Harbor Bancorp & Subsidiaries - Page 40

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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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Last modified: May 25, 2011