Harbor Bancorp & Subsidiaries - Page 23

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          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)."                                                                       



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