WASHINGTON -- An overlooked tax law problem is creating heartburn for the market for tax-exempt notes with maturities over one year, the money market funds holding the notes and the bond firms and lawyers that put together the note offering statements.

The problem arose when a lot of market participants only recently discovered that the Internal Revenue Service's original issue discount and market discount rules cover tax-exempt notes with maturities of more than a year that do not pay interest at least annually -- even if the notes are sold at a premium.

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