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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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