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result, we held that the costs of issuing the bonds, including
underwriting costs, should be taken into account in determining
the existence of arbitrage. The Court of Appeals for the
District of Columbia Circuit affirmed.
In 1986, when Congress enacted section 148, it specifically
reversed Washington v. Commissioner, supra.
The bill provides that, under all arbitrage
restrictions applicable to tax-exempt bonds, the yield
on an issue is determined based on the issue price,
taking into account the Code rules on original issue
discount and discounts on debt instruments issued for
property (secs. 1273 and 1274). This amendment
reverses the holding in the case State of Washington v.
Commissioner, supra. [S. Rept. 99-313, at 845 (1986),
1986-3 C.B. (Vol. 3) 1, 845.]
The Committee explained the reason for this change as follows:
The committee believes it is important for issuers
of tax-exempt bonds to pay the costs associated with
their borrowing. The bill provides that the costs of
issuance, including attorneys' fees and underwriters'
commissions, must be paid by the issuers or
beneficiaries of the bonds, rather than recovered
through arbitrage profits at the Federal Government's
expense. The committee believes that this restriction
will result in a more efficient use of tax-exempt
financing, as borrowers will more closely monitor the
costs of their borrowing. However, the committee
intends to monitor the effect of these provisions to
determine whether further restrictions on costs such as
attorneys' fees and underwriters' commissions are
needed. [S. Rept. 99-313, supra at 828, 1986-3 C.B.
(Vol. 3) at 828.]
From this, it is clear that when Congress enacted section 148, it
did not want to permit the investment of tax-exempt bond proceeds
in higher yielding investments, the income from which would be
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