106 T.C. No. 17
UNITED STATES TAX COURT
CITY OF COLUMBUS, OHIO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3301-95B. Filed May 14, 1996.
P, a home rule municipal corporation and political
subdivision of the State of Ohio, seeks a declaratory
judgment that interest on bonds it proposes to issue
will be exempt from taxation under sec. 103(a), I.R.C.
In 1967, in exchange for the assumption of P's accrued
unfunded pension obligation by a fund established for
that purpose by the State of Ohio, P incurred a long-
term obligation to the State Fund. In 1994, P made a
lump-sum payment equal to 65 percent of the remaining
principal in satisfaction of the long-term obligation.
Taking into account the 35-percent discount, the yield
to P in making the prepayment, as compared to the
payments it otherwise would have made, is 7.57484
percent. P proposes to issue long-term obligations,
with an interest rate of 6 percent, to fund the
prepayment to the State Fund. Pending our decision
herein, P has issued short-term obligations to fund the
prepayment. Held, P entered into the prepayment
transaction with a principal purpose being to profit
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