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It is clear that the threshold question is a narrow one:
Does the acquisition of one's indebtedness constitute an
acquisition of property so as to bring section 148 into play?2
It is petitioner's position that the prepayment extinguished
its indebtedness to the State fund and that it acquired no
property in that transaction. It is respondent's position that
petitioner's prepayment was investment-type property. Respondent
describes the result of petitioner's prepayment as "the city
received economic property through this investment use."
Respondent argues that to allow petitioner to issue tax-exempt
bonds contravenes the intent of section 148 through the use of a
vehicle similar to that of the prepayment for property or
services described in section 1.148-1(b), Income Tax Regs.
The purpose of section 148 is to prevent the use of tax-
exempt bonds to acquire higher-yielding investment property.
City of Columbus v. Commissioner, 112 F.3d at 1207; Conf. Rept.
99-841 (1986), 1986-3 C.B. (Vol. 4) 1, 747 ("the arbitrage
restrictions are expanded to apply to the acquisition of any
property held for investment other than another bond exempt from
tax under Code section 103."); sec. 1.148-10(a), Income Tax Regs.
Section 148(b)(2) defines investment property to include any
security, any obligation, any annuity contract, and any
2 We left this question aside in our original opinion, and
the Court of Appeals did likewise. City of Columbus v.
Commissioner, 106 T.C. 325, 334 (1996), revd. and remanded 112
F.3d 1201, 1205 (D.C. Cir. 1997).
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