A simple breakdown of what Arbitrage is and why tax-exempt organizations need to be in compliance in accordance with the Internal Revenue Service (IRS).

1. Arbitrage 101
2016

2. What is
Arbitrage?
Arbitrage is the spread between tax-exempt
borrowing rates and taxable earnings rates
When taxable investments generate a yield in excess of
tax-exempt borrowing rate, the dollar value of the
difference is paid back to the IRS as a Rebate

3. What is
Arbitrage?
Excess
Earnings
Positive
Arbitrage
Rebate
Paid to
IRS

4. Example:
3.0% Positive Arbitrage 3.5%
3.0% No Arbitrage 3.0%
3.0% Negative Arbitrage 1.0%
Tax-Exempt Bonds
• Principal Payments
• Interest Payments
• Guarantee/Hedge Fees
• = BOND YIELD
Taxable
Investments
• Purchases
• Sales/Maturities
• Interest Income
• =INVESTMENT YIELD

5. IMPORTANT DATES
 The IRS requires cumulative
calculations at least every 5
years.
 Upon final maturity of the
issue.
 Refunding activity has
impacted many issues and
accelerated final maturity
dates
 Annual accrual computations
are best practice to identify
and avoid other non-rebate
issues.
Rebate
Compliance
PAYMENTS
 Positive Arbitrage
 90% paid Installment
Computation Date
 100% after final maturity
 Form 8038-T and check
due within 60 days of
computation date.
 Computation Credit as an
annual offset to liability
provided by IRS (2016 -
$1650)

6. WHY should the Issuer be in compliance?
Why?
IRS
• Tax-exempt borrowing is
a privilege from the
federal government
• Rules in place to remove
incentives to issue bonds
for the purpose of
earning rebate
Consequences
• Bonds may be declared
taxable retroactively
• IRS enters into
settlement agreement
with the issuer

7. Voluntary
Closing
Agreement
Program
(VCAP)
• Encourage issuers to exercise due
diligence/self-monitoring
• Incentive to timely identify violations
• Taxing bondholders  last resort
Goals
• Closing agreements are final and
conclusive
• Program not available when the bond
issue is under examination (audit)
• Form 14429
Structure
• Expedite VCAP requests
• Model closing agreement
• Further standardized the process or
agreements
Updates

8. Laurie Scott
(904) 652-0791
Scott Gordon
(904) 652-0794
Sandy Bright
(252)451-8102
Caroline Patsy
(904) 652-0795
www.integritypfc.com
Unanswered
Questions?