Opinion ID: 410333
Heading Depth: 3
Heading Rank: 1

Heading: Discount.

Text: 17 The State and the Tax Court present the better construction of the statutory term. Yield has a common and accepted meaning: it is the economic return on a debt instrument. THE AMERICAN COLLEGE DICTIONARY 1415 (1962); 1 S. LEVINE, FINANCIAL ANALYST'S HANDBOOK 339 (1975); G. MUNN & F. GARCIA, ENCYCLOPEDIA OF BANKING AND FINANCE 948 (7th ed. 1972). The Treasury regulation that defines the term yield accepts this common meaning by defining it to be the rate which, when used in computing the present worth of all payments of principal and interest to be paid on the obligation, produces an amount equal to the purchase price. Treas.Reg. Sec. 1.103-13(c)(1) (1978). Yield therefore changes whenever a different purchase price is paid. But whenever a bond is sold--from state to underwriter or from underwriter to public--a different purchase price is paid, and a different yield must result. Yield can be consistently determined only by using the purchase prices in the transactions to which the State was a party--the purchase price paid to the State for its bonds and the purchase price paid by the State for the U.S. Treasury certificates. It is the State that borrows money, and it is the State that buys Treasury certificates; only the State can earn arbitrage profits, and only the State can eliminate those profits by restricting the yield of its investment. By interpreting the relevant purchase prices to be those in the transactions to which the State was a party, the Tax Court used the same parameter in calculating the permissible yield, and thus applied one (not two) interpretation(s) of the statutory term. 18 The Commissioner's argument--that the relevant purchase price of the State's issuance is the one paid by the public--makes sense only if the price at which an underwriter resells the bonds to the public can be attributed to the State. If attribution is possible, then the effective price would not be a discounted one and the effective yield to the State would be higher. But attribution is not possible in this case: The proposed bond sale is to be undertaken pursuant to sealed bids, the purchaser will be the one making the best offer, and the purchaser will have no continuing obligation to the State. The important incidents of ownership--especially the risk that the value of the bonds may rise or fall--shifts to the underwriter, and the discount on par is a genuine reduction in the purchase price. Thus, the discount should be taken into account in computing the rate that makes the present worth of the future principal and interest payments equal to that purchase price. 19 The most natural reading of the statute supports the Tax Court's and the State's interpretation. To begin with, the statute expressly contemplates that discounts should be taken into account in calculating yield. 12 Congress specifically provided that arbitrage bonds would exist only if the proceeds available from the sale of the bonds were invested in taxable obligations with a yield materially higher than the yield on the bonds themselves, taking into account any discount incurred. 26 U.S.C. Sec. 103(c)(2)(A) (1976). Congress' specific reference to discount was consistent with a substantial body of case law and published IRS rulings that existed when Section 103 was enacted. See, e.g., United States v. Midland-Ross Corp., 381 U.S. 54, 57, 85 S.Ct. 1308, 1310, 14 L.Ed.2d 214 (1967) ([D]iscount serves the same function as stated interest    ; it is simply 'compensation for the use or forebearance of money.' ); Rev.Rul. 60-210, 1960-1 C.B. 38 (discount at which bonds and similar obligations were issued constitutes compensation    and, hence, was the equivalent for Federal income tax purposes) (emphasis in original). Congress was genuinely attempting to compare the cost to the state of issuing debt with the actual return to the state on the debt it purchases, and therefore specifically stated that discount should be taken into account. See Helvering v. Union Pacific R. Co., 293 U.S. 282, 283, 286, 55 S.Ct. 165, 166, 167, 79 L.Ed. 363 (1934). Second, the statute uses the term yield both for bonds issued by the State and for securities acquired by the State. The key denominators in the statute are the purchase prices in transactions to which the State was a party; the determination of whether the State will make arbitrage profits can be comfortably made only by using these purchase prices. The Commissioner encourages the awkward construction that would require the State to compute yield by reference to two transactions, one in which the State is a party, and one in which it is not. 20