A Rose by Any other Color. Municipal Bond Interest Can Be Taxable

Under IRC § 103(b)(2), interest which would otherwise be excluded from gross income under IRC § 103(a) is instead subject to federal income taxation if the obligation is classified as an arbitrage bond. Arbitrage bonds are one of several exceptions to the federal income tax exemption for interest on obligations issued by governmental entities. These bonds are obligations that are reasonably expected to be used to acquire obligations that yield "materially higher" returns than the original obligation during the original obligation's term of issue. 

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