Harbor Bancorp & Subsidiaries - Page 63

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          question the validity of its purported issuance of bonds.  As the           
          Court of Appeals for the District of Columbia Circuit said in               
          Washington v. Commissioner, 692 F.2d at 137:                                
                    Still, states and municipalities should be                        
               chary in their issuance of tax-free bonds and their                    
               subsequent reinvestment of the proceeds.  It is a                      
               fundamental principle of state and municipal bond law                  
               that the issuing body must have a legitimate,                          
               independent purpose to sell debt instruments in order                  
               to raise moneys.  L. Jones, THE LAW OF BONDS AND BOND                  
               SECURITIES �12 (1950).  If no such purpose exists, the                 
               issuance would be violative of local law, and should                   
               not qualify for the tax exemption that Section 103                     
               provides for validly issued municipal and state bonds.                 
               * * *                                                                  
               The steps in the analysis would be along the following                 
          lines:                                                                      
               1. The bonds were sold to the public as the Housing                    
          Authority's revenue bonds, based on representations that the                
          proceeds would be used to finance construction of the housing               
          projects.                                                                   
               2.  Because the obligations on the bonds were nonrecourse to           
          the Housing Authority, the primary sources of payment of the bond           
          obligations were to be the housing projects and the income                  
          streams that the projects were expected to generate.                        
               3.  Contrary to the conception underlying a properly                   
          structured "black box" scheme,4 the proceeds of the bond                    
          offerings were irrevocably diverted from the projects on the day            

               4I have my doubts about the efficaciousness of the "black              
          box" scheme, but, under the facts of the purported bond issues of           
          the Riverside Housing Authority, that question need not detain us           
          in other cases in which the bond proceeds were diverted in                  
          similar fashion.                                                            



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