WASHINGTON -- The short-term tax-exempt note market would have been hurt by a recently discovered change in tax rules if the IRS had not acted to fix the problem, market sources said yesterday.

The problem, which lawyers from Orrick, Herrington & Sutcliffe discovered last week in connection with a California note issue, occurred when the IRS dropped a cross-reference in its final original-issue discount rules that would have assured certain provisions would not apply to tax-exempt notes with maturities of less than a year.

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