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In example (5), 5 years after constructing a qualified
residential rental project, Corporation P, the developer and
owner, converted 80 percent of the units into nonqualifying
condominium units and repaid the loan to State X, the bond
issuer, which in turn redeemed the bonds. The example concludes
that the bonds were not used to provide residential rental
housing within the meaning of section 103(b)(4)(A).
In example (4), there is a similar disqualifying event, the
failure of the issuer, County Z, to enforce the 20 percent
requirement. As a result, the bonds are classified as nonexempt
industrial development bonds, retroactive to the date of
issuance.3
Petitioners would construe examples (4) and (5) as
inapplicable because the disqualifying actions by the issuers or
developers are "volitional". I believe that the examples do
apply to the case at hand because in each of them--as in the case
at hand--the governmental issuer fails to enforce the statutory
3See also sec. 1.103-8(a)(1), Income Tax Regs. (the 1979
reg.). ("Substantially all of the proceeds of an issue of
governmental obligations are used to provide an exempt facility
if 90% or more of such proceeds are so used."); H. Conf. Rept.
99-841, at II-697 (1986), 1986-3 C.B. (Vol. 4) 1, 697 ("The
conference agreement further provides that at least 95 percent of
the net proceeds of each issue must be used for the exempt
facility for which the bonds are issued"); Woods v. Homes &
Structures, Inc., 489 F. Supp. 1270, 1292 (D. Kan. 1980)
("Although section 103, speaks in prospective terms * * * we tend
to agree with plaintiffs that the actual distribution of the
proceeds will control.").
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