- 23 -
148(f), which the Commissioner determined to be $2,250,475 with
respect to the Whitewater bonds, and $1,543,199 with respect to
the Ironwood bonds.5 The Housing Authority refused to make such
payments.
OPINION
Section 103(a) generally excludes interest earned on State
and local government bonds from taxable income. This exclusion,
however, does not apply to "arbitrage bonds". Sec. 103(c)(1).6
Section 103(c)(2) defines an arbitrage bond generally as a bond
the proceeds of which are "reasonably expected" to be used to
acquire higher yielding investments. Section 148(f)(1) provides
that if the requirements of section 148(f)(2) are not met, State
and local government bonds will be "treated as" arbitrage bonds.
Respondent's primary argument is based on section 148(f).
Accordingly, we will first consider whether the Bonds should be
treated as arbitrage bonds under section 148(f).
5On June 20, 1991, the Housing Authority filed an action in
the U.S. District Court in Los Angeles, California, seeking a
preliminary injunction enjoining the Internal Revenue Service
from declaring the interest on the Bonds taxable. On June 20,
1991, Judge Marshall of the District Court granted a preliminary
injunction. On July 23, 1992, she dissolved the injunction,
ruling that the court lacked jurisdiction. No decision on the
merits was entered.
6Sec. 103(c)(1) provides that "any arbitrage bond shall be
treated as an obligation not described in subsection (a)(1) or
(2)."
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011