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Abstract: 

Section 148 of the Internal Revenue Code prohibits issuers of tax-exempt bonds from using tax-exempt bonds to acquire investment property which will produce a materially higher yield than that on the issue. Since its enactment, the question remains as to what constitutes investment-type property. The Internal Revenue Service (IRS) has struggled to answer this question. In 1997, in City of Columbus v. Commissioner, new questions were raised concerning Section 148. The D.C. Court of Appeals held that after a contract to purchase property is entered into, prepayments under the contract will not be considered investment-type property. Concerned with the inconsistencies between this decision and congressional intent when Section 148 of the Code was established, the IRS proposed new regulations to clarify which prepayments give rise to investment-type property. After reviewing considerable public comment on the proposed regulation, the IRS withdrew the 1999 proposed regulation and replaced it with a new proposed regulation.

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Affiliations:  1: Reed Smith LLP.