Services (Full Listing)
Pinnacle Arbitrage Compliance has a stringent set of calculation and review procedures designed to make sure all calculations comply with applicable Regulations. We utilize comprehensive checklists and work programs to address the various aspects of arbitrage compliance. Pinnacle Arbitrage Compliance offers a variety of calculation and compliance services.
Arbitrage Rebate Calculations
In preparing arbitrage rebate calculations, Pinnacle evaluates the cash flows from investments made with gross proceeds of the Bonds. This evaluation includes an analysis of the relevant funds associated with the Bonds, such as reserve funds, construction funds, capitalized interest funds, debt service funds, etc. The cash flows from includable funds are future valued to the computation date using the bond yield to determine if the issue has accrued a rebate liability.
In determining the rebate amount, we perform calculations using the future value method as required by the Regulations. On each engagement we verify the yield on the bonds, compute the investment yield and cash flow on each investment, determine the composite yield on all investments, compute the cumulative rebate amount, and determine the amount of arbitrage associated with each investment. More complex bond issues may also include the calculation of transferred proceeds associated with a refunding issue, the allocation of commingled funds, and the application of the universal cap rules.
Applying Spending Exception
The Regulations offer certain exceptions to the arbitrage rebate rules if the proceeds of a bond issue are spent within a specific time frame. All or a portion of the proceeds of the Bonds may qualify for certain exceptions to the rebate requirement (the 6-month, 18-month or 2-year spending exceptions). If these proceeds and the earnings on the proceeds are spent in accordance with the specified requirements, the spending exceptions are available to be applied to all or a portion of the Bonds.
Spending exceptions to rebate are optional and, as a result, are only beneficial if these proceeds are generating a positive rebate liability. Therefore, it is necessary to first determine the rebate liability for these funds and then, if appropriate, apply the spending exception. With the exception of the six-month spending exception, we will evaluate the application of the spending exceptions after the second anniversary date of the bond were issued to see if an exception would reduce or eliminate the rebate liability.
Yield Reduction Payments
Certain accounts or funds are subject to the yield restriction rules of the Regulations in addition to the rebate requirement. These accounts are included in the determination of required yield reduction payments after the expiration of certain defined temporary periods established by the Regulations and disclosed in the bond documents.
In preparing the yield restriction calculation, the cash flows for the yield restricted investments must be isolated for the time period after the expiration of the temporary periods. The cash flows are then future valued to the determination date using a “materially higher bond yield,” as defined in the Regulations, to determine if the issue has violated the yield restriction rules, which would result in a yield reduction payment being due.
IRS Form 8038-T Preparation
When an arbitrage rebate liability is found to be due to the United States Treasury as of a required payment date, Pinnacle assists its clients in completing the IRS Form 8038-T and provides clients with filing instructions necessary for proper submittal of the payment.
Overpayment Refund Requests
It is not uncommon for changes in interest rates to result in an issuer earning negative arbitrage which may be used to offset arbitrage earned and already paid, making the issuer eligible to apply for a refund of prior rebate payments. Pinnacle monitors possible refund request opportunities as part of our rebate calculation service and notifies clients when a refund opportunity exists. Pinnacle provides refund request analysis which includes the preparation of the refund request and assistance in answering any questions the IRS may have about the request.
Our approach to the recovery of overpayments is pursuant to the Regulations. Overpayments can only be recovered to the extent that the recovery does not result in additional rebate as of the date the recovery is requested. We determine the maximum allowable refund, consult with the client, and offer to file a recovery request with supporting documentation. IRS agents reviewing recovery requests must be satisfied the refund request is valid, and it is not uncommon for them to have questions. Our involvement does not end with the submission of the request. We assist our clients in resolving any rebate related questions that arise. We routinely include a Power of Attorney allowing us to deal directly with the IRS to expedite the recovery process.
Bond Yield Election Analysis for Variable Rate Issues
If the a variable rate bond issue has generated a positive rebate amount using the composite bond yield, it may be possible to recompute the Rebate Amount using alternate yield periods which may reduce the rebate liability. However, the alternate yield period methodology could increase the rebate liability, in which case, the composite yield computation would be used to determine the Rebate Amount. Pinnacle’s customized software performs the calculations necessary to determine the optimal yield period(s) that will result in the lowest rebate amount to be paid.
Assistance with IRS Examinations
Pinnacle’s professionals have experience representing clients before the IRS during audits, have been engaged to defend clients’ positions with the IRS, and have assisted clients in entering into voluntary closing agreements with the IRS. Members of our firm have appeared before the U.S. Treasury Department to provide consultation about the application of the rebate requirements and about specific matters, which were addressed in the Temporary Regulations, issued in May 1989, amended in April 1991 and finalized in May 1992, June 1993, and May 1997.
Escrow Monitoring Services
Some issuers utilize a combination of variable rate bonds with an interest rate swap in connection with the advance refunding of prior bonds. This structure produces a fixed yield during the escrow period that is based upon certain assumptions regarding the interest rate on the variable rate bonds at the time of closing for the issue. Actual interest rates on the variable rate bonds subsequent to closing may cause the yield on the issue to vary from the originally anticipated yield. This may require a restructuring of the escrow or a deposit to a yield restricted sinking fund to correct the yield on the escrow. Pinnacle provides escrow monitoring services to calculate the yield on the bonds and compare the resulting yield to the yield on the escrow. If the escrow yield exceeds the bond yield, we work with the client to evaluate alternative escrow structures to correct the yield on the escrow.