Harbor Bancorp & Subsidiaries - Page 66

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          Ultimately, I would hold that the interest on the Bonds is                  
          excludable from gross income under section 103(a).                          
               Section 103(a) provides that a taxpayer's gross income does            
          not include interest earned on the obligations of a State or a              
          political subdivision of a State.  This exemption has been a                
          feature of the Internal Revenue Code ever since the Federal income          
          tax was adopted in 1913.  S. Rept. 91-552, at 219 (1969), 1969-3            
          C.B. 423, 562.  The purpose of this exemption is to assist State            
          and local governments by allowing them to issue marketable bonds at         
          interest rates below those of corporate and Federal securities.             
          See, e.g., State of Washington  v. Commissioner, 77 T.C. 656                
          (1981), affd. 692 F.2d 128 (D.C. Cir. 1982); 113 Cong. Rec. 31,611          
          (daily ed. Nov. 8, 1967) (statement of Senator Ribicoff).                   



               2(...continued)                                                        
          substantially all of the proceeds are to be used to construct               
          residential rental property where 20 percent or more of the units           
          in each project are to be occupied by individuals of low or                 
          moderate income. Such obligations are referred to in the body of            
          this dissent as nontaxable industrial development bonds.                    
                    Pursuant to sec. 1.103-8(b)(6)(iii), Income Tax Regs.,            
          the "substantially all" requirements of sec. 103(b)(4) do not               
          apply to a project in the event of "involuntary noncompliance",             
          provided the obligation used to provide financing for the project           
          is retired within a reasonable period.  In my opinion, the Bonds            
          satisfied the "substantially all" requirements of sec. 1.103-               
          8(b)(6)(iii), Income Tax Regs., because the Whitewater and                  
          Ironwood projects were not constructed due to "involuntary                  
          noncompliance" on the part of the Housing Authority of Riverside            
          County.  Further, because the Bond proceeds were improperly                 
          locked into GIC's, the term of the GIC's determined when the                
          Bonds could be retired.                                                     
                    Morever, with respect to the Whitewater bonds, I would            
          hold that their issuance satisfied the reasonable public notice             
          requirements of sec. 103(k)(2)(B)(i).                                       



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