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localities to obtain capital at lower than market rates of
interest; the exclusion causes purchasers of tax-exempt bonds to
accept interest at lower rates equal to the lower after-tax rates
of interest earned by holders of taxable bonds of equivalent
risk. United States Trust Co. v. Anderson, supra; see Drew v.
United States, supra; King v. Commissioner, supra; see also
Bradford, Untangling the Income Tax 243-254 (1986). In the line
of cases that formulated and applied this notion, qualification
for the exclusion depends on whether the governmental obligation
was incurred by operation of law, as where interest is paid at a
rate fixed by statute in a condemnation proceeding, or as the
result of a voluntary bargain between the State or local issuer
and the purchaser, where the rate of interest is established in
the marketplace. See also Consolidated Edison Co. v. United
States, 10 F.3d 68 (2d Cir. 1993); Stewart v. Commissioner,
supra; Drew v. Commissioner, supra. Compare, e.g., United States
Trust Co. v. Anderson, supra, with Commissioner v. Meyer, 104
F.2d 155, 156 (2d Cir. 1939).
The distinction is illustrated by King v. Commissioner,
supra. There we held that interest received on warrants issued
as part of the consideration for land sold to the Trinity River
Authority under the threat of condemnation was not excludable
from gross income under section 103(a), but that interest
received from warrants issued as part of the consideration for
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