- 70 -
computation of the rebate. The amount to be rebated is determined
by first finding the amount earned on "nonpurpose investments".
These earnings then are compared to the amount that would be
yielded at the bond issue's rate of interest. For such purposes,
the Commissioner's regulations, in general, require an allocation
of the higher-earning nonpurpose "acquired obligations" to bond
proceeds under an accounting pooling convention. These
regulations, however, continue to reflect that the "acquired
obligations" to be scrutinized are those acquired by the State or
local government that issues the bonds. Thus, section 1.103-
13(f)(1), Income Tax Regs., provides:
In general. A State or local government unit shall
allocate the cost of its acquired obligations to the
unspent proceeds of each issue of governmental
obligations issued by such unit. * * * [Emphasis added.]
Congress added another important provision in the Tax Reform
Act of 1986 when it provided that a bond will be considered an
arbitrage bond if, after the bond is issued, the issuer
intentionally uses the proceeds to earn arbitrage. Sec. 148(a), as
added by TRA sec. 1301(b), 100 Stat. 2641; see H. Conf. Rept. 98-
841, at II-746 (1986), 1986-3 C.B. (Vol. 4), 1, 746. By its terms,
section 148(a) will remove the tax-exempt status of a bond
retroactively, but only when the issuer intentionally contravenes
the provisions against arbitrage. This new provision thus provides
an exception to the assurances earlier provided by Assistant
Secretary Lubick that the tax-exempt status of a bond would be
determined as of the date of issue.
Page: Previous 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 NextLast modified: May 25, 2011