March 30, 2019

Tax-Exempt Bonds: A Quick Guide to Yield Restriction and Rebate Exceptions

State and local governments often use tax-exempt bonds to finance capital improvements and infrastructure and, in limited circumstances, to meet working capital needs. The tax exemption on the bonds provides the governmental issuer (the “Issuer”) with lower interest rates than comparable taxable debt. In order to qualify for the tax exemption, the Issuer must comply with various requirements with respect to the investment and use of proceeds, as well as the use of the bond-financed facilities. Section 148 of the Internal Revenue Code of 1986, as amended (the “Code”), limits the Issuer’s ability to exploit the difference between tax-exempt and taxable interest rates, also known as arbitrage.

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