Opinion for the Court filed by Circuit Judge ROBINSON.
Dissenting opinion filed by Senior Circuit Judge WRIGHT.
The City of Tucson, Arizona, challenges a regulation of the Department of the Treasury on the ground of incompatibility with the statutory proscription it purports to implement. The regulation1 provides that sinking funds established by state and local governments for payment of principal or interest on their bonds are subject to the yield restriction imposed by Section 103(c) of the Internal Revenue Code.2 Each security in an issue covered by that section is classified as an “arbitrage bond,” the interest on which does not enjoy any tax-exempt status as a municipal obligation. The United States Tax Court upheld the regulation.3
We find that neither the statutory text nor the legislative scheme sustains the Department’s interpretation of Section 103(c). *1285We therefore reverse the Tax Court’s decision and set aside the questioned regulation.
I
Section 103(a)(1) of the Internal Revenue Code confers a general exclusion of interest on municipal bonds from gross income for purposes of federal taxation.4 This concession has created a separate financial market in which state and local governments can borrow at interest rates significantly below those featured by taxable obligations.5 While the interest differential undoubtedly is integral to a congressional effort to enhance governmental capacity to finance public works,6 it has also afforded to issuers of municipal bonds an opportunity to pursue purely monetary goals at the expense of the animating legislative policy. The exclusion has enabled state and local governments to market their bonds at low rates of interest and use the proceeds to purchase taxable securities providing comparatively higher yields. Instead of providing funds for public improvements, municipal bond issues thus could be used simply to gamer profits from the disparity in interest rates. Serving in this fashion as entrepreneurial vehicles for governmental issuers, municipal securities functioned as arbitrage bonds, in derogation of the legislative intent.7
Responsively to the prevalence of this practice, Congress enacted, as part of the Tax Reform Act of 1969, a provision denying tax exclusion of interest on municipal bond issues the proceeds of which expect-ably would produce arbitrage profits.8 Codified as Section 103(c)(2) of the Internal Revenue Code, that provision expressly defines a non-exempt “arbitrage bond” as
any obligation which is issued as part of an issue all or a major portion of the proceeds of which are reasonably expected to be used directly or indirectly—
(A) to acquire securities ... or obligations ... which may be reasonably expected at the time of issuance of such issue, to produce a yield over the term of the issue which is materially higher ... than the yield on obligations of such issue, or
(B) to replace funds which were used directly or indirectly to acquire securities or obligations described in subparagraph (A).9
While not designed to cover all transactions in which municipal issues could serve to some extent as investment conduits,10 Section 103(c)(2) does curtail the most pervasive and serious abuses by effecting a “mechanical test”11 for identification of municipal securities actually functioning as arbitrage bonds.12
*1286The focal point of the case at bar is a regulation by the Department of the Treasury 13 purportedly pursuant to its authority to “prescribe such regulations as may be necessary to carry out the purposes of [Section 103(c) ].”14 That regulation undertakes to implement the statutory provision classifying as arbitrage bonds state or local issues producing proceeds “all or a major portion of” which “are reasonably expected to be used directly or indirectly ... to replace funds which were used directly or indirectly to acquire” instruments offering a materially higher yield.15 The regulation specifies that amounts held in sinking funds to be used to pay principal or interest on municipal bonds are to be deemed “proceeds of the issue.” 16 Accordingly, investment of such funds in higher-yielding securities pending the occasion to discharge principal and interest on the bonds issued would transform them into nonexempt arbitrage bonds.
The validity of this regulation is the sole question on appeal. The City of Tucson issued four series of general obligation bonds, and proposed to issue a fifth, to finance various public works in obedience to the mandate of a special bond referendum.17 The proceeds of each issue have been and would be expended solely for public improvements,18 and principal and *1287interest on the first, third, and fifth series would be paid from a common sinking fund.19 As required by state law, the City levies annually an ad valorem property tax, from which payments are made annually into the sinking fund.20 The City candidly acknowledges, however, an intent to invest the tax revenues placed in the sinking fund in higher-yielding securities until needed for debt service on its own issues,21 and therein lies the problem. The regulation implicated here, while in terms inapplicable to the already-issued first and third series, would subject to Section 103(c)’s yield restriction all proceeds from future issues utilizing the sinking fund.22 For this reason, the City petitioned the Tax Court for a judgment declaring the regulation invalid as an impermissible extension of the arbitrage-bond provision of Section 103(c),23 and from the Tax Court’s decision upholding the sinking fund regulation the City took this appeal.24
II
The standard governing our review of the regulation under attack is well established. A treasury regulation commands significant judicial deference as a construction of a statute by the authority entrusted with its administration,25 especially when, as here, the statute so construed itself contains an express grant of rulemaking power.26 The regulation must *1288be sustained if it “implement[s] the congressional mandate in some reasonable manner;”27 it may be nullified only if “unreasonable and plainly inconsistent” with that mandate.28
We emphasize, however, that these principles, while providing impetus for judicial validation of disputed regulations, do not give the Treasury Department carte blanche in interpreting the tax laws. As the Supreme Court has put it, the Department sets “the framework for judicial analysis; it does not displace it,”29 and when we “can measure the Commissioner’s interpretation against a specific provision of the Code, we owe the interpretation less deference” than it would otherwise command.30 Courts routinely have subjected administrative regulations to close scrutiny on review, annulling those that are incompatible with the underlying statute or otherwise unreasonable, including those attempting to “enlarge the scope of the statute.” 31 Mindful of these prescriptions, we turn to the issue presented.
Ill A.
The Department’s sinking fund regulation incorporates an expansive reading of the statutory replacement theory it supposedly implements. Under Section 103(c)(2)(B), a municipal bond issue forfeits its tax exclusion if the issuer uses all or a major portion of the proceeds therefrom to “replace” funds used earlier to acquire higher-yielding securities.32 Prototypically, a replacement occurs when the issuer places in an investment fund monies that otherwise would be dedicated to a discrete public use, and then channels the proceeds of its bond issue into the void created by the diversion. Section 103(c)(2)(B) endeavors to eliminate this thinly veiled method of circumventing the prohibition on arbitrage. The regulation here assailed, however, reshapes the statutory command and extends it far beyond these contours. It theorizes that proceeds of a municipal bond issue, in whatever manner actually used, “replace” monies, from whatever source derived, deposited in a sinking fund that will be used to pay principal or interest on the bonds.33 The question whether this formulation is faithful to the replacement concept embodied in Section 103(c)(2)(B) is the crux of this case.
Courts attribute to nontechnical statutory words their “known and ordinary signification.” 34 This longstanding guide to *1289statutory construction assumes special stature with respect to revenue laws in general35 and Section 103(c) in particular,36 and we find it dispositive here.37 As ordinarily used and comprehended, “replace” is equated with such expressions “to take the place of,” “to serve as a substitute for or successor of,” and “to supplant.”38 The sinking fund regulation simply cannot be reconciled with these common understandings of “replace.” By totally ignoring the origin of the sinking fund revenues through subsequent taxation and the uses to which the bond proceeds are to be put, the Treasury Department has severed all connection between the regulation and the precondition to operation of the statute— that the proceeds be used to take the place of, to substitute for, to succeed, to supplant, or, in the language of the statute, to “replace” monies deposited into the sinking fund.39
This construction of “replace” is bolstered by use of the past tense in the replacement formula in Section 103(c)(2)(B) —“to replace funds which were used directly or indirectly to acquire securities” offering materially higher yields.40 Congress limited its language to funds already invested in higher-interest obligations that are subsequently recouped through a bond issue.
The disassociation of the statute from the regulation becomes all the more evident when we look once again to the facts of this case. As we have noted, the monies comprising the City’s sinking fund are derived, as required by state law, from ad valorem property taxes levied for the sole purpose of defraying debt service on outstanding bond issues.41 In its effort to justify application of the arbitrage rule of the statute in these circumstances, the Department argues that proceeds of the City’s bond issues “replace” tax revenues yet to be raised, and which might never be *1290raised but for the bond issues.42 This unrealistic position serves only to confirm our conclusion that the regulation is predicated upon a notion of replacement unrecognizable in the statute.
Persuaded by this analysis that the disputed regulation stretches the language of Section 103(c)(2)(B) beyond the breaking point, we cannot sustain it as an authorized implementation thereof.43 In our view, the Treasury Department has sought to sculpt a straight-forward statutory provision aimed at transactions in which bond proceeds replace funds previously invested in higher-yielding securities into a regulatory proscription encompassing financial arrangements for retirement of the bond issue by after-acquired funds temporarily so invested. In so doing, the Department has forged, not a reasonable implementation of the legislative mandate, but rather an impermissible enlargement by an unnatural construction of the statutory language.
B.
Our holding is fortified by consideration of the far-reaching consequences potentially attending the Department’s approach to Section 103(c)(2)(B). Although the regulation by its terms applies only to bond issues to be serviced by “amounts held in a sinking fund,”44 the statutory interpretation upon which it rests is not so confined. Imbedded in the regulation is the thought that a replacement occurs each time municipal bonds issue, simply by virtue of the obligation and mechanics of repayment.45 Unless debt service is contractually confined to availability of earmarked funds, the issuer’s general revenues will constitute the source from which payments of principal and interest will be made. The statutory theory advanced by the Department to rationalize the role that the regulation assigns to sinking funds contains at least the rudiments of a tentacular approach barring — with respect at least to issues not to be retired exclusively by funds set aside and designated for that purpose — investments of general revenues as a derogation of Section 103(c)(2)(B). We think the wide swath such an approach threatens to cut into municipal investment alternatives underscores the incongruity between the sinking fund regulation and the statutory restriction. Indeed, since we have held that Section 103(c) does not encompass all transactions in which a municipal bond issue serves as an investment conduit,46 the section cannot reasonably be construed to impose such a widescale embargo on the financial practices of state and local governments.
Seeking to parry this logic, the Department insists 47 that the regulation applies, not to revenues merely available to retire debt, but only to funds the issuer “reasonably expects to use ... to pay principal or *1291interest on the issue.”48 We do not agree, however, that this limitation inheres in the theory animating the regulation. The Department itself has endorsed the proposition that funds which plainly are not bond proceeds may, at least in some circumstances, be subject to Section 103(c)’s restriction even if not reasonably expected to be used for debt service.49 The Department has indicated its willingness to apply the restriction to funds thus used “indirectly” though not actually to retire bond debt,50 as well as to transactions deemed “an artifice or device” in circumvention of Section 103(c),51 thus further rebutting any idea of adherence to a reasonable-expectation standard. We note, too, that occasionally the Department has articulated an alternative standard in holding that funds are subject to the statutory limitation when invested in securities bearing a “nexus or sufficiently direct relationship” with the bond issue.52
Instead of disproving the claim that its replacement concept augurs widescale intrusion into the financial policies of state and local governments, the Department’s disparate practices have accentuated our concerns on that score. It is but a small step from the broad positions already advanced to the stance that availability of funds to pay principal and interest on municipal bonds, without more, renders the statutory limitation applicable thereto. For instance, the Department, in a treasury regulation, opines that a reserve fund not designed for debt service on a municipal issue nevertheless is to be governed by Section 103(c) if the fund is pledged as collateral.53 Although the Department has declined to push this reasoning beyond the facts hypothesized,54 an unsurprising outgrowth of the Department’s thinking could well be a wielding of the statutory prohibition against general revenues simply because of their availability to pay principal or interest, especially when, as commonly occurs,55 they are “pledged” as collateral for the issue. Surely the Department’s idea of “arbitrage” — any pecuniary benefit whatsoever from exploitation of the interest differential56 — is broad enough to sanction that doctrinal extension. Under a scheme of this sort, mere use of available monies to purchase higher-yielding securities, rather than to discharge principal or interest indebtedness on the bond issue, might easily be characterized as an enlistment of the differential, and hence as arbitrage.
Accordingly, the Department’s protestations to the contrary notwithstanding, *1292we are persuaded that the replacement theory spawning the challenged regulation portends a sphere of operation for Section 103(c) surpassing regulation of sinking funds expectably to provide debt service on bond issues, and extends potentially to investment of an issuer’s general revenues pending maturity of outstanding obligations. That neither the terms nor the legislative antecedents of Section 103(c) reveal a congressional purpose to hold general municipal revenues hostage to its restriction buttresses our conclusion that the Department entertains a notion of replacement significantly at odds with the underlying statutory precept.
Finally, we note that the Department’s interpretational technique not only inflates Section 103(c) beyond its intended configuration, but also casts an administrative role for the Department disproportionate to the congressional design. Early drafts of that section envisioned a wholesale delegation to the Department of power to define “arbitrage bond,” but Congress plainly abjured that route by substituting a “mechanical” test in conjunction with a narrower grant of rulemaking power to the Department.57 By an idiosyncratic construction of Section 103(c), however, the Department has undertaken to expand its authority in a manner that would largely reinstate the defunct legislative approach. In accepting the natural and ordinary meaning of the statutory language as the most reliable indication of its intended effect, our decision also restores regulatory equanimity in this area.
IV
With all due regard for the Treasury Department’s pivotal role as administrator of the revenue laws, and as well its considerable expertise in the field of taxation, we hold that the challenged regulation exceeds the Department’s delegated power to implement Section 103(c)(2)(B). The regulation attributes to the statutory word “replace” an unnatural and unreasonably broad interpretation, and thereby enlarges both the section’s coverage and the Department’s administrative authority beyond the boundaries contemplated by Congress. Accordingly, we reverse the order of the Tax Court and remand the case for proceedings not inconsistent with this opinion.
So ordered.