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rules) necessary or appropriate to accomplish the
purpose of the arbitrage restrictions, which is to
eliminate significant arbitrage incentives to issue
more bonds, to issue bonds earlier, or to leave bonds
outstanding longer. [H. Rept. 100-795 at 327-328
(1988).]
In accordance with the authority, section 1.148-10(e),
Income Tax Regs., provides:
(e) Authority of the Commissioner to clearly
reflect the economic substance of a transaction. If an
issuer enters into a transaction for a principal
purpose of obtaining a material financial advantage
based on the difference between tax-exempt and taxable
interest rates in a manner that is inconsistent with
the purposes of section 148, the Commissioner may
exercise her discretion to depart from the rules of
� 1.148-1 through � 1.148-11 as necessary to clearly
reflect the economic substance of the transaction. For
this purpose, the Commissioner may recompute yield on
an issue or on investments, reallocate payments and
receipts on investments, recompute the rebate amount on
an issue, or otherwise adjust any item whatsoever
bearing upon the investments and expenditures of gross
proceeds of an issue.
Petitioner makes much of the fact that it is prepared to
issue the proposed bonds on the basis of the interest thereon
being taxable, i.e., not exempt under section 103(a). Such being
the case, petitioner argues that the prepayment did not have "a
principal purpose * * * to receive an investment return" within
the meaning of section 1.148-1(b) or 1.148-10(e), Income Tax
Regs. Consequently, petitioner asserts that the question of
"yield" becomes irrelevant in determining whether the proposed
bonds are arbitrage bonds. We disagree.
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