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The Irs's Application Of Arbitrage Provisions: Overregulation Of Municipal Finance, Carol L. Gruendel

Fordham Urban Law Journal

The federal tax exemption afforded to municipal bonds makes them a desirable investment, but the tax exemption is a costly preference in the federal tax system, that has caused a loss of $9.4 billion in federal revenues in the fiscal year of 1981. Legislation has been enacted to regulate the use of the tax exemption for municipal bonds when their issuers engage in arbitrage practices. Arbitrage bonds are defined under Section 103(c) of the Internal Revenue Code as municipal securities which are issued for the purpose of investing the majority of the proceeds in higher yielding securities, or to replace …