- 66 -
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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