Rev. Rul. 76-202

The Council of the District of Columbia (Council) proposes to issue industrial development bonds, as defined in section 103(c)(2) of the Internal Revenue Code of 1954, and arbitrage bonds, as defined in section 103(d).

Section 461(a) of the District of Columbia Self-Government and Governmental Reorganization Act (Act), 87 Stat. 774 (1973), provides that, subject to certain limitations, the District of Columbia may incur indebtedness by issuing general obligation bonds to refund indebtedness of the District at any time outstanding and to provide for the payment of the cost of acquiring or undertaking its various capital projects. Section 462 of the Act provides that the Council may by act authorize the issuance of general obligation bonds for the purposes specified in section 461. In addition, section 490(a) of the Act provides that the Council may by act issue revenue bonds, notes, or other obligations (including refunding bonds, notes, or other obligations) to borrow money to finance or assist in the financing of undertakings in the areas of housing, health facilities, transit and utility facilities, recreational facilities, college and university facilities, and industrial and commercial development.

Section 485 of the Act, 1974-1 C.B. 378, 379, provides that bonds and notes issued by the Council pursuant to Title IV of the Act (sections 401-495) and the interest thereon shall be exempt from all Federal and District taxation except estate, inheritance, and gift taxes.

Held, the interest on bonds and notes to be issued by the Council pursuant to Title IV of the Act, including bonds and notes issued for industrial development, will be exempt from Federal income tax under section 485 of the Act notwithstanding the provisions of section 103(c) of the Code that interest on industrial development bonds is not excludable from gross income except under certain circumstances.

Held further, the interest on bonds to be issued by the Council for arbitrage purposes will not be exempt from Federal income tax since the issuance of arbitrage bonds is not one of the limited purposes provided for under the Act. However, bonds will not be considered arbitrage bonds if they would not be classified as such under section 103(d) of the Code and the regulations thereunder.