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There is no question that petitioner's purpose in prepaying
the City Obligation was to profit from the discount offered by
the State Fund.5 The fact that it would profit from the discount
if the interest on the proposed bonds were taxable does not
negate the fact that such profit would be greater if such
interest was exempt from tax under section 103(a). Nor does the
fact that the issuance of taxable bonds would also be
advantageous turn the purpose of the proposed issue on a
nontaxable basis from a principal to a subsidiary purpose. Such
a view would emasculate the arbitrage restrictions of section 148
whenever a financial advantage of a bond issue could be obtained
whether the interest on the bonds was taxable or nontaxable. In
this connection, we think it significant that the regulation
speaks in terms of "a" and not "the" principal purpose. Santa Fe
Pacific v. Central States Pension Fund, 22 F.3d 725, 727 (7th
Cir. 1994).
In its application for the ruling, petitioner stated:
[O]ne of the principal governmental purposes for
issuing the BANs, and for issuing the Proposed Bonds
* * * was to achieve an economic benefit represented by
a present value debt service savings with respect to
the City Obligation. That debt service savings was
made possible in part because of the ability of the
City to pay off the City Obligation at the amount
provided for in the Payoff Agreement, i.e. 65% of the
principal balance of the City's employer's accrued
liability, plus accrued interest through January 31,
1994 at 4.25%.
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