THE SHORT ANSWER
The 6-month spending exception treats a bond issue as meeting the arbitrage rebate requirement when the issue's gross proceeds, as specially defined, are spent on the governmental purpose within 6 months of the issue date and rebate is paid on amounts not required to be spent. It is the shortest spending exception and the only one available to refunding issues.
The 6-month spending exception treats a bond issue as meeting the arbitrage rebate requirement when the issue's gross proceeds, as specially defined for this exception, are allocated to expenditures for the governmental purposes of the issue within the 6-month period beginning on the issue date, and rebate is paid on amounts not required to be spent, under section 148(f)(4)(B) of the Internal Revenue Code and Treasury Regulation §1.148-7(c).
It is the shortest of the three spending exceptions in the federal arbitrage rules, and it is the only spending exception available to refunding issues.
This page works through the spending test, the issues it fits, what the special definition counts as spent, and what a 6-month window means for the investment holding the proceeds between closing and the last invoice.
What does the 6-month exception require?
Two conditions have to be met: the specially defined gross proceeds are allocated to expenditures for the governmental purposes of the issue within the 6-month period beginning on the issue date, and the issuer pays rebate on amounts not required to be spent.
An issue that meets both conditions is treated as meeting the rebate requirement, under Treasury Regulation §1.148-7(c).
The clock runs from the issue date, so the period is fixed at closing rather than starting with the first draw.
The first condition applies to the whole specially defined base rather than a percentage of it, subject to the one longer tail described below, which is what separates this exception from the staged schedules on the longer exceptions.
The provision itself allows one longer tail: section 148(f)(4)(B)(ii) allows 1 year for up to 5 percent of the proceeds of certain governmental issues.
Which issues can use the 6-month exception?
The exception fits any issue that can spend its specially defined gross proceeds inside the window, including an issue that refunds earlier bonds.
For refunding issues it is also the whole list: Treasury Regulation §1.148-7(b)(1)(ii)(A), restated in the Form 8038-T instructions, states that the only spending exception applicable to refunding issues is the 6-month exception.
The two longer schedules carry eligibility conditions the 6-month exception does not have.
The 18-month exception requires at least 15 percent of gross proceeds spent within 6 months, at least 60 percent within 12 months and 100 percent within 18 months, and it is available only when all gross proceeds qualify for the 3-year capital project temporary period, under Treasury Regulation §1.148-7(d)(1).
That exception lives in the regulations rather than the statute, and it is not available when any portion of the issue uses the 2-year exception, under §1.148-7(d)(4).
The 2-year construction exception is measured on available construction proceeds rather than all gross proceeds and is limited to construction issues, under section 148(f)(4)(C)(ii) and Treasury Regulation §1.148-7(e)(1).
Both schedules are covered in depth on the 18-month exception and 2-year construction exception pages.
What counts as spent under the 6-month test?
The test reaches gross proceeds as specially defined for the spending exceptions, and that definition is narrower than everything an issue generates.
What the definition leaves in has to be allocated to expenditures for the governmental purposes of the issue, the regulation's own phrase, within the window.
Four categories sit outside the special definition, under Treasury Regulation §1.148-7(c):
| Amount | Where it sits for the 6-month test |
|---|---|
| Amounts in a bona fide debt service fund | Excluded from the special definition of gross proceeds |
| Amounts in a reasonably required reserve fund | Excluded from the special definition, though the fund's earnings remain subject to rebate |
| Amounts not expected at issuance that arise after 6 months | Excluded from the special definition |
| Certain purpose-investment receipts and grant repayments | Excluded from the special definition |
The reserve fund row carries a caveat: reserve fund earnings remain subject to rebate even though the reserve amounts themselves sit outside the spending test.
Debt service fund earnings also have a separate rebate exclusion: section 148(f)(4)(A)(ii) excludes earnings on a bona fide debt service fund from rebate when gross earnings on the fund for the bond year are under $100,000, and under the flush language of section 148(f)(4)(A) that dollar limit does not apply to an issue that is not a private activity bond and carries fixed interest rates with an average maturity of at least 5 years.
The debt service fund guide covers how those funds are built and tested.
What does the 6-month window mean for the investment?
A window measured from the issue date leaves little gap between closing and the last dollar of spending, so the fund's investment has to convert to cash on the draw schedule.
GFOA's guidance on investing bond proceeds makes the same point about duration: it recommends keeping an investment's duration no longer than the expected drawdown schedule, and it also suggests not issuing well before spending begins, to limit arbitrage liability and negative arbitrage.
The bidding rules build the schedule into the solicitation itself: for a guaranteed investment contract, the solicitation terms must take into account the issuer's reasonably expected deposit and drawdown schedule, under Treasury Regulation §1.148-5(d)(6)(iii)(A)(5).
Meeting the window resolves the rebate side of section 148 only; IRS Publication 5271 treats yield restriction under section 148(a) and rebate under section 148(f) as independent sets of rules, and failing either set makes the bonds arbitrage bonds.
Rebate still applies to amounts not required to be spent: paying rebate on those amounts is the exception's second condition, under section 148(f)(4)(B).
A project that slows down and leaves money invested past month 6 raises the follow-on questions in the unspent proceeds guide.
mGIC's spending exception checker walks an issue's spending profile against the three schedules before anything is bid.
As Bidding Agent and reinvestment advisor, mGIC reviews the fund's objectives, permitted investments and draw schedule, develops the bid specifications, solicits qualified providers, compares the bids on rate and non-rate terms, and coordinates documentation and settlement through closing.
For an issue that has already closed, mGIC can check your proceeds against the rules as part of a free, no-obligation reinvestment review.
To start that review, or a conversation about a fund still being structured, use the contact page.
Whether an issue's spending meets the 6-month test, and how the special definition applies to its funds, are legal and tax determinations for bond counsel and tax counsel.
Frequently asked questions
Do amounts in the reserve fund have to be spent within 6 months?
No. The special definition of gross proceeds for the 6-month exception excludes amounts in a reasonably required reserve fund and amounts in a bona fide debt service fund, under Treasury Regulation §1.148-7(c). The exclusion does not settle the reserve fund's earnings, which remain subject to rebate.
What happens to amounts that first arrive after month 6?
Amounts not expected at issuance that arise after 6 months sit outside the special definition, so they are not part of the 6-month spending test. Certain purpose-investment receipts and grant repayments are excluded as well.
Can part of the proceeds stay unspent at the end of the window?
The exception treats an issue as meeting the rebate requirement when its specially defined gross proceeds are spent within the window and rebate is paid on amounts not required to be spent. Which amounts are not required to be spent is a conclusion for bond counsel and tax counsel.
Is there a longer period for a small share of the proceeds?
Section 148(f)(4)(B)(ii) allows 1 year for up to 5 percent of the proceeds of certain governmental issues. Whether a particular issue fits that allowance is a tax determination.
Sources
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
