WASHINGTON -- State and local tax-exempt bond issuers are expected to rebate $305 million in arbitrage profits to the federal government this year -- about 5% more than last year, an Internal Revenue Service official said this week.

"It seems like the volumes of dollars coming in are stabilizing compared to the last few years," said Allan Lisse, a statistician at the IRS' Philadelphia Service Center.

The $305 million the IRS expects to collect this year tops the $291 million in arbitrage profits it got in 1992, and is more than three times the $90 million in arbitrage collected in 1991.

Bond market participants expected the surge in arbitrage payments last year because 1992 marked the end of the first five-year arbitrage rebate computation period for issuers of long-term, fixed-rate bonds.

But this year the arbitrage payments appear to have leveled off somewhat, Lisse said, noting that the IRS had collected $275 million in arbitrage as of Monday. He expects the figure to rise to $305 million before yearend and to continue to rise slowly in future years.

Under the tax laws, issuers of long-term, fixed-rate bonds must compute and rebate arbitrage at least once every five years. Arbitrage payments would have been due in 1992 for most of the governmental bonds issued in 1987, the first year after the rebate requirements for such bonds took effect.

Before 1992, issuers' arbitrage payments to the IRS had risen steadily each year, but still remained below $100 million. The IRS collected $72 million in 1990,$22 million in 1989, $16 million in 1988, and $17 million in 1987.

In a related matter, the new arbitrage rebate rules do not appear to have driven state and local bond issuers to seek millions of dollars in refunds of arbitrage payments they previously made.

Earlier this year, IRS officials rewrote and consolidated several sets of arbitrage rules that had been outstanding. When they published the new rules, they said issuers could apply them retroactively to their outstanding bond issues.

The IRS officials said that to the extent issuers applied the new rules to old bond issues and found them more favorable than previously issued rules, issuers could seek refunds of arbitrage profits paid under previously issued rules that would not be owed under the new rules.

Lisse said that since January the IRS has received only 10 requests for refunds, totaling $743,000. Five of the 10 refund requests, totaling $526,000, came in after June 18, when the new arbitrage rules were published.

Lisse said it is impossible to determine at this point if the refund requests were due to the new rules or to mathematical errors made under previously issued rules.

In either case, though, issuers clearly are not seeking huge refunds of arbitrage profits they have already rebated.

The IRS has refunded about $134,000 to issuers so far this year, Lisse said, but none of the refunds were for requests made after June 18.

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