WASHINGTON The Treasury did not intend its revised arbitrage rules to prohibit borrowers from using the proceeds of tax-exempt small-issue industrial development bonds to repay temporary construction loans, a department official said yesterday.

"We believe that the regulations should not interfere with the issuance of tax-exempt small issue bonds to refinance interim taxable borrowings," wrote Glen Kohl, Treasury's tax legislative counsel, in a letter to Nell Arkuss.

Arkuss, a lawyer at Palmer & Dodge in Boston and president of the National Association of Bond Lawyers, had asked Treasury officials to formally clarify their position on the issue after it arose in connection with a financing.

The Georgia Housing and Finance Authority had planned to issue $5 million to $10 million of industrial development bonds for several projects, including the expansion of two manufacturing facilities.

Authority officials had hoped that, once they adopted an inducement resolution announcing their intent to issue the bonds, the owners of the facilities could obtain short-term taxable loans to begin construction and the loans could later be repaid from the bond proceeds.

But the authority's bond counsel, lawyers with the firm of Troutman Sanders in Atlanta, were concerned that, under the revised arbitrage rules, the repayment of the loan would make the bonds taxable.

The problem occurred, according to bond lawyers, because the revised rules had defined refundings to cover taxable as well as tax-exempt financings.

In addition, Treasury and IRS offiCials had dropped a provision in the rules that said that when issuers adopted inducement resolutions to issue bonds, borrowers could begin construction with temporary taxable loans and could repay those loans with bond proceeds.

Some bond lawyers thought the glitch had been fixed in technical corrections to the arbitrage rules. But others Believed the problem remained and was preventing them from rendering unqualified opinions that bonds would be tax-exempt if loans were repaid with bond proceeds.

But Kohl, in his letter to Arkuss, made clear that bond lawyers should not worry further about this issue because Treasury did not intend to create such a problem.

Arkuss said in an interview yesterday that he was pleased with the letter.

"We're delighted with their speedy response and their substantive answer to our questions," he said, adding "I hope that-this resolves the issue."

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