Court Opinion

ID: 4472708
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:34:52.046792+00
Date Added: 2024-06-11T11:51:20.373711
License: Public Domain

HALPERN, J., concurring: I agree with the majority’s opinion except in one respect, the majority’s reliance on tracing the bond proceeds into the Gic’s. I am not convinced that the statute (sec. 148(f)) contemplates tracing, and I would rely on a different rationale, viz, that the issuer (the housing authority) itself invested in the Gic’s. The key to the majority’s analysis concerning section 148(f) is in the following paragraph: The Whitewater and Ironwood GIC’s were acquired with the gross proceeds of the Whitewater and Ironwood bond issues, respectively. These proceeds were first placed in developer loan fund accounts and then transferred to Unified. Unified then transferred most of these proceeds to the MCFC entities, which, in turn, used them to purchase the GIC’s. Following the flow of funds on February 20, 1986, it is clear that $16,110,817.98 of Whitewater bond proceeds and $11,047,408.05 of Ironwood bond proceeds were expended to acquire the GIC’s. The governmental purpose for the issuance of the Whitewater and Ironwood bonds was the construction of low- and moderate-income multifamily housing projects. The GIC’s were not acquired to carry out this governmental purpose. Accordingly, the GIC’s constituted nonpurpose investments within the meaning of section 148(f)(6)(A). [Majority op. pp. 277-278.] Petitioners attempt to rebut the majority’s conclusion about the Gic’s by (1) conceding that, yes, the bond proceeds are traceable into the Gic’s, but (2) arguing that the Gic’s were an unauthorized investment. In effect, petitioners’ argument is that, whatever in fact happened to the bond proceeds, the housing authority did not do it: some other guys (thieves!) did it. Id. p. 278. The majority makes plain that, to the majority, it does not matter who invested the bond proceeds in the Gic’s, so long as someone (anyone) invested the bond proceeds in the Gic’s: While the Housing Authority did not directly purchase the GIC’s and, presumably, did not intend that the bond proceeds be used to purchase the GIC’s, the GIC’s were in fact purchased with the proceeds of the bonds and committed to provide funds for the repayment of principal and interest on the bonds rather than for the governmental purpose of constructing multifamily housing. Thus, the GIC’s fall within the statutory definition of nonpurpose investments. [Id.] Section 148(f)(6)(A) defines the term “nonpurpose investment”. The operative provision, however, is section 148(f)(2)(A), which provides that the rebatable excess of an arbitrage bond is determined by starting with “the amount earned on all nonpurpose investments”. An important question, of course, is: investment by whom? The majority’s analysis implicitly leads to the conclusion that, if A lends bond proceeds to B, who lends them to C, who makes an investment of the bond proceeds that, in A’s hands, would be a nonpurpose investment, the bonds issued by A can be arbitrage bonds under section 148(f). A’s balance sheet, however, shows only B’s obligation, and the only investment made by A is in a loan to B. The majority’s analysis, in effect, attributes C’s use of the bond proceeds to A. Generally, unless there is some special arrangement between the parties to a loan, we would not attribute the actions of the borrower to the lender. If A lends money to B, who, without any instruction from A, buys drugs with the money, we do not attribute the drugs to A. A pertinent regulation is section 1.103-13(f)(1), Income Tax Regs.,1 which provides: In general. A State or local governmental unit shall allocate the cost of its acquired obligations to the unspent proceeds of each issue of governmental obligations issued by such unit. * * * [Emphasis added.] The majority fails to state who it thinks is making the nonpurpose investments in the Gic’s. If it is any person other than the housing authority, then the majority fails adequately to emphasize and justify its tracing rationale. I would not attempt to justify a tracing rationale. I think that, on the facts of this case, we can find that the housing authority made nonpurpose investments. I would do so as follows. The financing plan was that the housing authority would lend the bond proceeds to the developers and, in consideration thereof, receive the developer notes and the benefit of the letters of credit. The letters of credit were to be secured by the Gic’s. Indeed, the expectation was that the letters of credit would be the exclusive source of repayment to the housing authority (and on the bonds). The first paragraph of the first page of the secondary offering statement of the Ironwood bond issue states in part: The Bonds are secured by, and are paid solely from, a direct pay Letter of Credit issued by Mercantile Capital Finance Corporation No. 30 (the “Credit Institution”) to secure and provide the source of repayment of the principal of, and interest on, a loan to be made to the Developer to finance the Development (as hereinafter defined) with respect to which the bonds are issued. The sole source of payment of the Letter of Credit is a guaranteed investment contract . . . described herein, the payments on which are to be made to the First National Bank of Commerce, New Orleans, Louisiana, as collateral agent (the “Collateral Agent”). The secondary offering statement for the Whitewater bonds is identical except that Mercantile Capital Finance Corp. (mcfc) No. 47 is substituted for mcfc No. 30. The letters of credit (secured by the guaranteed investment contracts) were, thus, in substance, if not in form, investment property held by the housing authority. I say that for the following reasons: the letters of credit were to be the source of funds to discharge the housing authority’s nominal obligation to repay the bonds. The developer notes were of no economic consequence to the housing authority (or to the bondholders). Neither the housing authority nor the bondholders necessarily cared whether the developer notes were paid. Indeed, it is difficult to see how, if the deal had gone as planned, the developers could have paid off both the developer notes and the reimbursement notes (issued to pay for the letters of credit). Based on that rationale, I would say that the letters of credit were acquired by the housing authority and were not acquired in order to carry out the governmental purpose of the issue. Accordingly, the letters of credit constitute nonpurpose investments within the meaning of section 148(f)(6)(A). My analysis does not turn on the diversion of the bond proceeds from the contemplated purposes of the bond issues. Thus, it should answer the criticism of Judge Jacobs as to the reasonable expectations of the housing authority officials on February 20, 1986, the date on which the majority finds (and Judge Jacobs agrees) the bonds were issued. As of that date, apparently, the “black [boxes]” referred to by Judge Jacobs (Jacobs, J., dissenting op. note 4) had been designed, as integral parts of the bond financings, and were known to (or should have been known to) the housing authority.   The parties agree that sec. 1.103-13(f), Income Tax Regs. (1979), is the appropriate regulation governing the allocation of investments to bond proceeds in the case of the bonds in issue.