105 T.C. No. 19
UNITED STATES TAX COURT
HARBOR BANCORP & SUBSIDIARIES, Petitioner
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
EDWARD J. KEITH AND ELENA KEITH, Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 24112-92, 5857-93. Filed October 16, 1995.
The Housing Authority of Riverside County,
California, issued revenue bonds to finance the
construction of multifamily housing for families of low
and moderate incomes. Ps purchased some of these bonds
and, believing that the bonds were tax exempt, did not
include the interest received thereon in income. Sec.
103(a), I.R.C., generally provides a tax exemption for
interest earned on bonds issued by State and local
governments. This exemption does not apply to
"arbitrage bonds". Sec. 103(c), I.R.C. Under sec.
148(f), I.R.C., a bond is treated as an "arbitrage
bond" if (1) the bond proceeds are used to purchase
investments that are not acquired to carry out the
governmental purpose of the bond issue; (2) the
investment of the bond proceeds produces an excess
amount of earnings described in sec. 148(f)(2), I.R.C.;
and (3) the bond issuer fails to pay such excess amount
to the United States. The Commissioner determined that
the bonds should be treated as arbitrage bonds pursuant
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