SECTION 2. BACKGROUND

1. Section 103(a) of the Internal Revenue Code of 1986 provides that, except as provided in section 103(b), gross income does not include interest on any state or local bond.

2. Section 103(b) provides that the exclusion described in section 103(a) does not apply to any arbitrage bond.

3. Section 148(a) provides that an arbitrage bond is any bond issued as part

(1) to acquire higher yielding invest ments, or (2) to replace funds which were used

2002–19 I.R.B. 916 May 13, 2002

the issue is not later than the end of the applicable temporary period under § 1.148–2(e)(3)(i) or § 1.148–2(e)(3)(ii) for which proceeds of the issue qualify. This revenue procedure does not apply to determine whether an issue of tax or revenue anticipation bonds meets the other requirements of section 148.