Treasury and IRS Release March 2026 Proposed Regulations under Internal Revenue Code Sections 148 and 150

On March 12, 2026, the Department of Treasury and the IRS released proposed regulations to update and clarify several provisions in the arbitrage regulations under Section 148 of the Internal Revenue Code.  The proposed regulations also cover a couple of definitional and other provisions under Code Section 150.

The proposed changes to the regulatory scheme offered in this release are relatively limited and technical, and this alert will not attempt to describe all of the technical aspects of the proposals.  Instead, Hinckley Allen’s public finance team has prepared a brief description of the most critical elements of the proposed regulations.  A couple of these changes will be helpful to issuers and borrowers of tax-exempt bonds; at least one appears to be problematic.

Amending the Rules for Timing of Requests for Recovery of Overpayments of Rebate

By way of backdrop, the current arbitrage regulations state that, in general, issuers can recover overpayments of rebate on tax-exempt bonds by demonstrating to the IRS that an overpayment occurred.  The current regulations require issuers to request a refund of such an overpayment no later than the date two years after the final computation date for the issue to which the overpayment relates.  The final computation date is generally the date on which a bond issue is fully retired, whether at final maturity or by way of optional redemption.

In the explanation of provisions for the proposed regulations, Treasury and the IRS note that in some cases involving payments to the United States made under section 148 after the final computation date, the filing deadline in the current arbitrage regulations may not provide an adequate opportunity for issuers of tax-advantaged bonds to recover their overpayments.  They go on to note that Revenue Procedure 2024–37 extended the time for filing claims so that issuers have a reasonable opportunity to recover overpayments whether they are made before or after the final computation date of a bond issue.  Section 4.02 of Rev. Proc. 2024–37 provides that an issuer must file a claim with respect to an issue of bonds no later than two years after (1) the date that is 60 days after the final computation date of the issue to which the payment relates; or (2) with respect to the portion of the overpayment paid more than 60 days after the final computation date, the date that the payment was made to the United States.  The proposed regulations would amend current Treasury Regulations Section 1.148–3(i)(3)(i) to reflect the extended filing deadline provided in Section 4.02 of Rev. Proc. 2024–37.

This proposed change will be helpful to issuers and borrowers in circumstances (likely rare) in which they make a rebate overpayment at or shortly after the final retirement of a bond issue, giving them more time to identify the overpayment and to request a repayment of the overage from the IRS.

Tightening the Rules Governing Allocations of Funding Sources to Expenditures

The current Treasury Regulations provide that issuers may use reasonable, consistently applied accounting methods, such as specific tracing and gross-proceeds-spent first, for allocating funds from different sources to expenditures for the same governmental purpose.  These rules state, however, that an allocation of proceeds of an issue to an expenditure must involve a “current outlay of cash” for a governmental purpose of the issue, meaning a cash outlay reasonably expected to occur not later than five banking days after the date as of which the allocation of gross proceeds to the expenditure is made.

In their explanation of provisions accompanying the proposed regulations, Treasury and the IRS say there have been questions about whether an issuer can allocate from a source of funds that the issuer receives after the cash outlay but before the deadline to account for its allocations.  That these questions have arisen probably should not surprise anyone, as it is not uncommon for issuers and borrowers to have to wait on late-arriving grant funding or local aid payments to finalize the overall funding for a capital project.  There are also many P3 projects in which an equity investor’s contribution will be furnished on a last-funds-in basis, with its funding commitment secured in the meantime by a letter of credit or other comparable liquidity facility.  Notwithstanding this, the regulators are offering Proposed Treasury Regulations Section 1.148–6(d)(1)(ii) to “clarify” that in order to allocate any funds from a specific source (not just gross proceeds of a bond issue) to an expenditure, those funds must be held by or on behalf of the issuer on the date of the cash outlay.

This regulatory position appears to be detached from the realities of everyday, common-sense accounting for projects funded from multiple sources, including for State, city or town issuers borrowing to build and improve water infrastructure, public roads or schools, and borrowers in the private sector that are funding much needed affordable housing and clean energy projects.  In our view, this is a needlessly restrictive rule that will make it more difficult to allocate non-bond funding sources to projects in a way that matches the real economics of funding complex capital projects.  Moreover, the proposed rule change is in direct tension with the concepts of “qualified equity” that are laid out in the current private activity bond regulations, which, broadly speaking, are designed to permit flexibility in truing up bond proceeds and other funding sources on a retrospective basis as issuers approach project completion, using concepts that are analogous to the reimbursement timing rules of Treasury Regulations Section 1.150-2.

The good news here is that it appears that participants in the municipal marketplace, including the leadership of the National Association of Bond Lawyers (NABL), are gearing up to advocate for the withdrawal of this proposed rule change.  Hinckley Allen’s Public Finance team will be a part of that effort.

Amendment to the Definition of Tax-Exempt Bond

Currently, the regulations under Internal Revenue Code Section 150 define the term ‘‘tax- exempt bond’’ to mean any bond the interest on which is excludable from gross income under Code Section 103(a); this is pretty straightforward.  For purposes of Code Section 148, the definition also includes certificates of indebtedness issued by the United States Treasury pursuant to the Demand Deposit State and Local Government Series program described in 31 CFR part 344 (better known as the “SLGS regulations”); these Demand Deposit SLGS are specialized short-term interest rate Treasury products that can be redeemed on something like an “overnight” basis.

The explanation of provisions for the proposed regulations notes that Section 344.7(b) of the SLGS regulations provides that whenever the Secretary of the Treasury determines that the issuance of Treasury obligations to conduct the orderly financing operations of the United States cannot be undertaken without exceeding the federal debt limit, the Bureau of the Fiscal Service may invest any unredeemed Demand Deposit securities in special 90-day certificates of indebtedness.  These special 90-day certificates of indebtedness, along with accrued interest, are reinvested in Demand Deposit securities when regular Treasury borrowing operations resume.

In the proposed regulations, Treasury and the IRS note that they have determined that the “involuntary conversion” of a Demand Deposit security into special 90-day certificates of indebtedness during a debt limit contingency may lead to a failure to comply with the arbitrage rules Code Section 148, such as the yield restriction rules, which could result in an issue of tax-exempt bonds being characterized as arbitrage bonds.  To address this situation, the proposed regulations would add the special 90-day certificate of indebtedness to the definition of the term “tax- exempt bond” for purposes of section 148.

Although there may be other provisions in the current regulations to ensure that these involuntary conversions of Demand Deposit SLGS would not cause an issue of bonds to become taxable arbitrage bonds, the clarification in the this proposed definitional change should be helpful to issuers and borrowers of tax-exempt bonds, by providing an additional assurance that the regulators do not view this type of investment scenario as an occasion for identifying arbitrage abuse.  As such, we think that this would be a constructive update to the regulations.

Changing the Address for Filing Notices and Elections

Treasury Regulations Section 1.150–5(a) provides that certain notices and elections must be filed with the Internal Revenue Service at 1111 Constitution Avenue NW, Attention: T:GE:TEB:O, Washington, DC 20024 or such other place designated by publication of a notice in the Internal Revenue Bulletin.  Noting that this address is outdated, and causes inefficiencies because it delays appropriate routing of the notices and elections, the proposed regulations would delete the specified address and expand the options for publication of the address to include any publication in the Internal Revenue Bulletin or on the IRS website, such as at https://www.irs.gov/bondsmailing or a successor IRS web page.  They suggest that these revisions will increase efficiency by facilitating the timely receipt of the filings by the IRS and permit the IRS to more efficiently publish any address changes for the filings of the specified notices and elections.

Effective Dates and Applicability

Finally, as is typical for proposed regulations, these rules generally would apply to bonds sold on or after the date that is 90 days after their publication as final regulations in the Federal Register.  One exception, however, relates to the proposed change to the definition of the term “tax-exempt bond” to include special 90-day certificates of indebtedness, as discussed in Part 3 above.  Issuers may rely on this definitional change immediately.

The preceding is a very brief and selective overview of the proposed regulations.  As noted above, readers who wish to learn more about the proposed regulations are encouraged to contact Antonio Martini or any other member of Hinckley Allen’s Public Finance Group.