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Rutgers Municipal Capital And Trust Fund Accounting Practice Test

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IRS policy allows tax-exempt interest for municipal bonds intended for public purposes and not to permit exemption when bonds are issued primarily to reinvest to exploit the spread.
Correct Answer:
True
Explanation:
Tax-exempt status for municipal bonds hinges on serving a legitimate public purpose and avoiding private use or arbitrage profit. When bonds fund a true public project, the interest can be exempt. But if the primary motive is to reinvest bond proceeds to exploit the yield spread and earn arbitrage, that undermines the public-use requirement and triggers rules that deny the exemption (often accompanied by rebate requirements). So the statement reflects the IRS stance: tax-exempt interest is allowed for public-purpose bonds, and exemption should not be granted when the primary aim is arbitrage exploitation.

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