- 43 -
issue. Petitioners may be, as they allege, the first bondholders
to be taxed upon interest received from purportedly tax-exempt
bonds that fail to meet the requirements for tax exemption.
However, that does not mean that they have been targets of
impermissible discrimination.21
Finally, we realize that under our holding, it is the
bondholders, rather than the bond issuer, that bear the immediate
brunt of the issuer's failure to pay the amount required by
section 148(f)(2). However, the statutory exemption from Federal
tax for interest on State and local government bonds is
conditioned on the requirement that the bond issuer pay the
amount required by section 148(f)(2), and exclusions from taxable
income are to be narrowly construed. Commissioner v. Schleier,
21Petitioners rely on International Business Machines Corp.
v. United States, 170 Ct. Cl. 357, 343 F.2d 914 (1965), to
support their claim of discrimination. In that case, one of
IBM's competitors had obtained a ruling from the Commissioner
that certain equipment was exempt from an excise tax. IBM sought
a similar ruling for similar equipment, which the Commissioner
finally denied 2 years later. At the time of the denial, the
Commissioner prospectively revoked the favorable ruling that
IBM's competitor had received, but the competitor had already
enjoyed several years of favorable tax treatment. The Court of
Claims found that this course of conduct constituted "manifest
and unjustifiable discrimination", and its effect "was to favor
the other competitor so sharply that fairness called upon the
Commissioner, if he could under Section 7805(b), to establish a
greater measure of equality." 343 F.2d at 923.
We find that the present case is distinguishable from IBM.
The present case does not involve a determination by the
Commissioner, which has the effect of penalizing petitioners and
favoring similarly situated taxpayers so as to give them a
significant competitive or financial advantage.
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