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Abstract

This Note analyzes transactions involving VRDBs, to determine whether they comply with the strictures of IRC section 103(c) and, hence, qualify for the tax exemption. Initially, this Note provides an overview of the tax-exempt bond market by examining the factors that led to the development of VRDBs. It then demonstrates how a reasonable interpretation of the language of IRC section 103(c), gleaned from its legislative history and Treasury promulgations, requires that almost all VRDBs lose their tax-exempt status. More specifically, this Note concludes that the inability to calculate the yield for VRDBs creates an impermissible potential to earn arbitrage profits. Based on this conclusion, this Note suggests that it is incumbent upon the Treasury Department to issue regulations that will limit the tax exemption for transactions involving VRDBs. Finally, this Note proposes measures that delineate the proper scope of the tax exemption for VRDBs and incorporates them in a model Treasury Regulation.

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