(3)(ii)(A) and the attached The Bond Lawyer from 1998 referencing the TAM.

The TAM considers the tax-exempt bond refinancing by a 501(c)(3) University of a prior taxable loan.  The Service explains that, because the taxable loan constituted an “obligation” within the meaning of the regulations, the taxable loan therefore constituted a “prior issue” for purposes of section 1.150-1(d)(5).  As a result, the Service concluded that, because proceeds of the Bonds were used to redeem the taxable loan, the Bonds should be considered a “refunding issue.”

The TAM addresses the issue only with respect to whether or not the refunding bonds should be considered a “refunding issue” for purposes of the refunding rules.  The TAM does not address whether the taxable loan should also be considered a “prior issue” for purposes of lines 27 and 28 of the IRS Form 8038.

The best approach might be to complete Line 27 or 28 and add a footnote stating that: “The total amount in line 27 represents the current refunding of a prior taxable loan.  Pursuant to instructions to Form 8038, Part VI has been intentionally left blank.”  If the taxable loan was a bridge loan, one might instead treat that refinancing as a simple new money project.

2.  When is Part VI completed? Part VI should not be completed in connection with a refinancing of taxable indebtedness.  The instructions expressly state that Part VI should be completed only if the bonds are to be used to refund a prior issue of tax-exempt private activity bonds. “Tax-exempt bond” is any obligation on which the interest is excluded from gross income under section 103 of the code .  Taxable indebtedness is neither tax-exempt (see section 150(a)(6)) nor private activity bonds (see section 1.149(d)-1(g)(2)).

Checking the Box for Line 18:

Issue: When do you need to check the box for line 18 (Check box if 95% or more of net proceeds will be used only for capital expenditures)? If the bonds are part of a refunding issue, and the prior issue was a new money issue 95% of which financed a new money project, do you check the box?

Discussion: Bonds issued after August 5, 1997 for nonhospital expenditures, together with bonds issued prior to August 6, 1997, may not exceed $150 million in aggregate principal amount outstanding (Section 145(b)(1)). Bonds are issued for capital expenditures if 95% or more of the net proceeds are used solely for capital expenditures incurred after August 5, 1997.  It may be reasonable to state that the box should be checked if 95% or more of the net proceeds of the refunded bonds were used for capital expenditures and such refunded bonds were issued after August 5, 1997.

Note: A bond is a “qualified hospital bond” if it is issued as part of an issue 95% or more of the net proceeds of which are used with respect to a hospital.  If the bond is a qualified hospital bond, do not answer line 18. Instead, answer line 17.

Issue Date, and Draw Down Loans:

Note the special information reporting rules described in IRS Notice 2011-63 for bonds and draw-down loan bonds that have volume cap assigned to them. The issue date for these bonds may be either the issue date of the bond or the issue date of the issue. If the election is made to use the issue date of the issue, the 8038 should include the phrase “FILED IN ACCORDANCE WITH NOTICE 2011-63 STATE AND LOCAL BONDS: VOLUME CAP AND TIMING OF ISSUING BONDS.”  See also the draw-down loan posting on this site.

Calculating Yield:

Yield for capital appreciation bonds:

  1. A Capital Appreciation Convertible to Current Interest Bond might provide for capital appreciation (increasing principal) for the first three years to a “par amount,” and then interest and principal commencing at that point based on the “par amount.”
  2. You may consider calculating yield by treating the capital appreciation portion as “original issue discount,” and then discounting all cash flows based on the issue price at closing (the “unaccreted” value).
  3. Weighted average maturity is calculated by dividing bond years by the issue price. The usual bond year calculation won’t necessarily work with your spreadsheet because the deemed OID portion relating to the accretion is not reflected in the issue price of each principal payment. Therefore, to determine weighted average maturity (and bond years) for these types of CABs, determine what the accreted value as of the issue date is for each principal cash flow in later years. Do this by multiplying the number of bonds per principal payment (maturity) * the accreted value of each $5,000 par bond.  The number of bonds per principal payment (maturity) is calculated by dividing the principal payment on a particular date by the dollar value of each bond. E.g., if the payment is $40,000 on a particular date, and you have $5,000 bonds, that payment of $40,000 “implicates” 8 bonds.  Assuming the accreted value of each bond as of the issue date is $4,213, the total accreted value of the $40,000 is really only $33,708.  You then multiply this total accreted value by the years from the issue date to the principal payment date.  Do this for each principal payment and divide the aggregate sum by the issue price.

IRS Form 8038-T:

The Form 8038-T is used to pay (1) arbitrage rebate, (2) yield reduction payments (including payments relating to the transferred proceeds penalty), (3) the penalty in lieu of arbitrage, (4) the penalty to terminate the election to pay a penalty in lieu of arbitrage rebate, and (5) penalties and interest on the failure to pay on time any amounts in 1-4 above.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: