- 3 -
percent of the outstanding principal balance (plus interest from
the time of the prepayment agreement until date of the lump-sum
payment). Petitioner made the lump-sum payment on January 31,
1994 (the prepayment).
Petitioner proposed to issue tax-exempt bonds to finance the
lump-sum payment and requested a ruling from respondent that the
interest on the proposed bonds would be exempt under section 103.
Respondent denied petitioner's request on the ground that such
bonds would be arbitrage bonds pursuant to section 148. In our
original opinion, we attributed the prepayment to the acquisition
of the State fund obligation in 1967, City of Columbus v.
Commissioner, 106 T.C. at 334, and concluded that the bonds would
be arbitrage bonds. The Court of Appeals reasoned that, if we
were correct in that attribution, the proposed bonds could not be
arbitrage bonds because the arbitrage provisions did not apply
retroactively to the 1967 transaction. City of Columbus v.
Commissioner, 112 F.3d at 1205-1206. The Court of Appeals
remanded the case and defined the scope of the remand as follows:
The purpose of � 148 is to prevent states and local
governments from using tax-exempt bond proceeds to
acquire higher yielding "investment property." Even if
a "prepayment for property" may itself be investment
property, it remains to be seen whether the City of
Columbus, by satisfying its obligation to the State
Fund in 1994, was making a "prepayment for property."
Before the anti-abuse regulations [sec. 1.148-10(e),
Income Tax Regs.] is considered, that question must be
resolved. [Id. at 1207.]
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