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the bond proceeds. Like section 103(c), section 103(b) should
not be read to encourage issuers both to be ignorant of the facts
prospectively and to remain ignorant and do nothing after the
fact.
Because the Whitewater and Ironwood bonds were not exempt
industrial development bonds under section 103(b)(4), by virtue
of section 103(b)(1), they were not tax-exempt bonds under
section 103(a).
Petitioners and Judge Jacobs, dissenting op. note 2, argue
that the diversion of the bond proceeds amounted to "involuntary
noncompliance" under section 1.103-8(b)(6)(iii), Income Tax Regs.
(the 1979 reg.). Their argument seems to be based on the
assumption or assertion that nothing could be done after the fact
by the Riverside Housing Authority because the bond proceeds had
flowed irrevocably to Crown Life Insurance Co., which had issued
the GIC's. Judge Jacobs states that "the Bond proceeds were
improperly locked into GIC's", dissenting op. note 2. However, I
don't understand why the Riverside Housing Authority could not
have brought a successful action to revoke the GIC's and recover
the proceeds for use as originally intended. If the funds had
been unlawfully diverted, didn't Crown Life Insurance Co. have
notice, actual or constructive, of this fact? The answer to
these questions may be that the Riverside Housing Authority
decided, once things started to go badly for the developer, that
it would be better to leave the bond holders with the continuing
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