Harbor Bancorp & Subsidiaries - Page 36

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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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