This document provides an overview of arbitrage and arbitrage compliance. It defines arbitrage as the difference between tax-exempt borrowing rates and taxable investment yields. If investments earn more than tax-exempt bonds, the excess earnings must be rebated to the IRS. It provides an example showing positive, no, and negative arbitrage scenarios. It outlines important rebate compliance dates and payment requirements. The document explains that issuers must comply with arbitrage rules because tax-exempt borrowing is a privilege and noncompliance can result in bonds being declared retroactively taxable or IRS penalties. It also describes the voluntary closing agreement program that encourages self-reporting of violations.

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?