** PART II **
B. REASONABLE EXPECTATIONS.
THE DETERMINATION OF AN ENTITY'S MAXIMUM CUMULATIVE CASH FLOW DEFICIT IS BASED UPON THE ISSUER'S REASONABLE EXPECTATIONS CONCERNING CERTAIN FUTURE EVENTS. THESE FUTURE EVENTS INCLUDE INTER ALIA THE ANTICIPATED LEVEL OF REVENUES, THE EXPECTED DATE THE REVENUES WILL BE RECEIVED AND THE ANTICIPATED AMOUNT AND TIMING OF EXPENDITURES. THE REGULATIONS DO NOT SPECIFICALLY ADDRESS WHAT MAKES AN EXPECTATION "REASONABLE." NEVERTHELESS, IT IS CLEAR THAT TO BE "REASONABLE" AN EXPECTATION MUST HAVE SOME DEMONSTRABLE BASIS IN REALITY. THIS WOULD APPEAR TO REQUIRE THAT A PROJECTION HAVE SOME SUPPORTING BASIS IN HISTORICAL FACT. CONVERSELY, IT WOULD APPEAR THAT A PROJECTION WHICH WAS NOT CONSISTENT WITH HISTORICAL DATA WOULD NEED TO BE JUSTIFIED BY A CREDIBLE SHOWING OF CHANGED CIRCUMSTANCES.
TO SOME EXTENT THE REGULATIONS ALLOW AN ISSUER TO ESTABLISH ITS REASONABLE EXPECTATIONS THROUGH AN "ARBITRAGE CERTIFICATE." AN ARBITRAGE CERTIFICATE MUST BE EXECUTED BY AN OFFICER RESPONSIBLE FOR ISSUING THE OBLIGATION AND MUST SET FORTH A BRIEF SUMMARY OF THE FACTS AND ESTIMATES ON WHICH THE ISSUER'S EXPECTATIONS ARE BASED. THE CERTIFICATE MUST ALSO STATE THAT TO THE BEST OF THE KNOWLEDGE AND BELIEVE OF THE CERTIFYING OFFICER THE ISSUER'S EXPECTATIONS ARE REASONABLE. SUBSEQUENT EVENTS WILL NOT AFFECT A PROPER CERTIFICATION. HOWEVER, IF A CERTIFICATION CONTAINS A MATERIAL MISREPRESENTATION, THE COMMISSIONER OF THE INTERNAL REVENUE SERVICE MAY DISQUALIFY THE ISSUER. TREAS.REG. S 1. 10313(A)
C. ARTIFICE OR DEVICE; OVERISSUANCE.
THE REGULATIONS CONTAIN AN ANTI-ABUSE PROVISION WHICH PROHIBITS AN ISSUER FROM EMPLOYING AN "ARTIFICE" OR "DEVICE" IN CONNECTION WITH THE ISSUANCE OF GOVERNMENTAL OBLIGATIONS. AN ARTIFICE OR DEVICE IS A TRANSACTION OR SERIES OF TRANSACTIONS THAT ATTEMPTS TO CIRCUMVENT THE ARBITRAGE RESTRICTIONS SO AS TO INCREASE THE BURDEN ON THE MARKET FOR TAX-EXEMPT OBLIGATIONS AND ENABLE THE ISSUER TO EXPLOIT THE DIFFERENCE BETWEEN TAX-EXEMPT AND TAXABLE INTEREST RATES TO GAIN A MATERIAL FINANCIAL ADVANTAGE. AN OBLIGATION ISSUED THROUGH SUCH A TRANSACTION WILL BE CONSIDERED TO BE AN ARBITRAGE BOND. TREAS.REG. 1.103-13(J).
TO ILLUSTRATE THE KINDS OF TRANSACTIONS THAT THE INTERNAL REVENUE SERVICE CONSIDERS TO BE ABUSIVE, THE REGULATIONS SET FORTH A NUMBER OF EXAMPLES. THESE EXAMPLES SPECIFICALLY INCLUDE SELLING OBLIGATIONS THAT WOULD NOT OTHERWISE BE SOLD AND SELLING MORE OBLIGATIONS THAN WOULD OTHERWISE BE NECESSARY. THUS, THE REGULATIONS SPECIFICALLY FORBID THE OVERISSUANCE OF GOVERNMENTAL OBLIGATIONS. TREAS.REG. 1.103-13(J).
THE REBATE REQUIREMENT
IN ADDITION TO THE SIZING REQUIREMENTS OUTLINED ABOVE, THE CODE GENERALLY REQUIRES ISSUERS, INCLUDING SCHOOL DISTRICTS AND COUNTIES, TO REBATE ANY ARBITRAGE EARNINGS TO THE UNITED STATES. 26 U.S.C.A. 148(F). THE AMOUNT OF REBATE PAYABLE IS THE AMOUNT EARNED FROM INVESTING THE PROCEEDS OF THE ISSUE, MINUS THE AMOUNT WHICH WOULD HAVE BEEN EARNED IF SUCH PROCEEDS HAD BEEN INVESTED AT A RATE EQUAL TO THE YIELD ON THE ISSUE. IRC 148(F). WHERE A GOVERNMENTAL ISSUER FAILS TO COMPLY WITH THE REBATE REQUIREMENT, ITS OBLIGATIONS MAY BE TREATED AS ARBITRAGE BONDS. IRC 148(F).
EXEMPTIONS FROM THE REBATE REQUIREMENT
THE CODE PROVIDES A NUMBER OF EXEMPTIONS FROM THE REBATE REQUIREMENT. AN ISSUER WILL NOT HAVE TO REBATE ARBITRAGE