Treasury supports the objective of the bill to deny taxexempt status to state and local bonds issued in a true arbitrage transaction.

However, Treasury recommends that the

bill be amended to provide a rule which may be easily understood and applied and which furnishes a clearer standard to be followed in the regulations. Treasury proposes that an obligation be considered an "arbitrage obligation" if, under regulations prescribed by the Secretary or his delegate the circumstances (including but not limited to the terms of the obligation, the specified purpose of the issue, the nature of the security provided for the obligation, and all other relevant facts) demonstrate that the result of the issuance is the realization of an arbitrage profit from reinvestment of the proceeds in higher yield securities other than governmental obligations to which section 103(a) of the Code applies. The provision, however, should contain explicit authority

for the regulations to treat temporary investment of the proceeds of an issue in higher yield securities as not constituting an arbitrage transaction where substantially all of the proceeds of the issue are used within a specified period for other purposes, such as construction of new government

facilities. Similarly, authority should be given to provide that obligations issued to refund obligations then outstanding which are not themselves arbitrage obligations will not be arbitrage obligations if the refunding is completed within a stated period.

Further, explicit authority should be given to exclude from the definition of an arbitrage obligation any obligation the proceeds of which are used to provide permanent financing (mortgage funds) for family housing, sports facilities, or other exempt activities specified in section 103(c) of the Code. No limit is placed in the Code on the issuance of tax-exempt bonds to construct governmental facilities which may in fact produce a profit from operation. The same considerations justifying the blanket exemptions from industrial revenue bond treatment apply with respect to funds used to provide mortgage financing for the construction of such facilities. The exception should only be available if the yield received on such mortgage obligations does not substantially exceed the interest yield on the obligations of the state or local government. Further, a limitation should

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be included making the exception inapplicable with respect

to such obligations of the state or local government for any

period for which they are held by the mortgagor (see, for

example, section 103 (c) (7) of the Code).

1. Definition of a Certified Pollution Control Facility

The House bill provides for five-year amortization of the cost of a "new identifiable treatment facility" construction of which is completed after December 31, 1968, or which is acquired after that date. There is no differentiation between pollution control facilities which are added to existing plants and those which are incorporated into new plants constructed after that date. In general, the cost of modifying an existing installation for pollution control is greatly in excess of the cost of incorporating such facilities into new construction. The impact of pollution control laws

will thus be more severe on existing plants where the need for such devices is the greatest. A special incentive for installation of pollution control facilities in new plants constructed in the future subject to pollution control laws

seems unnecessary.

Treasury recommends that the benefits of this provision

be limited to pollution control facilities added after December 31, 1968, to plants which were in actual operation on that date. In addition, the definition should be further limited so as to exclude any facility which serves any function other than pollution control.

The intent of this provision of the bill, as shown by the Committee report, is to assist those industries which add pollution control devices to correct or reduce pollution now being released directly in the course of manufacturing operations. It has been suggested that the bill could be construed to extend this rapid amortization privilege to primary fuel processors, such as an oil refinery, which add facilities to remove pollutants from fuels sold to customers. The bill should be clarified to limit the provision solely to installations which prevent or minimize the direct release of pollutants into the air or water in the course of manufacturing operations and to exclude any facilities which tend to remove from fuel certain elements which upon burning would cause pollutants to be released.