Amunicipal bondissued at a lowerinterest ratethan another municipal bond. The funds from the second bond are invested intreasury securitiesuntil thecall dateof the first bond, when they are used to pay for the first bondsredemption. Depending on whether an arbitrage bond is also used for projects relating to municipal development, it may or may not betax free.

A municipal bond issued for the purpose of investing the proceeds in securities with higher yields than those paid by the municipal bond. Generally, the arbitrage involves purchasing U.S. Treasury bonds that are used to prerefund an outstanding issue prior to the outstanding issues call date.

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First, it must be determined whether an artifice or device is employed in connection with the issuance of the obligation, thus making the bond an

if the issuer intentionally uses any portion of the proceeds of the issue f or these purposes.

Tax-exempt bonds – questions and answers on arbitrage rebate

Code Section 148 begins by explaining the meaning of

as any bond issued as part of an issue a portion of the proceeds of which are reasonably expected …

Code Section 103(b), however, revokes the exclusion if the bonds are determined to be either private activity bonds (not the subject of this article) or

Tax-exempt financing: traps for the unwary executive. (Taxing Issues)

, qualified tuition plans and the regulation of political contributions.

The Solomon Exam Prep Guide: Series 51 MSRB Municipal Fund Securities Limited Principal Qualification Examination, 2nd Edition Now Available

Code Section 103(b), however, revokes the exclusion if the bonds are determined to be either

(not the subject of this article) or any private activity bond which is not a qualified bond. Code Section 141 defines a private activity bond.

Tax exempt bonds: IRS examinations are coming. Will your organization be ready?

This provision, which is in section 103 of the Internal Revenue Code of 1986, currently disallows the application of this general exclusion for private activity bonds that are not qualified bonds, and for

, which are bonds whose proceeds are used to acquire higher-yielding investments, was initially eliminated in 1969 [2].

, and the federal tax law provides that interest earned on those bonds is not exempt.

Yield burning: federal agencies should pursue violators instead of victims

Tax Court ruled for the city that bonds it had proposed to issue in 1993 are not

Moreover, issuers that choose not to enter closing agreements may be subject to IRS enforcement action and, thus, run the risk that their advance refunding bonds will be declared taxable

. Revocation [TABULAR DATA FOR EXHIBIT 1 OMITTED] of tax exemption would, in turn, expose public agencies to even greater potential liabilities to bondholders.

Overpricing of municipal escrow purchases: yield burning issues and potential liabilities

The Internal Revenue Service (IRS) characterizes such bonds as taxable

because the implicit interest rate on the annuity contract is considered to exceed the yield on the bonds.

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