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The regulations under section 148(f) are consistent with the
statute and legislative history in that they are mechanical in
nature and require no reference to the issuer's intent or
expectations. The section 148(f)(2) amount is defined as the
excess of the future value of all nonpurpose receipts over the
future value of all nonpurpose payments. Sec. 1.148-2(a), Income
Tax Regs. "Receipts" are defined broadly to include any amount
actually or constructively received with respect to the
investment as well as the fair market value of the investment at
the end of a computation period. Sec. 1.148-2(b)(2)(i), (iii),
Income Tax Regs. "Payments" are also defined broadly and include
the amount of gross proceeds of the issue to which the investment
is allocated, whether or not the investment was directly
purchased with such gross proceeds. Sec. 1.148-2(b)(3)(i) and
(ii), Income Tax Regs. If the receipts exceed the payments,
there is an amount that must be paid to the United States in
order to avoid treatment as an arbitrage bond.
It is clear that the investments in the GIC's earned a
higher rate of return than the yield on the Bonds. This produced
an excess amount within the meaning of section 148(f)(2). It is
also clear that some of the excess was used for purposes that
Congress did not want to subsidize through Federal tax
exemptions. Congress provided that the exempt status of such
bonds could be maintained only if the issuer paid the excess
amount as defined in section 148(f)(2) to the United States.
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