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payment within 90 days of November 3, 1993, and was required to
pay interest at a rate of 4.25 percent per annum from
November 15, 1993, until the payment was made. The City made the
payment of $27,304,720 to the State Fund on January 31, 1994,
including interest of $371,502.
If the 35-percent discount is taken into account, the yield
to petitioner for prepaying the City Obligation, as compared to
the payments it otherwise would have made, is 7.57484 percent.
It was commercially reasonable for the City to finance the
lump-sum payment by issuing obligations carrying a taxable
interest rate. However, petitioner initially contemplated
issuing tax-exempt bonds. After discussions with respondent, and
before issuing long-term bonds, petitioner decided to obtain a
private letter ruling from respondent on whether interest on the
bonds would be excludable from gross income under section 103.
On January 31, 1994, the City issued $27,300,000 in 1-year
bond anticipation notes (BAN's), due January 31, 1995. The BAN's
sold for $27,334,125 and were general obligations of the City.
On January 31, 1994, the City transferred $27,304,720 of the BAN
proceeds to the State Fund in satisfaction of the lump-sum
payment agreement.
Upon the maturity of the 1994 BAN's, petitioner, having
repaid $600,000 of the 1994 BAN's, refinanced the remaining
$26,700,000 with an issue of BAN's in that amount, maturing
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