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the exception, the number of persons who took advantage of the
prepayment terms would appear to be irrelevant.
Having decided that petitioner is not entitled to the
benefits of the exception in section 1.148-1(b), Income Tax
Regs.,7 we are left with the issue whether the prepayment
produced a materially higher yield than the proposed bonds. Sec.
148(b)(1).
Respondent argues that, by virtue of the discount
arrangement with the State Fund, the City should be treated as
sharing in the investment yield of that fund, the rate of yield
being 8.25 percent. Petitioner argues that the City and the
State Fund are separate entities and that such "sharing" implies
a partnership or combined entity which has no legal
justification. We agree with petitioner on this point. There is
no doubt that the high rate of yield anticipated by the State
Fund was the foundation of the discount arrangement and no doubt
entered into the determination of the amount of the discount
which the State Fund decided to offer. But it does not follow
that this circumstance justifies the conclusion that the City had
an ongoing share in the investment yield of the State Fund. Our
No inference should be drawn that we would have ruled in favor
of petitioner if the exception did apply. Under such
circumstances, we would still have to decide whether respondent
should still prevail because of the broad discretionary authority
conferred upon her by sec. 1.148-10(e), Income Tax Regs., supra
p. 14.
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