- 68 -
The Housing Authority did not benefit from the misuse of the
Bond proceeds. The majority, however, would attribute the
shenanigans of the wrongdoers to the Housing Authority; I would
not.
The development of the arbitrage provisions shows that
Congress sought to prevent States and their subdivisions from
misusing their tax-exempt privileges by issuing low-yielding bonds
and thereafter investing the bond proceeds into higher-yielding
instruments. There is no indication that Congress would require
States or local governments to rebate amounts that they never
authorized or received.
In 1969, when Congress enacted the section 103 provisions
removing arbitrage bonds from tax-exempt status, the Senate Finance
Committee explained that it did so to ensure that the Federal
Government does not become "an unintended source of revenue for
State and local governments". S. Rept. 91-522, supra at 219, 1969-
3 C.B. at 562. Concerns later developed, however, that unwary
purchasers of tax-exempt bonds might be taxed upon the interest
4(...continued)
In this case, the black box structure was corrupted by
the use of Unified, a shell entity, instead of a bona fide
financial institution that was supposed to be both the depository
of the bond proceeds and the buyer (from separate funds) of the
project mortgage from the L/C provider. Because Unified had no
substantial capital of its own, it used the Bond proceeds to buy
the project mortgage; and via this route, the Bond proceeds were
invested in the GIC's. Unified improperly used the Bond proceeds
to purchase the GIC's, causing the Commissioner to assert that
the Bonds are to be treated as arbitrage bonds pursuant to the
provisions of sec. 148(f). Hence, the central failure in this
case was the improper use of the Bond proceeds by Unified to
purchase the GIC's.
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