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to produce arbitrage. For bonds issued after August 15, 1986,
the general definition of an arbitrage bond appears in section
148(a). Section 148(a) expanded the definition to include not
only bonds that the issuer reasonably expected, at the time of
issuance, would produce arbitrage, but also bonds whose proceeds
were at any time "intentionally" used by the issuer to acquire
higher yielding investments. Arbitrage bonds within the
definition of section 103(c) and section 148(a) are not tax
exempt, and there are no statutory provisions allowing the issuer
to attain or regain tax exempt status by paying the amount of
arbitrage earnings to the Federal Government. In contrast, a
bond's treatment as an arbitrage bond under section 148(f)
depends first upon whether a payment to the United States is
required by section 148(f). This cannot be ascertained until
after the date the State or local government bonds are issued and
after the nonpurpose investment is made. The first computation
date for making this determination is normally 5 years after the
original bond issue. Furthermore, section 148(f)(1) and (2) does
not treat a bond as an arbitrage bond merely because of the
existence of excess earnings within the meaning of section
148(f)(2). Rather, it is the existence of such excess (based on
a mathematical calculation) plus the failure of the issuer to pay
the excess amount to the Federal Government that triggers
arbitrage bond treatment and the resulting loss of tax-exempt
status.
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