§ 145. Qualified 501(c)(3) bond

Legislative history

Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.

1. 1986

   Tax Reform Act of 1986

   Pub. L. 99–514 title XIII § 1301(b) · 100 Stat. 2085

   Enacted · 26 U.S.C. § 145

   Added Pub. L. 99–514, title XIII, § 1301(b), Oct. 22, 1986, 100 Stat. 2629

   Source evidence

   Code source credit
   Added Pub. L. 99–514, title XIII, § 1301(b), Oct. 22, 1986, 100 Stat. 2629

   Enacted provision · exact public law section
   (b) Tax Exemption Requirements for State and Local Bonds.— Part IV of subchapter B of chapter 1 (relating to determination of marital status) is amended to read as follows: “PART IV— TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS “Subpart A. Private activity bonds. “Subpart B. Requirements applicable to all State and local bonds. “Subpart C. Definitions and special rules. “Subpart A— Private Activity Bonds “Sec. 141. Private activity bond; qualified bond. “Sec. 142. Exempt facility bond. “Sec. 143. Mortgage revenue bonds: qualified mortgage and qualified veterans’ mortgage bond. “Sec. 144. Qualified small issue bond; qualified student loan bond; qualified redevelopment bond. “Sec. 145. Qualified 501(c)(3) bond. “Sec. 146. Volume cap “Sec. 147. Other requirements applicable to certain private activity bonds “SEC. 141. PRIVATE ACTIVITY BOND; QUALIFIED BOND. “(a) Private Activity Bond.— For purposes of this title, the term ‘private activity bond’ means any bond issued as part of an issue— “(1) which meets— “(A) the private business use test of paragraph (1) of subsection (b), and “(B) the private security or payment test of paragraph (2) of subsection (b), or “(2) which meets the private loan financing test of subsection (c). “(b) Private Business Tests.— “(1) Private business use test.— Except as otherwise provided in this subsection, an issue meets the test of this paragraph if more than 10 percent of the proceeds of the issue are to be used for any private business use. “(2) Private security or payment test.— Except as otherwise provided in this subsection, an issue meets the test of this paragraph if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly— “(A) secured by any interest in— “(i) property used or to be used for a private business use, or “(ii) payments in respect of such property, or “(B) to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use. “(3) 5 percent test for private business use not related o. disproportionate to government use financed by the issue.— “(A) In general.— An issue shall be treated as meeting the tests of paragraphs (1) and (2) if such tests would be met if such paragraphs were applied— “(i) by substituting ‘5 percent’ for TO percent’ each place it appears, and “(ii) by taking into account only— “(I) the proceeds of the issue which are to be used for any private business use which is not related to any government use of such proceeds, “(II) the disproportionate related business use proceeds of the issue, and “(III) payments, property, and borrowed money with respect to any use of proceeds described in subclause (I) or (II). “(B) Disproportionate related business use proceeds.— For purposes of subparagraph (A), the disproportionate related business use proceeds of an issue is an amount equal to the aggregate of the excesses (determined under the following sentence) for each private business use of the proceeds of an issue which is related to a government use of such proceeds. The excess determined under this sentence is the excess of— “(i) the proceeds of the issue which are to be used for the private business use, over “(ii) the proceeds of the issue which are to be used for the government use to which such private business use relates. “(4) Lower limitation for certain output facilities.— An issue 5 percent or more of the proceeds of which are to be used with respect to any output facility (other than a facility for the furnishing of water) shall be treated as meeting the tests of paragraphs (1) and (2) if the nonqualified amount with respect to such issue exceeds the excess of— “(A) $15,000,000, over “(B) the aggregate nonqualified amounts with respect to all prior tax-exempt issues 5 percent or more of the proceeds of which are or will be used with respect to such facility (or any other facility which is part of the same project). There shall not be taken into account under subparagraph (B) any bond which is not outstanding at the time of the later issue or which is to be redeemed (other than in an advance refunding) from the net proceeds of the later issue. “(5) Coordination with volume cap where nonqualified amount exceeds $15,000,000.— If the nonqualified amount with respect to an issue— “(A) exceeds $15,000,000, but “(B) does not exceed the amount which would cause bond which is part of such issue to be treated as a private activity bond without regard to this paragraph, such bond shall nonetheless be treated as a private activity bond unless the issuer allocates a portion of its volume cap under section 146 to such issue in an amount equal to the excess of such nonqualified amount over $15,000,000. “(6) Private business use defined.— “(A) In general.— For purposes of this subsection, the term ‘private business use’ means use (directly or indirectly) in a trade or business carried on by any person other than a governmental unit. For purposes of the preceding sentence, use as a member of the general public shall not be taken into account. “(B) Clarification of trade or business.— For purposes of the 1st sentence of subparagraph (A), any activity carried on by a person other than a natural person shall be treated as a trade or business. “(7) Government use.— The term ‘government use’ means any use other than a private business use. “(8) Nonqualified amount.— For purposes of this subsection, the term ‘nonqualified amount’ means, with respect to an issue, the lesser of— “(A) the proceeds of such issue which are to be used for any private business use, or “(B) the proceeds of such issue with respect to which there are payments (or property or borrowed money) described in paragraph (2). “(9) Exception for qualified 501(c)(3) bonds.— There shall not be taken into account under this subsection or subsection (c) the portion of the proceeds of an issue which (if issued as a separate issue) would be treated as a qualified 501(c)(3) bond if the issuer elects to treat such portion as a qualified 501(c)(3) bond. “(c) Private Loan Financing Test.— “(1) In general.— An issue meets the test of this subsection if the amount of the proceeds of the issue which are to be used (directly or indirectly) to make or finance loans (other than loans described in paragraph (2)) to persons other than governmental units exceeds the lesser of— “(A) 5 percent of such proceeds, or “(B) $5,000,000. “(2) Exception for tax assessment, etc., loans.— For purposes of paragraph (1), a loan is described in this paragraph if such loan— “(A) enables the borrower to finance any governmental tax or assessment of general application for a specific essential governmental function, or “(B) is a nonpurpose investment (within the meaning of section 148(f)(6)(A)). “(d) Qualified Bond.— For purposes of this part, the term ‘qualified bond’ means any private activity bond if— “(1) In general.— Such bond is— “(A) an exempt facility bond, “(B) a qualified mortgage bond, “(C) a qualified veterans’ mortgage bond. “(D) a qualified small issue bond, “(E) a qualified student loan bond, “(F) a qualified redevelopment bond, or “(G) a qualified 501(c)(3) bond. “(2) Volume cap.— Such bond is issued as part of an issue which meets the applicable requirements of section 146, and “(3) Other requirements.— Such bond meets the applicable requirements of each subsection of section 147. “SEC. 112. EXEMPT FACILITY BOND. “(a) General Rule.— For purposes of this part, the term ‘exempt facility bond’ means any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide— “(1) airports, “(2) docks and wharves, “(3) mass commuting facilities, “(4) facilities for the furnishing of water, “(5) sewage facilities, “(6) solid waste disposal facilities, “(7) qualified residential rental projects, “(8) facilities for the local furnishing of electric energy or gas, “(9) local district heating or cooling facilities, or “(10) qualified hazardous waste facilities. “(b) Special Exempt Facility Bond Rules.— For purposes of subsection (a)— “(1) Certain facilities must be governmentally owned.— “(A) In general.— A facility shall be treated as described in paragraph (1), (2), or (3) of subsection (a) only if all of the property to be financed by the net proceeds of the issue is to be owned by a governmental unit. “(B) Safe harbor for leases and management contracts.— For purposes of subparagraph (A), property leased by a governmental unit shall be treated as owned by such governmental unit if— “(i) the lessee makes an irrevocable election (binding on the lessee and all successors in interest under the lease) not to claim depreciation or an investment credit with respect to such property, “(ii) the lease term (as defined in 168(i)(3)) is not more than 80 percent of the reasonably expected economic life of the property (as determined under section 147(b)), and “(iii) the lessee has no option to purchase the property other than at fair market value (as of the time such option is exercised). Rules similar to the rules of the preceding sentence shall apply to management contracts and similar types of operating agreements. “(2) Limitation on office space.— An office shall not be treated as described in a paragraph of subsection (a) unless— “(A) the office is located on the premises of a facility described in such a paragraph, and “(B) not more than a de minimis amount of the functions to be performed at such office is not directly related to the day-to-day operations at such facility. “(c) Airports, Docks and Wharves, and Mass Commuting Facilities.— For purposes of subsection (a)— “(1) Storage and training facilities.— Storage or training facilities directly related to a facility described in paragraph (1), (2), or (3) of subsection (a) shall be treated as described in the paragraph in which such facility is described. “(2) Exception for certain private facilities.— Property shall not be treated as described in paragraph (1), (2), or (3) of subsection (a) if such property is described in any of the follow-ing subparagraphs and is to be used for any private business use (as defined in section 141(b)(6)). “(A) Any lodging facility. “(B) Any retail facility (including food and beverage facilities) in excess of a size necessary to serve passengers and employees at the exempt facility. “(C) Any retail facility (other than parking) for passengers or the genera] public located outside the exempt facility terminal. “(D) Any office building for individuals who are not employees of a governmental unit or of the operating authority for the exempt facility. “(E) Any industrial park or manufacturing facility. “(d) Qualified Residential Rental Project.— For purposes of this section— “(1) In general.— The term ‘qualified residential rental project’ means any project for residential rental property if, at all times during the qualified project period, such project meets the requirements of subparagraph (A) or (B), whichever is elected by the issuer at the time of the issuance of the issue with respect to such project: “(A) 20–50 test.— The project meets the requirements of this subparagraph if 20 percent or more of the residential units in such project are occupied by individuals whose income is 50 percent or less of area median gross income. “(B) 40–60 test.— The project meets the requirements of this subparagraph if 40 percent or more of the residential units in such project are occupied by individuals whose income is 60 percent or less of area median gross income. For purposes of this paragraph, any property shall not be treated as failing to be residential rental property merely because part of the building in which such property is located is used for purposes other than residential rental purposes. “(2) Definitions and special rules.— For purposes of this subsection— “(A) Qualified project period.— The term ‘qualified project period’ means the period beginning on the 1st day on which 10 percent of the residential units in the project are occupied and ending on the latest of— “(i) the date which is 15 years after the date on which 50 percent of the residential units in the project are occupied, “(ii) the 1st day on which no tax-exempt private activity bond issued with respect to the project is outstanding, or “(iii) the date on which any assistance provided with respect to the project under section 8 of the United States Housing Act of 1937 terminates. “(B) Income of individuals; area median gross income.— The income of individuals and area median gross income shall be determined by the Secretary in a manner consistent with determinations of lower income families and area median gross income under section 8 of the United States Housing Act of 1937 (or, if such program is terminated, under such program as in effect immediately before such termination). Determinations under the preceding sentence shall include adjustments for family size. “(3) Current income determinations.— For purposes of this subsection— “(A) In general.— The determination of whether the income of a resident of a unit in a project exceeds the applicable income limit shall be made at least annually on the basis of the current income of the resident. “(B) Continuing resident’s income may increase above the applicable limit.— If the income of a resident of a unit in a project did not exceed the applicable income limit upon commencement of such resident’s occupancy of such unit (or as of any prior determination under subparagraph (A)), the income of such resident shall be treated as continuing to not exceed the applicable income limit. The preceding sentence shall cease to apply to any resident whose income as of the most recent determination under subparagraph (A) exceeds 140 percent of the applicable income limit if after such determination, but before the next determination, any residential unit of comparable or smaller size in the same project is occupied by a new resident whose income exceeds the applicable income limit. “(4) Special rule in case of deep rent skewing.— “(A) In general.— In the case of any project described in subparagraph (B), the 2d sentence of subparagraph (B) of paragraph (3) shall be applied by substituting— “(i) ‘170 percent’ for ‘140 percent’, and “(ii) ‘any low-income unit in the same project is occupied by a new resident whose income exceeds 40 percent of area median gross income’ for ‘any residential unit of comparable or smaller size in the same project is occupied by a new resident whose income exceeds the applicable income limit’. “(B) Deep rent skewed project.— A project is described in this subparagraph if the owner of the project elects to have this paragraph apply and, at all times during the qualified project period, such project meets the requirements of clauses (i), (ii), and (iii): “(i) The project meets the requirements of this clause if 15 percent or more of the low-income units in the project are occupied by individuals whose income is 40 percent or less of area median gross income. “(ii) The project meets the requirements of this clause if the gross rent with respect to each low-income unit in the project does not exceed 30 percent of the applicable income limit which applies to individuals occupying the unit. “(iii) The project meets the requirements of this clause if the gross rent with respect to each low-income unit in the project does not exceed ¥3 of the average rent with respect to units of comparable size which are not occupied by individuals who meet the applicable income limit. “(C) Definitions applicable to subparagraph (b).— For purposes of subparagraph (B)— “(i) Low-income unit.— The term ‘low-income unit’ means any unit which is required to be occupied by individuals who meet the applicable income limit. “(ii) Gross rent.— The term ‘gross rent’ includes— “(I) any payment under section 8 of the United States Housing Act of 1937, and “(II) any utility allowance determined by the Secretary after taking into account such determinations under such section 8. “(5) Applicable income limit.— For purposes of paragraphs (3) and (4), the term ‘applicable income limit’ means— “(A) the limitation under subparagraph (A) or (B) of paragraph (1) which applies to the project, or “(B) in the case of a unit to which paragraph (4)(B)(i) applies, the limitation which applies to such unit. “(6) Special rule for certain high cost housing area.— In the case of a project located in a city having 5 boroughs and a population in excess of 5,000,000, subparagraph (B) of paragraph (1) shall be applied by substituting ‘25 percent’ for ‘40 percent’. “(7) Certification to secretary.— The operator of any project with respect to which an election was made under this subsection shall submit to the Secretary (at such time and in such manner as the Secretary shall prescribe) an annual certification as to whether such project continues to meet the requirements of this subsection. Any failure to comply with the provisions of the preceding sentence shall not affect the tax-exempt status of any bond but shall subject the operator to penalty, as provided in section 6652(j). “(e) Facilities for the Furnishing of Water.— For purposes of subsection (a)(4), the term ‘facilities for the furnishing of water’ means any facility for the furnishing of water if— “(1) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users), and “(2) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. “(f) Local Furnishing of Electric Energy or Gas.— For purposes of subsection (a)(8), the local furnishing of electric energy or gas from a facility shall only include furnishing solely within the area consisting of— “(1) a city and 1 contiguous county, or “(2) 2 contiguous counties. “(g) Local District Heating or Cooling Facility.— “(1) In general.— For purposes of subsection (a)(9), the term ‘local district heating or cooling facility’ means property used as an integral part of a local district heating or cooling system. “(2) Local district heating or cooling system.— “(A) In general.— For purposes of paragraph (1), the term ‘local district heating or cooling system’ means any local system consisting of a pipeline or network (which may be connected to a heating or cooling source) providing hot water, chilled water, or steam to 2 or more users for— “(i) residential, commercial, or industrial heating or cooling, or “(ii) process steam. “(B) Local system.— For purposes of this paragraph, a local system includes facilities furnishing heating and cooling to an area consisting of a city and 1 contiguous county. “(h) Qualified Hazardous Waste Facilities.— For purposes of subsection (a)(10), the term ‘qualified hazardous waste facility’ means any facility for the disposal of hazardous waste by incineration or entombment but only if— “(1) the facility is subject to final permit requirements under subtitle C of title II of the Solid Waste Disposal Act (as in effect on the date of the enactment of the Tax Reform Act of 1986), and “(2) the portion of such facility which is to be provided by the issue does not exceed the portion of the facility which is to be used by persons other than— “(A) the owner or operator of such facility, and “(B) any related person (within the meaning of section 144(a)(3)) to such owner or operator. “SEC. 143. MORTGAGE REVENUE BONDS: QUALIFIED MORTGAGE BOND AND QUALIFIED VETERANS’ MORTGAGE BOND. “(a) Qualified Mortgage Bond.— “(1) Qualified mortgage bond defined.— “(A) In general.— For purposes of this title, the term ‘qualified mortgage bond’ means a bond which is issued as part of a qualified mortgage issue. “(B) Termination on December 31, 1988.— No bond issued after December 31, 1988, may be treated as a qualified mortgage bond. “(2) Qualified mortgage issue defined.— “(A) Definition.— For purposes of this title, the term ‘qualified mortgage issue’ means an issue by a State or political subdivision thereof of 1 or more bonds, but only if— “(i) all proceeds of such issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences, “(ii) such issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), and (i), and “(iii) no bond which is part of such issue meets the private business tests of paragraphs (1) and (2) of section 141(b). “(B) Good faith effort to comply with mortgage eligibility requirements.— An issue which fails to meet 1 or more of the requirements of subsections (c), (d), (e), (f), and (i) shall be treated as meeting such requirements if— “(i) the issuer in good faith attempted to meet all such requirements before the mortgages were executed, “(ii) 95 percent or more of the proceeds devoted to owner-financing was devoted to residences with respect to which (at the time the mortgages were executed) all such requirements were met, and “(iii) any failure to meet the requirements of such subsections is corrected within a reasonable period after such failure is first discovered. “(C) Good faith effort to comply with other requirements.— An issue which fails to meet 1 or more of the requirements of subsections (g) and (h) shall be treated as meeting such requirements if— “(i) the issuer in good faith attempted to meet all such requirements, and “(ii) any failure to meet such requirements is due to inadvertent error after taking reasonable steps to comply with such requirements. “(b) Qualified Veterans’ Mortgage Bond Defined.— For purposes of this part, the term ‘qualified veterans’ mortgage bond’ means any bond— “(1) which is issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide residences for veterans, “(2) the payment of the principal and interest on which is secured by the general obligation of a State, “(3) which is part of an issue which meets the requirements of subsections (c), (g), (i)(1), and (l), and “(4) which does not meet the private business tests of paragraphs (1) and (2) of section 141(b). Rules similar to the rules of subparagraphs (B) and (C) of subsection (a)(2) shall apply to the requirements specified in paragraph (3) of this subsection. “(c) Residence Requirements.— “(1) For a residence.— A residence meets the requirements of this subsection only if— “(A) it is a single-family residence which can reasonably be expected to become the principal residence of the mortgagor within a reasonable time after the financing is provided, and “(B) it is located within the jurisdiction of the authority issuing the bond. “(2) For an issue.— An issue meets the requirements of this subsection only if all of the residences for which owner-financing is provided under the issue meet the requirements of paragraph (1). “(d) 3-Year Requirement.— “(1) In general.— An issue meets the requirements of this subsection only if 95 percent or more of the net proceeds of such issue are used to finance the residences of mortgagors who had no present ownership interest in their principal residences at any time during the 3-year period ending on the date their mortgage is executed. “(2) Exceptions.— For purposes of paragraph (1), the proceeds of an issue which are used to provide— “(A) financing with respect to targeted area residences, and “(B) qualified home improvement loans and qualified rehabilitation loans, shall be treated as used as described in paragraph (1). “(3) Mortgagor’s interest in residence being financed.— For purposes of paragraph (1), a mortgagor’s interest in the residence with respect to which the financing is being provided shall not be taken into account. “(e) Purchase Price Requirement.— “(1) In general.— An issue meets the requirements of this subsection only if the acquisition cost of each residence the owner-financing of which is provided under the issue does not exceed 90 percent of the average area purchase price applicable to such residence. “(2) Average area purchase price.— For purposes of paragraph (1), the term ‘average area purchase price’ means, with respect to any residence, the average purchase price of single family residences (in the statistical area in which the residence is located) which were purchased during the most recent 12-month period for which sufficient statistical information is available. The determination under the preceding sentence shall be made as of the date on which the commitment to provide the financing is made (or, if earlier, the date of the purchase of the residence). “(3) Separate application to new residences and old residences.— For purposes of this subsection, the determination of average area purchase price shall be made separately with respect to— “(A) residences which have not been previously occupied, and “(B) residences which have been previously occupied, “(4) Special rule for 2 to 4 family residences.— For purposes of this subsection, to the extent provided in regulations, the determination of average area purchase price shall be made separately with respect to 1 family, 2 family, 3 family, and 4 family residences. “(5) Special rule for targeted area residences.— In the case of a targeted area residence, paragraph (1) shall be applied by substituting ‘110 percent’ for ‘90 percent’. “(6) Exception for qualified home improvement loans.— Paragraph (1) shall not apply with respect to any qualified home improvement loan. “(f) Income Requirements.— “(1) In general.— An issue meets the requirements of this subsection only if all owner-financing provided under the issue is provided for mortgagors whose family income is 115 percent or less of the applicable median family income. “(2) Determination of family income.— For purposes of this subsection, the family income of mortgagors, and area median gross income, shall be determined by the Secretary after taking into account the regulations prescribed under section 8 of the United States Housing Act of 1937 (or, if such program is terminated, under such program as in effect immediately before such termination). “(3) Special rule for applying paragraph (i) in the case of targeted area residences.— In the case of any financing provided under any issue for targeted area residences— “(A) ⅓ of the amount of such financing may be provided without regard to paragraph (1), and “(B) paragraph (1) shall be treated as satisfied with respect to the remainder of the owner financing if the family income of the mortgagor is 140 percent or less of the applicable median family income. “(4) Applicable median family income.— For purposes of this subsection, the term ‘applicable median family income’ means, with respect to a residence, whichever of the following is the greater: “(A) the area median gross income for the area in which such residence is located, or “(B) the statewide median gross income for the State in which such residence is located. “(g) Requirements Related to Arbitrage.— “(1) In general.— An issue meets the requirements of this subsection only if such issue meets the requirements of paragraphs (2) and (3) of this subsection. Such requirements shall be in addition to the requirements of section 148 (other than subsection (f) thereof). “(2) Effective rate of mortgage interest cannot exceed bond yield by more than 1.125 percentage points.— “(A) In general.— An issue shall be treated as meeting the requirements of this paragraph only if the excess of— “(i) the effective rate of interest on the mortgages provided under the issue, over “(ii) the yield on the issue, is not greater than 1.125 percentage points. “(B) Effective rate of mortgage interest.— “(i) In general.— In determining the effective rate of interest on any mortgage for purposes of this paragraph, there shall be taken into account all fees, charges, and other amounts home by the mortgagor which are attributable to the mortgage or to the bond issue. “(ii) Specification of some of the amounts to be treated as borne by the mortgagor.— For purposes of clause (i), the following items (among others) shall be treated as borne by the mortgagor: “(I) all points or similar charges paid by the seller of the property, and “(II) the excess of the amounts received from any person other than the mortgagor by any person in connection with the acquisition of the mortgagor’s interest in the property over the usual and reasonable acquisition costs of a person acquiring like property where owner-financing is not provided through the use of qualified mortgage bonds or qualified veterans’ mortgage bonds. “(iii) Specification of some of the amounts to be treated as not borne by the mortgagor.— For purposes of clause (i), the following items shall not be taken into account: “(I) any expected rebate of arbitrage profits, and “(II) any application fee, survey fee, credit report fee, insurance charge, or similar amount to the extent such amount does not exceed amounts charged in such area in cases where owner-financing is not provided through the use of qualified mortgage bonds or qualified veterans’ mortgage bonds. Subclause (II) shall not apply to origination fees, points, or similar amounts. “(iv) Prepayment assumptions.— In determining the effective rate of interest— “(I) it shall be assumed that the mortgage prepayment rate will be the rate set forth in the most recent applicable mortgage maturity experi-ence table published by the Federal Housing Administration, and “(II) prepayments of principal shall be treated as received on the last day of the month in which the issuer reasonably expects to receive such prepayments. “(C) Yield on the issue.— For purposes of this subsection, the yield on an issue shall be determined on the basis of— “(i) the issue price (within the meaning of sections 1273 and 1274), and “(ii) an expected maturity for the bonds which is consistent with the assumptions required under subparagraph (B)(iv). “(3) Arbitrage and investment gains to be used to reduce costs of owner-financing.— “(A) In general.— An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of— “(i) the excess of— “(I) the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this clause), over “(II) the amount which would have been earned if such investments were invested at a rate equal to the yield on the issue, plus “(ii) any income attributable to the excess described in clause (i), is paid or credited to the mortgagors as rapidly as may be practicable. “(B) Investment gains and losses.— For purposes of subparagraph (A), in determining the amount earned on all nonpurpose investments, any gain or loss on the disposition of such investments shall be taken into account. “(C) Reduction where issuer does not use full 1.125 percentage points under paragraph (2).— “(i) In general.— The amount required to be paid or credited to mortgagors under subparagraph (A) (determined under this paragraph without regard to this subparagraph) shall be reduced by the unused paragraph (2) amount. “(ii) Unused paragraph (2) amount.— For purposes of clause (i), the unused paragraph (2) amount is the amount which (if it were treated as an interest payment made by mortgagors) would result in the excess referred to in paragraph (2)(A) being equal to 1.125 percentage points. Such amount shall be fixed and determined as of the yield determination date. “(D) Election to pay united states.— Subparagraph (A) shall be satisfied with respect to any issue if the issuer elects before issuing the bonds to pay over to the United States— “(i) not less frequently than once each 5 years after the date of issue, an amount equal to 90 percent of the aggregate amount which would be required to be paid or credited to mortgagors under subparagraph (A) (and not theretofore paid to the United States), and “(ii) not later than 60 days after the redemption of the last bond, 100 percent of such aggregate amount not theretofore paid to the United States. “(E) Simplified accounting.— The Secretary shall permit any simplified system of accounting for purposes of this paragraph which the issuer establishes to the satisfaction of the Secretary will assure that the purposes of this paragraph are carried out. “(F) Nonpurpose investment.— For purposes of this paragraph, the term ‘nonpurpose investment’ has the meaning given such term by section 148(f)(6)(A). “(h) Portion of Loans Required To Be Placed in Targeted Areas.— “(1) In general.— An issue meets the requirements of this subsection only if at least 20 percent of the proceeds of the issue which are devoted to providing owner-financing is made available (with reasonable diligence) for owner-financing of targeted area residences for at least 1 year after the date on which owner-financing is first made available with respect to targeted area residences. “(2) Limitation.— Nothing in paragraph (1) shall be treated as requiring the making available of an amount which exceeds 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences located in targeted areas within the jurisdiction of the issuing authority. “(i) Other Requirements.— “(1) Mortgages must be new mortgages.— “(A) In general.— An issue meets the requirements of this subsection only if no part of the proceeds of such issue is used to acquire or replace existing mortgages. “(B) Exceptions.— Under regulations prescribed by the Secretary, the replacement of— “(i) construction period loans, “(ii) bridge loans or similar temporary initial financing, and “(iii) in the case of a qualified rehabilitation, an existing mortgage, shall not be treated as the acquisition or replacement of an existing mortgage for purposes of subparagraph (A). “(2) Certain requirements must be met where mortgage is assumed.— An issue meets the requirements of this subsection only if each mortgage with respect to which owner-financing has been provided under such issue may be assumed only if the requirements of subsections (c), (d), and (e), and the requirements of paragraph (1) or (3)(B) of subsection (f) (whichever applies), are met with respect to such assumption. “(j) Targeted Area Residences.— “(1) In general.— For purposes of this section, the term ‘targeted area residence’ means a residence in an area which is either— “(A) a qualified census tract, or “(B) an area of chronic economic distress. “(2) Qualified census tract.— “(A) In general.— For purposes of paragraph (1), the term ‘qualified census tract’ means a census tract in which 70 percent or more of the families have income which is 80 percent or less of the statewide median family income. “(B) Data used.— The determination under subparagraph (A) shall be made on the basis of the most recent decennial census for which data are available. “(3) Area of chronic economic distress.— “(A) In general.— For purposes of paragraph (1), the term ‘area of chronic economic distress’ means an area of chronic economic distress— “(i) designated by the State as meeting the standards established by the State for purposes of this subsection, and “(ii) the designation of which has been approved by the Secretary and the Secretary of Housing and Urban Development. “(B) Criteria to be used in approving state designations.— The criteria used by the Secretary and the Secretary of Housing and Urban Development in evaluating any proposed designation of an area for purposes of this subsection shall be— “(i) the condition of the housing stock, including the age of the housing and the number of abandoned and substandard residential units, “(ii) the need of area residents for owner-financing under this section, as indicated by low per capita income, a high percentage of families in poverty, a high number of welfare recipients, and high unemployment rates, “(iii) the potential for use of owner-financing under this section to improve housing conditions in the area, and “(iv) the existence of a housing assistance plan which provides a displacement program and a public improvements and services program. “(k) Other Definitions and Special Rules.— For purposes of this section— “(1) Mortgage.— The term ‘mortgage’ means any owner-financing. “(2) Statistical area.— “(A) In general.— The term ‘statistical area’ means— “(i) a metropolitan statistical area, and “(ii) any county (or the portion thereof which is not within a metropolitan statistical area. “(B) Metropolitan statistical area.— The term ‘metropolitan statistical area’ includes the area defined as such by the Secretary of Commerce. “(C) Designation where adequate statistical information not available.— For purposes of this paragraph, if there is insufficient recent statistical information with respect to a county (or portion thereof described in subparagraph (A)(ii), the Secretary may substitute for such county (or portion thereof another area for which there is sufficient recent statistical information. “(D) Designation where no county.— In the case of any portion of a State which is not within a county, subparagraphs (A)(ii) and (C) shall be applied by substituting for ‘county’ an area designated by the Secretary which is the equivalent of a county. “(3) Acquisition cost.— “(A) In general.— The term ‘acquisition cost’ means the cost of acquiring the residence as a completed residential unit. “(B) Exceptions.— The term ‘acquisition cost’ does not include— “(i) usual and reasonable settlement or financing costs, “(ii) the value of services performed by the mortgagor or members of his family in completing the residence, and “(iii) the cost of land which has been owned by the mortgagor for at least 2 years before the date on which construction of the residence begins. “(C) Special rule for qualified rehabilitation loans.— In the case of a qualified rehabilitation loan, for purposes of subsection (e), the term ‘acquisition cost’ includes the cost of the rehabilitation. “(4) Qualified home improvement loan.— The term ‘qualified home improvement loan’ means the financing (in an amount which does not exceed $15,000)— “(A) of alterations, repairs, and improvements on or in connection with an existing residence by the owner thereof, but “(B) only of such items as substantially protect or improve the basic livability or energy efficiency of the property. “(5) Qualified rehabilitation loan.— “(A) In general.— The term ‘qualified rehabilitation loan’ means any owner-financing provided in connection with— “(i) a qualified rehabilitation, or “(ii) the acquisition of a residence with respect to which there has been a qualified rehabilitation, but only if the mortgagor to whom such financing is provided is the first resident of the residence after the completion of the rehabilitation. “(B) Qualified rehabilitation.— For purposes of subparagraph (A), the term ‘qualified rehabilitation’ means any rehabilitation of a building if— “(i) there is a period of at least 20 years between the date on which the building was first used and the date on which the physical work on such rehabilitation begins, “(ii) in the rehabilitation process— “(I) 50 percent or more of the existing external walls of such building are retained in place as external walls, “(II) 75 percent or more of the existing external walls of such building are retained in place as internal or external walls, and “(III) 75 percent or more of the existing internal structural framework of such building is retained in place, and “(iii) the expenditures for such rehabilitation are 25 percent or more of the mortgagor’s adjusted basis in the residence. For purposes of clause (iii), the mortgagor’s adjusted basis shall be determined as of the completion of the rehabilitation or, if later, the date on which the mortgagor acquires the residence. “(6) Determinations on actuarial basis.— All determinations of yield, effective interest rates, and amounts required to be paid or credited to mortgagors or paid to the United States under subsection (g) shall be made on an actuarial basis taking into account the present value of money. “(7) Single-family and owner-occupied residences include certain residences with 2 to 4 units.— Except for purposes of subsection (h)(2), the terms ‘single-family’ and ‘owner-occupied’, when used with respect to residences, include 2, 3, or 4 family residences— “(A) one unit of which is occupied by the owner of the units, and “(B) which were first occupied at least 5 years before the mortgage is executed. “(8) Cooperative housing corporations.— “(A) In general.— In the case of any cooperative housing corporation— “(i) each dwelling unit shall be treated as if it were actually owned by the person entitled to occupy such dwelling unit by reason of his ownership of stock in the corporation, and “(ii) any indebtedness of the corporation allocable to the dwelling unit shall be treated as if it were indebtedness of the shareholder entitled to occupy the dwelling unit. “(B) Adjustment to targeted area requirement.— In the case of any issue to provide financing to a cooperative housing corporation with respect to cooperative housing not located in a targeted area, to the extent provided in regulations, such issue may be combined with 1 or more other issues for purposes of determining whether the requirements of subsection (h) are met. “(C) Cooperative housing corporation.— The term ‘cooperative housing corporation’ has the meaning given to such term by section 216(b)(1). “(9) Treatment of limited equity cooperative housing.— “(A) Treatment as residential rental property.— Except as provided in subparagraph (B), for purposes of this part— “(i) any limited equity cooperative housing shall be treated as residential rental property and not as owner-occupied housing, and “(ii) bonds issued to provide such housing shall be subject to the same requirements and limitations as bonds the proceeds of which are to be used to provide qualified residential rental projects (as defined in section 142(d)). “(B) Bonds subject to qualified mortgage bond termination date.— Subparagraph (A) shall not apply to any bond issued after the date specified in subsection (a)(1)(B). “(C) Limited equity cooperative housing.— For purposes of this paragraph, the term ‘limited equity cooperative housing’ means any dwelling unit which a person is entitled to occupy by reason of his ownership of stock in a qualified cooperative housing corporation. “(D) Qualified cooperative housing corporation.— For purposes of this paragraph, the term ‘qualified cooperative housing corporation’ means any cooperative housing corporation (as defined in section 216(b)(1)) if— “(i) the consideration paid for stock held by any stockholder entitled to occupy any house or apartment in a building owned or leased by the corporation may not exceed the sum of— “(I) the consideration paid for such stock by the first such stockholder, as adjusted by a cost-of-living adjustment determined by the Secretary, “(II) payments made by any stockholder for improvements to such house or apartment, and “(III) payments (other than amounts taken into account under subclause (I) or (II) attributable to any stockholder to amortize the principal of the corporation’s indebtedness arising from the acquisition or development of real property, including improvements thereof, “(ii) the value of the corporation’s assets (reduced by any corporate liabilities), to the extent such value exceeds the combined transfer values of the outstanding corporate stock, shall be used only for public benefit or charitable purposes, or directly to benefit the corporation itself, and shall not be used directly to benefit any stockholder, and “(iii) at the time of issuance of the issue, such corporation makes an election under this paragraph. “(E) Effect of election.— If a cooperative housing corporation makes an election under this paragraph, section 216 shall not apply with respect to such corporation (or any successor thereof) during the qualified project period (as defined in section 142(d)(2)). “(F) Corporation must continue to be qualified cooperative.— Subparagraph (A)(i) shall not apply to limited equity cooperative housing unless the cooperative housing corporation continues to be a qualified cooperative housing corporation at all times during the qualified project period (as defined in section 142(d)(2)). “(G) Election irrevocable.— Any election under this paragraph, once made, shall be irrevocable. “(l) Additional Requirements for Qualified Veterans’ Mortgage Bonds.— An issue meets the requirements of this subsection only if it meets the requirements of paragraphs (1), (2), and (3). “(1) Veterans to whom financing may be provided.— An issue meets the requirements of this paragraph only if each mortgagor to whom financing is provided under the issue is a qualified veteran. “(2) Requirement that state program be in effect before june 22, 1984.— An issue meets the requirements of this paragraph only if it is a general obligation of a State which issued qualified veterans’ mortgage bonds before June 22, 1984. “(3) Volume limitation.— “(A) In general.— An issue meets the requirements of this paragraph only if the aggregate amount of bonds issued pursuant thereto (when added to the aggregate amount of qualified veterans’ mortgage bonds previously issued by the State during the calendar year) does not exceed the State veterans limit for such calendar year. “(B) State veterans limit.— A State veterans limit for any calendar year is the amount equal to— “(i) the aggregate amount of qualified veterans bonds issued by such State during the period beginning on January 1, 1979, and ending on June 22, 1984 (not including the amount of any qualified veterans bond issued by such State during the calendar year (or portion thereof) in such period for which the amount of such bonds so issued was the lowest), divided by “(ii) the number (not to exceed 5) of calendar years after 1979 and before 1985 during which the State issued qualified veterans bonds (determined by only taking into account bonds issued on or before June 22, 1984). “(C) Treatment of refunding issues.— “(i) In general.— For purposes of subparagraph (A), the term ‘qualified veterans’ mortgage bond’ shall not include any bond issued to refund another bond but only if the maturity date of the refunding bond is not later than the later of— “(I) the maturity date of the bond to be refunded, or “(II) the date 32 years after the date on which the refunded bond was issued (or in the case of a series of refundings, the date on which the original bond was issued). The preceding sentence shall apply only to the extent that the amount of the refunding bond does not exceed the outstanding amount of the refunded bond. “(ii) Exception for advance refunding.— Clause (i) shall not apply to any bond issued to advance refund another bond. “(4) Qualified veteran.— For purposes of this subsection, the term ‘qualified veteran’ means any veteran— “(A) who served on active duty at some time before January 1, 1977, and “(B) who applied for the financing before the later of— “(i) the date 30 years after the last date on which such veteran left active service, or “(ii) January 31, 1985. “(5) Special rule for certain short-term bonds.— In the case of any bond— “(A) which has a term of 1 year or less, “(B) which is authorized to be issued under O.R.S. 407.435 (as in effect on the date of the enactment of this subsection), to provide financing for property taxes, and “(C) which is redeemed at the end of such term, the amount taken into account under this subsection with respect to such bond shall be 115 of its principal amount. “SEC. 144. QUALIFIED SMALL ISSUE BOND; QUALIFIED STUDENT LOAN BOND; QUALIFIED REDEVELOPMENT BOND. “(a) Qualified Small Issue Bond.— “(1) In general.— For purposes of this part, the term ‘qualified small issue bond’ means any bond issued as part of an issue the aggregate authorized face amount of which is $1,000,000 or less and 95 percent or more of the net proceeds of which are to be used— “(A) for the acquisition, construction, reconstruction, or improvement of land or property of a character subject to the allowance for depreciation, or “(B) to redeem part or all of a prior issue which was issued for purposes described in subparagraph (A) or this subparagraph. “(2) Certain prior issues taken into account.— If— “(A) the proceeds of 2 or more issues of bonds (whether or not the issuer of each such issue is the same) are or will be used primarily with respect to facilities located in the same incorporated municipality or located in the same county (but not in any incorporated municipality), “(B) the principal user of such facilities is or will be the same person or 2 or more related persons, and “(C) but for this paragraph, paragraph (1) (or the corresponding provision of prior law) would apply to each such issue, then, for purposes of paragraph (1), in determining the aggregate face amount of any later issue there shall be taken into account the aggregate face amount of tax-exempt bonds issued under all prior such issues and outstanding at the time of such later issue (not including as outstanding any bond which is to be redeemed (other than in an advance refunding) from the net proceeds of the later issue). “(3) Related persons.— For purposes of this subsection, a person is a related person to another person if— “(A) the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), or “(B) such persons are members of the same controlled group of corporations (as defined in section 1563(a), except that ‘more than 50 percent’ shall be substituted for ‘at least 80 percent’ each place it appears therein). “(4) $10,000,000 limit in certain cases.— “(A) In general.— At the election of the issuer with respect to any issue, this subsection shall be applied— “(i) by substituting ‘$10,000,000’ for ‘$1,000,000’ in paragraph (1), and “(ii) in determining the aggregate face amount of such issue, by taking into account not only the amount described in paragraph (2), but also the aggregate amount of capital expenditures with respect to facilities described in subparagraph (B) paid or incurred during the 6-year period beginning 3 years before the date of such issue and ending 3 years after such date (and financed otherwise than out of the proceeds of outstanding tax-exempt issues to which paragraph (1) (or the corresponding provision of prior law) applied), as if the aggregate amount of such capital expenditures constituted the face amount of a prior outstanding issue described in paragraph (2). “(B) Facilities taken into account.— For purposes of subparagraph (A)(ii), the facilities described in this subparagraph are facilities— “(i) located in the same incorporated municipality or located in the same county (hut not in any incorporated municipality), and “(ii) the principal user of which is or will be the same person or 2 or more related persons. For purposes of clause (i), the determination of whether or not facilities are located in the same governmental unit shall be made as of the date of issue of the issue in question. “(C) Certain capital expenditures not taken into account.— For purposes of subparagraph (A)(ii), any capital expenditure— “(i) to replace property destroyed or damaged by fire, storm, or other casualty, to the extent of the fair market value of the property replaced, “(ii) required by a change made after the date of issue of the issue in question in a Federal or State law or local ordinance of general application or required by a change made after such date in rules and regulations of general application issued under such a law or ordinance, “(iii) required by circumstances which could not be reasonably foreseen on such date of issue or arising out of a mistake of law or fact (but the aggregate amount of expenditures not taken into account under this clause with respect to any issue shall not exceed $1,000,000), or “(iv) described in clause (i) or (ii) of section 41(b)(2)(A) for which a deduction was allowed under section 174(a), shall not be taken into account. “(D) Limitation on loss of tax exemption.— In applying subparagraph (A)(ii) with respect to capital expenditures made after the date of any issue, no bond issued as a part of such issue shall cease to be treated as a qualified small issue bond by reason of any such expenditure for any period before the date on which such expenditure is paid or incurred. “(E) Certain refinancing issues.— In the case of any issue described in paragraph (1)(B), an election may be made under subparagraph (A) of this paragraph only if all of the prior issues being redeemed are issues to which paragraph (1) (or the corresponding provision of prior law) applied. In applying subparagraph (A)(ii) with respect to such a refinancing issue, capital expenditures shall be taken into account only for purposes of determining whether the prior issues being redeemed qualified (and would have continued to qualify) under paragraph (1) (or the corresponding provision of prior law). “(F) Aggregate amount of capital expenditures where there is urban development action grant.— In the case of any issue 95 percent or more of the net proceeds of which are to be used to provide facilities with respect to which an urban development action grant has been made under section 119 of the Housing and Community Development Act of 1974, capital expenditures of not to exceed $10,000,000 shall not be taken into account for purposes of applying subparagraph (A)(ii). “(5) Issues for residential purposes.— This subsection shall not apply to any bond issued as part of an issue 5 percent or more of the net proceeds of which are to be used directly or indirectly to provide residential real property for family units. “(6) Limitations on treatment of bonds as part of the same issue.— “(A) In general.— For purposes of this subsection, separate lots of bonds which (but for this subparagraph) would be treated as part of the same issue shall be treated as separate issues unless the proceeds of such lots are to be used with respect to 2 or more facilities— “(i) which are located in more than 1 State, or “(ii) which have, or will have, as the same principal user the same person or related persons. “(B) Franchises.— For purposes of subparagraph (A), a person (other than a governmental unit) shall be considered a principal user of a facility if such person (or a group of related persons which includes such person)— “(i) guarantees, arranges, participates in, or assists with the issuance (or pays any portion of the cost of issuance) of any bond the proceeds of which are to be used to finance or refinance such facility, and “(ii) provides any property, or any franchise, trademark, or trade name (within the meaning of section 1253), which is to be used in connection with such facility. “(7) Subsection not to apply if bonds issued with certain other tax-exempt bonds.— This subsection shall not apply to any bond issued as part of an issue (other than an issue to which paragraph (4) applies) if the interest on any other bond which is part of such issue is excluded from gross income under any provision of law other than this subsection. “(8) Restrictions on financing certain facilities.— This subsection shall not apply to an issue if— “(A) more than 25 percent of the net proceeds of the issue are to be used to provide a facility the primary purpose of which is one of the following: retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment; or “(B) any portion of the proceeds of the issue is to be used to provide the following: any private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard, and ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, or racetrack. “(9) Aggregation of issues with respect to single project.— For purposes of this subsection, 2 or more issues part or all of the net proceeds of which are to be used with respect to a single building, an enclosed shopping mall, or a strip of offices, stores, or warehouses using substantial common facilities shall be treated as 1 issue (and any person who is a principal user with respect to any of such issues shall be treated as a principal user with respect to the aggregated issue). “(10) Aggregate limit per taxpayer.— “(A) In general.— This subsection shall not apply to any issue if the aggregate authorized face amount of such issue allocated to any test-period beneficiary (when increased by the outstanding tax-exempt facility-related bonds of such beneficiary) exceeds $40,000,000. “(B) Outstanding tax-exempt facility-related bonds.— “(i) In general.— For purposes of applying subparagraph (A) with respect to any issue, the outstanding tax-exempt facility-related bonds of any person who is a test-period beneficiary with respect to such issue is the aggregate amount of tax-exempt bonds referred to in clause (ii)— “(I) which are allocated to such beneficiary, and “(II) which are outstanding at the time of such later issue (not including as outstanding any bond which is to be redeemed (other than in an advance refunding) from the net proceeds of the later issue). “(ii) Bonds taken into account.— For purposes of clause (i), the bonds referred to in this clause are— “(I) exempt facility bonds, qualified small issue bonds, and qualified redevelopment bonds, and “(II) industrial development bonds (as defined in section 103(b)(2), as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) to which section 141(a) does not apply. “(C) Allocation of face amount of issue.— “(i) In general.— Except as otherwise provided in regulations, the portion of the face amount of an issue allocated to any test-period beneficiary of a facility financed by the proceeds of such issue (other than an owner of such facility) is an amount which bears the same relationship to the entire face amount of such issue as the portion of such facility used by such beneficiary bears to the entire facility. “(ii) Owners.— Except as otherwise provided in regulations, the portion of the face amount of an issue allocated to any test-period beneficiary who is an owner of a facility financed by the proceeds of such issue is an amount which bears the same relationship to the entire face amount of such issue as the portion of such facility owned by such beneficiary bears to the entire facility. “(D) Test-period beneficiary.— For purposes of this paragraph, except as provided in regulations, the term ‘test-period beneficiary’ means any person who is an owner or a principal user of facilities being financed by the issue at any time during the 3-year period beginning on the later of— “(i) the date such facilities were placed in service, or “(ii) the date of issue. “(E) Treatment of related persons.— For purposes of this paragraph, all persons who are related (within the meaning of paragraph (3)) to each other shall be treated as 1 person. “(11) Limitation on acquisition of depreciable farm property.— “(A) In general.— This subsection shall not apply to any issue if more than $250,000 of the net proceeds of such issue are to be used to provide depreciable farm property with respect to which the principal user is or will be the same person or 2 or more related persons. “(B) Depreciable farm property.— For purposes of this paragraph, the term ‘depreciable farm property’ means property of a character subject to the allowance for depreciation which is to be used in a trade or business of farming. “(C) Prior issues taken into account.— In determining the amount of proceeds of an issue to be used as described in subparagraph (A), there shall be taken into account the aggregate amount of each prior issue to which paragraph (1) (or the corresponding provisions of prior law) applied which were or will be so used. “(12) Termination dates.— “(A) In general.— This subsection shall not apply to— “(i) any bond (other than a bond described in clause (ii)) issued after December 31, 1986, or “(ii) any bond issued to refund a bond issued on or before such date unless— “(I) the refunding bond has a maturity date not later than the maturity date of the refunded bond, “(II) the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, “(III) the interest rate on the refunding bond is lower than the interest rate on the refunded bond, and “(IV) the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the refunding bond. “(B) Bonds issued to finance manufacturing facilities and farm property.— In the case of any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide— “(i) any manufacturing facility, or “(ii) any land or property in accordance with section 147(c)(2), subparagraph (A) shall be applied by substituting ‘1989’ for ‘1986’. “(C) Manufacturing facility.— For purposes of this paragraph, the term ‘manufacturing facility’ means any facility which is used in the manufacturing or production of tangible personal property (including the processing resulting in a change in the condition of such property). A rule similar to the rule of section 142(b)(2) shall apply for purposes of the preceding sentence. “(b) Qualified Student Loan Bond.— For purposes of this part— “(1) In general.— The term ‘qualified student loan bond’ means any bond issued as part of an issue the applicable percentage or more of the net proceeds of which are to be used directly or indirectly to make or finance student loans under— “(A) a program of general application to which the Higher Education Act of 1965 applies if— “(i) limitations are imposed under the program on— “(I) the maximum amount of loans outstanding to any student, and “(II) the maximum rate of interest payable on any loan, “(ii) the loans are directly or indirectly guaranteed by the Federal Government, “(iii) the financing of loans under the program is not limited by Federal law to the proceeds of tax-exempt bonds, and “(iv) special allowance payments under section 438 of the Higher Education Act of 1965— “(I) are authorized to be paid with respect to loans made under the program, or “(II) would be authorized to be made with respect to loans under the program if such loans were not financed with the proceeds of tax-exempt bonds, or “(B) a program of general application approved by the State to which part B of title IV of the Higher Education Act of 1965 (relating to guaranteed student loans) does not apply if no loan under such program exceeds the difference between the total cost of attendance and other forms of student assistance (not including loans pursuant to section 428B(a)(1) of such Act (relating to parent loans) or subpart I of part C of title VII of the Public Health Service Act (relating to student assistance)) for which the student borrower may be eligible. A bond issued as part of an issue shall be treated as a qualified student loan bond only if no bond which is part of such issue meets the private business tests of paragraphs (1) and (2) of section 141(b). “(2) Applicable percentage.— For purposes of paragraph (1), the term ‘applicable percentage’ means— “(A) 90 percent in the case of the program described in paragraph (1)(A), and “(B) 95 percent in the case of the program described in paragraph (1)(B). “(3) Student borrowers must be residents of issuing state, etc.— A student loan shall be treated as being made or financed under a program described in paragraph (1) with respect to an issue only if the student is— “(A) a resident of the State from which the volume cap under section 146 for such loan was derived, or “(B) enrolled at an educational institution located in such State. “(4) Discrimination on basis of school location not permitted.— A program shall not be treated as described in paragraph (1)(A) if such program discriminates on the basis of the location (in the United States) of the educational institution in which the student is enrolled. “(c) Qualified Redevelopment Bond.— For purposes of this part— “(1) In general.— The term ‘qualified redevelopment bond’ means any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used for 1 or more redevelopment purposes in any designated blighted area. “(2) Additional requirements.— A bond shall not be treated as a qualified redevelopment bond unless— “(A) the issue described in paragraph (1) is issued pursuant to— “(i) a State law which authorizes the issuance of such bonds for redevelopment purposes in blighted areas, and “(ii) a redevelopment plan which is adopted before such issuance by the governing body described in paragraph (4)(A) with respect to the designated blighted area, “(B) (i) the payment of the principal and interest on such issue is primarily secured by taxes of general applicability imposed by a general purpose governmental unit, or “(ii) any increase in real property tax revenues (attributable to increases in assessed value) by reason of the carrying out of such purposes in such area is reserved exclusively for debt service on such issue (and similar issues) to the extent such increase does not exceed such debt service, “(C) each interest in real property located in such area— “(i) which is acquired by a governmental unit with the proceeds of the issue, and “(ii) which is transferred to a person other than a governmental unit, is transferred for fair market value, “(D) the financed area with respect to such issue meets the no additional charge requirements of paragraph (5), and “(E) the use of the proceeds of the issue meets the requirements of paragraph (6). “(3) Redevelopment purposes.— For purposes of paragraph (1)— “(A) In general.— The term ‘redevelopment purposes’ means, with respect to any designated blighted area— “(i) the acquisition (by a governmental unit having the power to exercise eminent domain) of real property located in such area, “(ii) the clearing and preparation for redevelopment of land in such area which was acquired by such governmental unit, “(iii) the rehabilitation of real property located in such area which was acquired by such governmental unit, and “(iv) the relocation of occupants of such real property. “(B) New construction not permitted.— The term ‘redevelopment purposes’ does not include the construction (other than the rehabilitation) of any property or the enlargement of an existing building. “(4) Designated blighted area.— For purposes of this subsection— “(A) In general.— The term ‘designated blighted area’ means any blighted area designated by the governing body of a local general purpose governmental unit in the jurisdiction of which such area is located. “(B) Blighted area.— The term ‘blighted area’ means any area which the governing body described in subpara-graph (A) determines to be a blighted area on the basis of the substantial presence of factors such as excessive vacant land on which structures were previously located, abandoned or vacant buildings, substandard structures, vacancies, and delinquencies in payment of real property taxes. “(C) Designated areas may not exceed 20 percent of total assessed value of real property in government’s Jurisdiction.— “(i) In general.— An area may be designated by a governmental unit as a blighted area only if the designation percentage with respect to such area, when added to the designation percentages of all other designated blighted areas within the jurisdiction of such governmental unit, does not exceed 20 percent. “(ii) Designation percentage.— For purposes of this subparagraph, the term ‘designation percentage’ means, with respect to any area, the percentage (determined at the time such area is designated) which the assessed value of real property located in such area is of the total assessed value of all real property located within the jurisdiction of the governmental unit which designated such area. “(iii) Exception where bonds not outstanding.— The designation percentage of a previously designated blighted area shall not be taken into account under clause (i) if no qualified redevelopment bond (or similar bond) is or will be outstanding with respect to such area. “(D) Minimum designated area.— “(i) In general.— Except as provided in clause (ii), an area shall not be treated as a designated blighted area for purposes of this subsection unless such area is contiguous and compact and its area equals or exceeds 100 acres. “(ii) 10-acre minimum in certain cases.— Clause (i) shall be applied by substituting ‘10 acres’ for ‘100 acres’ if not more than 25 percent of the financed area is to be provided (pursuant to the issue and all other such issues) to 1 person. For purposes of the preceding sentence, all related persons (as defined in subsection (a)(3)) shall be treated as 1 person. For purposes of this clause, an area provided to a developer on a short-term interim basis shall not be treated as provided to such developer. “(5) No additional charge requirements.— The financed area with respect to any issue meets the requirements of this paragraph if, while any bond which is part of such issue is outstanding— “(A) no owner or user of property located in the financed area is subject to a charge or fee which similarly situated owners or users of comparable property located outside such area are not subject, and “(B) the assessment method or rate of real property taxes with respect to property located in the financed area does not differ from the assessment method or rate of real property taxes with respect to comparable property located outside such area. For purposes of the preceding sentence, the term ‘comparable property’ means property which is of the same type as the property to which it is being compared and which is located within the jurisdiction of the designating governmental unit. “(6) Use of proceeds requirements.— The use of the proceeds of an issue meets the requirements of this paragraph if— “(A) not more than 25 percent of the net proceeds of such issue are to be used to provide (including the provision of land for) facilities described in subsection (a)(8) or section 147(e), and “(B) no portion of the proceeds of such issue is to be used to provide (including the provision of land for) any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. “(7) Financed area.— For purposes of this subsection, the term ‘financed area’ means, with respect to any issue, the portion of the designated blighted area with respect to which the proceeds of such issue are to be used. “(8) Restriction on acquisition of land not to apply.— Section 147(c) (other than paragraphs (1)(B) and (2) thereof) shall not apply to any qualified redevelopment bond. “SEC. 145. QUALIFIED 501(c)(3) BOND. “(a) In General.— For purposes of this part, except as otherwise provided in this section, the term ‘qualified 501(c)(3) bond’ means any private activity bond issued as part of an issue if— “(1) all property which is to be provided by the net proceeds of the issue is to be owned by a 501(c)(3) organization or a governmental unit, and “(2) such bond would not be a private activity bond if— “(A) 501(c)(3) organizations were treated as governmental units with respect to their activities which do not constitute unrelated trades or businesses, determined by applying section 513(a), and “(B) paragraphs (1) and (2) of section 141(b) were applied by substituting ‘5 percent’ for ‘10 percent’ each place it appears and by substituting ‘net proceeds’ for ‘proceeds’ each place it appears. “(b) $150,000,000 Limitation on Bonds Other Than Hospital Bonds.— “(1) In general.— A bond (other than a qualified hospital bond) shall not be treated as a qualified 501(c)(3) bond if the aggregate authorized face amount of the issue (of which such bond is a part) allocated to any 501(c)(3) organization which is a test-period beneficiary (when increased by the outstanding tax-exempt nonhospital bonds of such organization) exceeds $150,000,000. “(2) Outstanding tax-exempt nonhospital bonds.— “(A) In general.— For purposes of applying paragraph (1) with respect to any issue, the outstanding tax-exempt nonhospital bonds of any organization which is a test-period beneficiary with respect to such issue is the aggregate amount of tax-exempt bonds referred to in subparagraph (B)— “(i) which are allocated to such organization, and “(ii) which are outstanding at the time of such later issue (not including as outstanding any bond which is to be redeemed (other than in an advance refunding) from the net proceeds of the later issue). “(B) Bonds taken into account.— For purposes of subparagraph (A), the bonds referred to in this subparagraph are— “(i) any qualified 501(c)(3) bond other than a qualified hospital bond, and “(ii) any bond to which section 141(a) does not apply if— “(I) such bond would have been an industrial development bond (as defined in section 103(b), as in effect on the day before the date of the enactment of the Tax Reform Act of 1986) if 501(c)(3) organizations were not exempt persons, and “(II) such bond was not described in paragraph (4), (5), or (6) of such section 103(b) (as in effect on the date such bond was issued). “(C) Only nonhospital portion of bonds taken into account.— “(i) In general.— A bond shall be taken into account under subparagraph (B)(ii) only to the extent that the proceeds of the issue of which such bond is a part are not used with respect to a hospital. “(ii) Special rule.— If 90 percent or more of the net proceeds of an issue are used with respect to a hospital, no bond which is part of such issue shall be taken into account under subparagraph (B)(ii). “(3) Aggregation rule.— For purposes of this subsection, 2 or more organizations under common management or control shall be treated as 1 organization. “(4) Allocation of face amount of issue; test-period beneficiary.— Rules similar to the rules of subparagraphs (C) and (D) of section 144(a)(10) shall apply for purposes of this subsection. “(c) Qualified Hospital Bond.— For purposes of this section, the term ‘qualified hospital bond’ means any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used with respect to a hospital. “(d) Election Out.— This section shall not apply to an issue if— “(1) the issuer elects not to have this section apply to such issue, and “(2) such issue is an issue of exempt facility bonds, or qualified redevelopment bonds, to which section 146 applies. “SEC. 146. VOLUME CAP. “(a) General Rule.— A private activity bond issued as part of an issue meets the requirements of this section if the aggregate face amount of the private activity bonds issued pursuant to such issue, when added to the aggregate face amount of tax-exempt private activity bonds previously issued by the issuing authority during the calendar year, does not exceed such authority s volume cap for such calendar year. “(b) Volume Cap for State Agencies.— For purposes of this section— “(1) In general.— The volume cap for any agency of the State authorized to issue tax-exempt private activity bonds for any calendar year shall be 50 percent of the State ceiling for such calendar year. “(2) Special rule where state has more than 1 agency.— If more than 1 agency of the State is authorized to issue tax-exempt private activity bonds, all such agencies shall be treated as a single agency. “(c) Volume Cap for Other Issuers.— For purposes of this section— “(1) In general.— The volume cap for any issuing authority (other than a State agency) for any calendar year shall be an amount which bears the same ratio to 50 percent of the State ceiling for such calendar year as— “(A) the population of the jurisdiction of such issuing authority, bears to “(B) the population of the entire State. “(2) Overlapping jurisdictions.— For purposes of paragraph (1)(A), if an area is within the jurisdiction of 2 or more governmental units, such area shall be treated as only within the jurisdiction of the unit having jurisdiction over the smallest geographical area unless such unit agrees to surrender all or part of such jurisdiction for such calendar year to the unit with overlapping jurisdiction which has the next smallest geographical area. “(d) State Ceiling.— For purposes of this section— “(1) In general.— The State ceiling applicable to any State for any calendar year shall be the greater of— “(A) an amount equal to $75 multiplied by the State population, or “(B) $250,000,000. Subparagraph (B) shall not apply to any possession of the United States. “(2) Adjustment after 1987.— In the case of calendar years after 1987, paragraph (1) shall be applied by substituting— “(A) ‘$50’ for ‘$75’, and “(B) ‘$150,000,000’ for ‘$250,000,000’. “(3) Special rule for states with constitutional home rule cities.— For purposes of this section— “(A) In general.— The volume cap for any constitutional home rule city for any calendar year shall be determined under paragraph (1) of subsection (c) by substituting ‘100 percent’ for ‘50 percent’. “(B) Coordination with other allocations.— In the case of any State which contains 1 or more constitutional home rule cities, for purposes of applying subsections (b) and (c) with respect to issuing authorities in such State other than constitutional home rule cities, the State ceiling for any calendar year shall be reduced by the aggregate volume caps determined for such year for all constitutional home rule cities in such State. “(C) Constitutional home rule city.— For purposes of this section, the term ‘constitutional home rule city’ means, with respect to any calendar year, any political subdivision of a State which, under a State constitution which was adopted in 1970 and effective on July 1, 1971, had home rule powers on the 1st day of the calendar year. “(4) Special rule for possessions with populations of less than the population of the least populous state.— “(A) In general.— If the population of any possession of the United States for any calendar year is less than the population of the least populous State (other than a possession) for such calendar year, the limitation under paragraph (1)(A) shall not be less than the amount determined under subparagraph (B) for such calendar year, “(B) Limitation.— The limitation determined under this subparagraph, with respect a possession, for any calendar year is an amount equal to the product of— “(i) the fraction— “(I) the numerator of which is the amount applicable under paragraph (1)(B) for such calendar year, and “(II) the denominator of which is the State population of the least populous State (other than a possession) for such calendar year, and “(ii) the population of such possession for such calendar year. “(e) State May Provide for Different Allocation.— For purposes of this section— “(1) In general.— Except as provided in paragraph (3), a State may, by law provide a different formula for allocating the State ceiling among the governmental units (or other authorities) in such State having authority to issue tax-exempt private activity bonds. “(2) Interim authority for governor.— “(A) In general.— Except as otherwise provided in paragraph (3), the Governor of any State may proclaim a different formula for allocating the State ceiling among the governmental units (or other authorities) in such State having authority to issue private activity bonds. “(B) Termination of authority.— The authority provided in subparagraph (A) shall not apply to bonds issued after the earlier of— “(i) the last day of the 1st calendar year after 1986 during which the legislature of the State met in regular session, or “(ii) the effective date of any State legislation with respect to the allocation of the State ceiling. “(3) State may not alter allocation to constitutional home rule cities.— Except as otherwise provided in a State constitutional amendment (or law changing the home rule provision adopted in the manner provided by the State constitution), the authority provided in this subsection shall not apply to that portion of the State ceiling which is allocated to any constitutional home rule city in the State unless such city agrees to such different allocation, “(f) Elective Carryforward of Unused Limitation for Specified Purpose.— “(1) In general.— If— “(A) an issuing authority’s volume cap for any calendar year after 1985, exceeds “(B) the aggregate amount of tax-exempt private activity bonds issued during such calendar year by such authority, such authority may elect to treat all (or any portion) of such excess as a carryforward for 1 or more carryforward purposes. “(2) Election must identify purpose.— In any election under paragraph (1), the issuing authority shall— “(A) identify the purpose for which the carryforward is elected, and “(B) specify the portion of the excess described in paragraph (1) which is to be a carryforward for each such purpose. “(3) Use of carryforward.— “(A) In general.— If any issuing authority elects a carryforward under paragraph (1) with respect to any carryforward purpose, any private activity bonds issued by such authority with respect to such purpose during the 3 calendar years following the calendar year in which the carryforward arose shall not be taken into account under subsection (a) to the extent the amount of such bonds does not exceed the amount of the carryforward elected for such purpose. “(B) Order in which carryforward used.— Carryforwards elected with respect to any purpose shall be used in the order of the calendar years in which they arose. “(4) Election.— Any election under this paragraph (and any identification or specification contained therein), once made, shall be irrevocable. “(5) Carryforward purpose.— The term ‘carryforward purpose’ means— “(A) the purpose of issuing bonds referred to in one of the clauses of section 141(d)(1)(A), “(B) the purpose of issuing qualified mortgage bonds or mortgage credit certificates, “(C) the purpose of issuing qualified student loan bonds, and “(D) the purpose of issuing qualified redevelopment bonds. “(g) Exception for Certain Bonds.— Only for purposes of this section, the term ‘private activity bond’ shall not include— “(1) any qualified veterans’ mortgage bond, “(2) any qualified 501(c)(3) bond, and “(3) any exempt facility bond issued as part of an issue described in paragraph (1) or (2) of section 142(a) (relating to airports and docks and wharves). “(h) Exception for Government-Owned Solid Waste Disposal Facilities.— “(1) In general.— Only for purposes of this section, the term ‘private activity bond’ shall not include any exempt facility bond described in section 142(a)(6) which is issued as part of an issue if all of the property to be financed by the net proceeds of such issue is to be owned by a governmental unit. “(2) Safe harbor for determination of government ownership.— In determining ownership for purposes of paragraph (1), section 142(b)(1)(B) shall apply, except that a lease term shall be treated as satisfying clause (ii) thereof if it is not more than 20 years. “(i) Treatment of Refunding Issues.— For purposes of the volume cap imposed by this section— “(1) In general.— The term ‘private activity bond’ shall not include any bond which is issued to refund another bond to the extent that the amount of such bond does not exceed the outstanding amount of the refunded bond. “(2) Special rules for student loan bonds.— In the case of any qualified student loan bond, paragraph (1) shall apply only if the maturity date of the refunding bond is not later than the later of— “(A) the maturity date of the bond to be refunded, or “(B) the date 17 years after the date on which the refunded bond was issued (or in the case of a series of refundings, the date on which the original bond was issued). “(3) Special rules for qualified mortgage bonds.— In the case of any qualified mortgage bond, paragraph (1) shall apply only if the maturity date of the refunding bond is not later than the later of— “(A) the maturity date of the bond to be refunded, or “(B) the date 32 years after the date on which the refunded bond was issued (or in the case of a series of refundings, the date on which the original bond was issued). “(4) Exception for advance refunding.— This subsection shall not apply to any bond issued to advance refund another bond. “(j) Population.— For purposes of this section, determinations of the population of any State (or issuing authority) shall be made with respect to any calendar year on the basis of the most recent census estimate of the resident population of such State (or issuing authority) released by the Bureau of Census before the beginning of such calendar year. “(k) Facility Must Be Located Within State.— “(1) In general.— Except as provided in paragraph (2), no portion of the State ceiling applicable to any State for any calendar year may be used with respect to financing for a facility located outside such State. “(2) Exception for certain facilities where state will get proportionate share of benefits.— Paragraph (1) shall not apply to any exempt facility bond described in paragraph (4), (5), (6), or (10) of section 142(a) if the issuer establishes that the State’s share of the use of the facility (or its output) will equal or exceed the State’s share of the private activity bonds issued to finance the facility. “(l) Issuer of Qualified Scholarship Funding Bonds.— In the case of a qualified scholarship funding bond, such bond shall be treated for purposes of this section as issued by a State or local issuing authority (whichever is appropriate), “(m) Treatment of Amounts Allocated to Private Activity Portion of Government Use Bonds.— “(1) In general.— The volume cap of an issuer shall be reduced by the amount allocated by the issuer to an issue under section 141(b)(5). “(2) Advance refundings.— Except as otherwise provided by the Secretary, any advance refunding of any part of an issue to which an amount was allocated under section 141 (b)(5) (or would have been allocated if such section applied to such issue) shall be taken into account under this section to the extent of the amount of the volume cap which was (or would have been) so allocated. “(n) Reduction for Mortgage Credit Certificates, Etc.— The volume cap of any issuing authority for any calendar year shall be reduced by the sum of— “(1) the amount of qualified mortgage bonds which such authority elects not to issue under section 25(c)(2)(A)(ii) during such year, plus “(2) the amount of any reduction in such ceiling under section 25(f) applicable to such authority for such year. “SEC. 147. OTHER REQUIREMENTS APPLICABLE TO CERTAIN PRIVATE ACTIVITY BONDS. “(a) Substantial User Requirement.— “(1) In general.— Except as provided in subsection (h), a private activity bond shall not be a qualified bond for any period during which it is held by a person who is a substantial user of the facilities or by a related person of such a substantial user. “(2) Related person.— For purposes of paragraph (1), the following shall be treated as related persons— “(A) 2 or more persons if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), “(B) 2 or more persons which are members of the same controlled group of corporations (as defined in section 1563(a), except that ‘more than 50 percent’ shall be substituted for ‘at least 80 percent’ each place it appears therein), “(C) a partnership and each of its partners (and their spouses and minor children), and “(D) an S corporation and each of its shareholders (and their spouses and minor children). “(b) Maturity May Not Exceed 120 Percent of Economic Life.— “(1) General rule.— Except as provided in subsection (h), a private activity bond shall not be a qualified bond if it is issued as part of an issue and— “(A) the average maturity of the bonds issued as part of such issue, exceeds “(B) 120 percent of the average reasonably expected economic life of the facilities being financed with the net proceeds of such issue. “(2) Determination of averages.— For purposes of paragraph (1)— “(A) the average maturity of any issue shall be determined by taking into account the respective issue prices of the bonds issued as part of such issue, and “(B) the average reasonably expected economic life of the facilities being financed with any issue shall be determined by taking into account the respective cost of such facilities. “(3) Special rules.— “(A) Determination of economic life.— For purposes of this subsection, the reasonably expected economic life of any facility shall be determined as of the later of— “(i) the date on which the bonds are issued, or “(ii) the date on which the facility is placed in service (or expected to be placed in service). “(B) Treatment of land.— “(i) Land not taken into account.— Except as provided in clause (ii), land shall not be taken into account under paragraph (1)(B). “(ii) Issues where 25 percent or more of proceeds used to finance land.— If 25 percent or more of the net proceeds of any issue is to be used to finance land, such land shall be taken into account under paragraph (1)(B) and shall be treated as having an economic life of 30 years. “(4) Special rule for pooled financing of 501(c)(3) organization.— “(A) In general.— At the election of the issuer, a qualified 501(c)(3) bond shall be treated as meeting the requirements of paragraph (1) if such bond meets the requirements of subparagraph (B). “(B) Requirements.— A qualified 501(c)(3) bond meets the requirements of this subparagraph if— “(i) 95 percent or more of the net proceeds of the issue of which such bond is a part are to be used to make or finance loans to 2 or more 501(c)(3) organizations or governmental units for acquisition of property to be used by such organizations, “(ii) each loan described in clause (i) satisfies the requirements of paragraph (1) (determined by treating each loan as a separate issue), “(iii) before such bond is issued, a demand survey was conducted which shows a demand for financing greater than an amount equal to 120 percent of the lendable proceeds of such issue, and “(iv) 95 percent or more of the net proceeds of such issue are to be loaned to 501(c)(3) organizations or governmental units within 1 year of issuance and, to the extent there are any unspent proceeds after such 1-year period, bonds issued as part of such issue are to be redeemed as soon as possible thereafter (and in no event later than 18 months after issuance). A bond shall not meet the requirements of this subparagraph if the maturity date of any bond issued as part of such issue is more than 30 years after the date on which the bond was issued (or, in the case of a refunding or series of refundings, the date on which the original bond was issued). “(5) Special rule for certain fha insured loans.— Paragraph (1) shall not apply to any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to finance mortgage loans insured under FHA 242 or under a similar Federal Housing Administration program (as in effect on the date of the enactment of the Tax Reform Act of 1986) where the loan term approved by such Administration plus the maximum maturity of debentures which could be issued by such Administration in satisfaction of its obligations exceeds the term permitted under paragraph (1). (c) Limitation on Use for Land Acquisition.— “(1) In general.— Except as provided in subsection (h), a private activity bond shall not be a qualified bond if— “(A) it is issued as part of an issue and 25 percent or more of the net proceeds of such issue are to be used (directly or indirectly) for the acquisition of land (or an interest therein), or “(B) any portion of the proceeds of such issue is to be used (directly or indirectly) for the acquisition of land (or an interest therein) to be used for farming purposes. “(2) Exception for first-time farmers.— “(A) In general.— If the requirements of subparagraph (B) are met with respect to any land, paragraph (1) shall not apply to such land, and subsection (d) shall not apply to property to be used thereon for farming purposes, but only to the extent of expenditures (financed with the proceeds of the issue) not in excess of $250,000. “(B) Acquisition by first-time farmers.— The requirements of this subparagraph are met with respect to any land if— “(i) such land is to be used for farming purposes, and “(ii) such land is to be acquired by an individual who is a first-time farmer, who will be the principal user of such land, and who will materially and substantially participate on the farm of which such land is a part in the operation of such farm. “(C) First-time farmer.— For purposes of this paragraph— “(i) In general.— The term ‘first-time farmer’ means any individual if such individual— “(I) has not at any time had any direct or indirect ownership interest in substantial farmland in the operation of which such individual materially participated, and “(II) has not received financing under this paragraph in an amount which, when added to the financing to be provided under this paragraph, exceeds $250,000. “(ii) Aggregation rules.— Any ownership or material participation, or financing received, by an individual’s spouse or minor child shall be treated as ownership and material participation, or financing received, by the individual. “(iii) Insolvent farmer.— For purposes of clause (i), farmland which was previously owned by the individual and was disposed of while such individual was insolvent shall be disregarded if section 108 applied to indebtedness with respect to such farmland. “(D) Farm.— For purposes of this paragraph, the term ‘farm’ has the meaning given such term by section 6420(c)(2). “(E) Substantial farmland.— For purposes of this paragraph, the term ‘substantial farmland’ means any parcel of land unless— “(i) such parcel is smaller than 15 percent of the median size of a farm in the county in which such parcel is located, and “(ii) the fair market value of the land does not at any time while held by the individual exceed $125,000. “(F) Used equipment limitation.— For purposes of this paragraph, in no event may the amount of financing pro-vided by reason of this paragraph to a first-time farmer for personal property— “(i) of a character subject to the allowance for depreciation, “(ii) the original use of which does not begin with such farmer, and “(iii) which is to be used for farming purposes, exceed $62,500. A rule similar to the rule of subparagraph (C)(ii) shall apply for purposes of the preceding sentence. “(3) Exception for certain land acquired for environmental purposes, etc.— Any land acquired by a governmental unit (or issuing authority) in connection with an airport, mass commuting facility, dock, or wharf shall not be taken into account under paragraph (1) if— “(A) such land is acquired for noise abatement or wetland preservation, or for future use as an airport, mass commuting facility, dock, or wharf, and “(B) there is not other significant use of such land. “(d) Acquisition of Existing Property Not Permitted.— “(1) In general.— Except as provided in subsection (h), a private activity bond shall not be a qualified bond if issued as part of an issue and any portion of the net proceeds of such issue is to be used for the acquisition of any property (or an interest therein) unless the 1st use of such property is pursuant to such acquisition. “(2) Exception for certain rehabilitations.— Paragraph (1) shall not apply with respect to any building (and the equipment therefor) if— “(A) the rehabilitation expenditures with respect to such building, equal or exceed “(B) 15 percent of the portion of the cost of acquiring such building (and equipment) financed with the net proceeds of the issue, A rule similar to the rule of the preceding sentence shall apply in the case of structures other than a building except that subparagraph (B) shall be applied by substituting ‘100 percent’ for ‘15 percent’. “(3) Rehabilitation expenditures.— For purposes of this subsection— “(A) In general.— Except as provided in this paragraph, the term ‘rehabilitation expenditures’ means any amount properly chargeable to capital account which is incurred by the person acquiring the building for property (or additions or improvements to property) in connection with the rehabilitation of a building. In the case of an integrated operation contained in a building before its acquisition, such term includes rehabilitating existing equipment in such building or replacing it with equipment having substantially the same function. For purposes of this subparagraph, any amount incurred by a successor to the person acquiring the building or by the seller under a sales contract with such person shall be treated as incurred by such person. “(B) Certain expenditures not included.— The term ‘rehabilitation expenditures’ does not include any expenditure described in section 48(g)(2)(B). “(C) Period during which expenditures must be incurred.— The term ‘rehabilitation expenditures’ shall not include any amount which is incurred after the date 2 years after the later of— “(i) the date on which the building was acquired, or “(ii) the date on which the bond was issued. “(4) Special rule for certain projects.— In the case of a project involving 2 or more buildings, this subsection shall be applied on a project basis. “(e) No Portion of Bonds May Be Issued for Skyboxes, Airplanes, Gambling Establishments, Etc.— A private activity bond shall not be treated as a qualified bond if issued as part of an issue and any portion of the proceeds of such issue is to be used to provide any airplane, skybox or other private luxury box, health club facility, facility primarily used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises. “(f) Public Approval Required for Private Activity Bonds.— “(1) In general.— A private activity bond shall not be a qualified bond unless such bond satisfies the requirements of paragraph (2). “(2) Public approval requirement.— “(A) In general.— A bond shall satisfy the requirements of this paragraph if such bond is issued as a part of an issue which has been approved by— “(i) the governmental unit— “(I) which issued such bond, or “(II) on behalf of which such bond was issued, and “(ii) each governmental unit having jurisdiction over the area in which any facility, with respect to which financing is to be provided from the net proceeds of such issue, is located (except that if more than 1 governmental unit within a State has jurisdiction over the entire area within such State in which such facility is located, only 1 such unit need approve such issue). “(B) Approval by a governmental unit.— For purposes of subparagraph (A), an issue shall be treated as having been approved by any governmental unit if such issue is approved— “(i) by the applicable elected representative of such governmental unit after a public hearing following reasonable public notice, or “(ii) by voter referendum of such governmental unit. “(C) Special rules for approval of facility.— If there has been public approval under subparagraph (A) of the plan for financing a facility, such approval shall constitute approval under subparagraph (A) for any issue— “(i) which is issued pursuant to such plan within 3 years after the date of the 1st issue pursuant to the approval, and “(ii) all or substantially all of the proceeds of which are to be used to finance such facility or to refund previous financing under such plan. “(D) Refunding bonds.— No approval under subparagraph (A) shall be necessary with respect to any bond which is issued to refund (other than to advance refund) a bond approved under subparagraph (A) (or treated as approved under subparagraph (C)) unless the maturity date of such bond is later than the maturity date of the bond to be refunded. “(E) Applicable elected representative.— For purposes of this paragraph— “(i) In general.— The term ‘applicable elected representative’ means with respect to any governmental unit— “(I) an elected legislative body of such unit, or “(II) the chief elected executive officer, the chief elected State legal officer of the executive branch, or any other elected official of such unit designated for purposes of this paragraph by such chief elected executive officer or by State law. “(ii) No applicable elected representative.— If (but for this clause) a governmental unit has no applicable elected representative, the applicable elected representative for purposes of clause (i) shall be the applicable elected representative of the governmental unit— “(I) which is the next higher governmental unit with such a representative, and “(II) from which the authority of the governmental unit with no such representative is derived. “(3) Special rule for approval of airports.— If— “(A) the proceeds of an issue are to be used to finance a facility or facilities located at an airport, and “(B) the governmental unit issuing such bonds is the owner or operator of such airport, such governmental unit shall be deemed to be the only governmental unit having jurisdiction over such airport for purposes of this subsection. “(g) Restriction on Issuance Costs Financed by Issue.— “(1) In general.— A private activity bond shall not be a qualified bond if the issuance costs financed by the issue (of which such bond is a part) exceed 2 percent of the aggregate face amount of the issue. “(2) Special rule for small mortgage revenue bond issues.— In the case of an issue of qualified mortgage bonds or qualified veterans’ mortgage bonds, paragraph (1) shall be applied by substituting ‘3.5 percent’ for ‘2 percent’ if the aggregate authorized face amount of the issue does not exceed $20,000,000. “(h) Certain Rules Not To Apply to Mortgage Revenue Bonds, Qualified Student Loan Bonds, and Qualified 501(c)(3) Bonds.— “(1) Mortgage revenue bonds and qualified student loan bonds.— Subsections (a), (b), (c), and (d) shall not apply to any qualified mortgage bond, qualified veterans’ mortgage bond, or qualified student loan bond. “(2) Qualified 501(c)(3) bonds.— Subsections (a), (c), and (d) shall not apply to any qualified 501(c)(3) bond and subsection (e) shall be applied as if it did not contain ‘health club facility’ with respect to such a bond. “Subpart B— Requirements Applicable to All State and Local Bonds “Sec. 148. Arbitrage. “Sec. 149. Bonds must be registered to be tax exempt; other requirements. “SEC. 148. ARBITRAGE. “(a) Arbitrage Bond Defined.— For purposes of section 103, the term ‘arbitrage bond’ means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly— “(1) to acquire higher yielding investments, or “(2) to replace funds which were used directly or indirectly to acquire higher yielding investments. For purposes of this subsection, a bond shall be treated as an arbitrage bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in paragraph (1) or (2). “(b) Higher Yielding Investments.— For purposes of this section— “(1) In general.— The term ‘higher yielding investments’ means any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue. “(2) Investment property.— The term ‘investment property’ means— “(A) any security (within the meaning of section 165(g)(2) (A) or (B)), “(B) any obligation, “(C) any annuity contract, or “(D) any investment-type property. Such term shall not include any tax-exempt bond. “(c) Temporary Period Exception.— “(1) In general.— For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that the proceeds of the issue of which such bond is a part may be invested in higher yielding investments for a reasonable temporary period until such proceeds are needed for the purpose for which such issue was issued. “(2) Limitation on temporary period for pooled financings.— “(A) In general.— The temporary period referred to in paragraph (1) shall not exceed 6 months with respect to the proceeds of an issue which are to be used to make or finance loans (other than nonpurpose investments) to 2 or more persons. “(B) Special rule for certain student loan pools.— In the case of the proceeds of an issue to be used to make or finance loans under a program described in section 144(b)(1)(A), subparagraph (A) shall be applied by substituting ‘18 months’ for ‘6 months’. The preceding sentence shall not apply to any bond issued after December 31, 1988. “(C) Shorter temporary period for loan repayments, etc.— Subparagraph (A) shall be applied by substituting ‘3 months’ for ‘6 months’ with respect to the proceeds from the sale or repayment of any loan which are to be used to make or finance any loan. For purposes of the preceding sentence, a nonpurpose investment shall not be treated as a loan. “(D) Exception for mortgage revenue bonds.— This paragraph shall not apply to any qualified mortgage bond or qualified veterans’ mortgage bond. “(d) Special Rules for Reasonably Required Reserve or Replacement Fund.— “(1) In general.— For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the proceeds of the issue of which such bond is a part may be invested in higher yielding investments which are part of a reasonably required reserve or replacement fund. The amount referred to in the preceding sentence shall not exceed 10 percent of the proceeds of such issue unless the issuer establishes to the satisfaction of the Secretary that a higher amount is necessary. “(2) Limitation on amount in reserve or replacement fund which may be financed by issue.— A bond issued as part of an issue shall be treated as an arbitrage bond if the amount of the proceeds from the sale of such issue which is part of any fund described in paragraph (1) exceeds 10 percent of the proceeds of the issue (or such higher amount which the issuer establishes is necessary to the satisfaction of the Secretary). “(3) Limitation on investment in nonpurpose investments.— “(A) In general.— A bond which is part of an issue which does not meet the requirements of subparagraph (B) shall be treated as an arbitrage bond. “(B) Requirements.— An issue meets the requirements of this subparagraph only if— “(i) at no time during any bond year may the amount invested in nonpurpose investments with a yield materially higher than the yield on the issue exceed 150 percent of the debt service on the issue for the bond year, and “(ii) the aggregate amount invested as provided in clause (i) is promptly and appropriately reduced as the amount of outstanding bonds of the issue is reduced (or, in the case of a qualified mortgage bond or a qualified veterans’ mortgage bond, as the mortgages are repaid). “(C) Exceptions for temporary period.— Subparagraph (B) shall not apply to— “(i) proceeds of the issue invested for an initial temporary period until such proceeds are needed for the governmental purpose of the issue, and “(ii) temporary investment periods related to debt service. “(D) Debt service defined.— For purposes of this paragraph, the debt service on the issue for any bond year is the scheduled amount of interest and amortization of principal payable for such year with respect to such issue. For purposes of the preceding sentence, there shall not be taken into account amounts scheduled with respect to any bond which has been redeemed before the beginning of the bond year. “(E) No disposition in case of loss.— This paragraph shall not require the sale or disposition of any investment if such sale or disposition would result in a loss which exceeds the amount which, but for such sale or disposition, would at the time of such sale or disposition— “(i) be paid to the United States, or, “(ii) in the case of a qualified mortgage bond or a qualified veterans’ mortgage bond, be paid or credited mortgagors under section 143(g)(3)(A). “(F) Exception for governmental use bonds and qualified 501(c)(3) bonds.— This paragraph shall not apply to any bond which is not a private activity bond or which is a qualified 501(c)(3) bond. “(e) Minor Portion May Be Invested in Higher Yielding Investments.— Notwithstanding subsections (a), (c), and (d), a bond issued as part of an issue shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the proceeds of such issue (in addition to the amounts under subsections (c) and (d)) is invested in higher yielding investments if such amount does not exceed the lesser of— “(1) 5 percent of the proceeds of the issue, or “(2) $100,000. “(f) Required Rebate to the United States.— “(1) In general.— A bond which is part of an issue shall be treated as an arbitrage bond if the requirements of paragraphs (2) and (3) are not met with respect to such issue. The preceding sentence shall not apply to any qualified mortgage bond or qualified veterans’ mortgage bond. “(2) Rebate to united states.— An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of— “(A) the excess of— “(i) the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this subparagraph), over “(ii) the amount which would have been earned if such nonpurpose investments were invested at a rate equal to the yield on the issue, plus “(B) any income attributable to the excess described in subparagraph (A), is paid to the United States by the issuer in accordance with the requirements of paragraph (3). “(3) Due date of payments under paragraph (2).— Except to the extent provided by the Secretary, the amount which is required to be paid to the United States by the issuer shall be paid in installments which are made at least once every 5 years. Each installment shall be in an amount which ensures that 90 percent of the amount described in paragraph (2) with respect to the issue at the time payment of such installment is required will have been paid to the United States. The last installment shall be made no later than 60 days after the day on which the last bond of the issue is redeemed and shall be in an amount sufficient to pay the remaining balance of the amount described in paragraph (2) with respect to such issue. “(4) Special rules for applying paragraph (2).— “(A) In general.— In determining the aggregate amount earned on nonpurpose investments for purposes of paragraph (2)— “(i) any gain or loss on the disposition of a nonpurpose investment shall be taken into account, and “(ii) unless the issuer otherwise elects, any amount earned on a bona fide debt service fund shall not be taken into account if the gross earnings on such fund for the bond year is less than $100,000. “(B) Temporary investments.— Under regulations prescribed by the Secretary— “(i) In general.— An issue shall, for purposes of this subsection, be treated as meeting the requirements of paragraph (2) if the gross proceeds of such issue are expended for the governmental purpose for which the issue was issued by no later than the day which is 6 months after the date of issuance of such issue. Gross proceeds which are held in a bona fide debt service fund shall not be considered gross proceeds for purposes of this subparagraph only. “(ii) Additional period for certain bonds.— “(I) In general.— In the case of an issue described in subclause (II), clause (i) shall be applied by substituting T year’ for ‘6 months’ with respect to the portion of the proceeds of the issue which are not expended in accordance with clause (i) if such portion does not exceed the lesser of 5 percent of the proceeds of the issue or $100,000. “(II) Issues to which subclause (i) applies.— An issue is described in this subclause if no bond which is part of such issue is a private activity bond (other than a qualified 501(c)(3) bond) or a tax or revenue anticipation bond. “(iii) Safe harbor for determining when proceeds of tax and revenue anticipation bonds are expended.— “(I) In general.— For purposes of clause (i), in the case of an issue of tax or revenue anticipation bonds, the net proceeds of such issue (including earnings thereon) shall be treated as expended for the governmental purpose of the issue on the 1st day after the date of issuance that the cumulative cash flow deficit to be financed by such issue exceeds 90 percent of the aggregate face amount of such issue. “(II) Cumulative cash flow deficit.— For purposes of subclause (I), the term ‘cumulative cash flow deficit’ means, as of the date of computation, the excess of the expenses paid during the period described in subclause (III) which would ordinarily be paid out of or financed by anticipated tax or other revenues over the aggregate amount available (other than from the proceeds of the issue) during such period for the payment of such expenses. “(III) Period involved.— For purposes of subclause (II), the period described in this subclause is the period beginning on the date of issuance of the issue and ending on the earliest of the maturity date of the issue, the date 6 months after such date of issuance, or the date of the computation of cumulative cash flow deficit. “(C) Exception for small governmental units.— An issue shall, for purposes of this subsection, be treated as meeting the requirements of paragraphs (2) and (3) if— “(i) the issue is issued by a governmental unit with general taxing powers, “(ii) no bond which is part of such issue is a private activity bond, “(iii) 95 percent or more of the net proceeds of such issue are to be used for local governmental activities of the issuer (or of a governmental unit the jurisdiction of which is entirely within the jurisdiction of the issuer), and “(iv) the aggregate face amount of all tax-exempt bonds (other than private activity bonds) issued by such unit (and all subordinate entities thereof) during the calendar year in which such issue is issued is not reasonably expected to exceed $5,000,000. Clause (iv) shall not take into account any bond which is not outstanding at the time of a later issue or which is redeemed (other than in an advance refunding) from the net proceeds of the later issue. “(D) Exception for certain qualified student loan bonds.— “(i) In general.— In determining the aggregate amount earned on nonpurpose investments acquired with gross proceeds of an issue of bonds described in section 144(b)(1)(A), the amount earned from investment of net proceeds of such issue during the initial temporary period under subsection (c) shall not be taken into account to the extent that the amount so earned is used to pay the reasonable— “(I) administrative costs of such a program attributable to such issue and the costs of carrying such issue, and “(II) costs of issuing such issue, but only to the extent such costs were financed with proceeds of such issue and for which the issuer was not reimbursed. “(ii) Only arbitrage on amounts loaned during temporary period taken into account for administrative costs, etc.— The amount earned from investment of net proceeds of an issue during the initial temporary period under subsection (c) shall be taken into account under clause (i)(I) only to the extent attributable to proceeds which were used to make or finance (not later than the close of such period) student loans under a program described in section 144(b)(1)(A). “(iii) Election.— This subparagraph shall not apply to any issue if the issuer elects not to have this subparagraph apply to such issue. “(iv) Termination.— This subparagraph shall not apply to any bond issued after December 31, 1988. “(5) Exemption from gross income of sum rebated.— Gross income shall not include the sum described in paragraph (2). Notwithstanding any other provision of this title, no deduction shall be allowed for any amount paid to the United States under paragraph (2). “(6) Definitions.— For purposes of this subsection and subsections (c) and (d)— “(A) Nonpurpose investment.— The term ‘nonpurpose investment’ means any investment property which— “(i) is acquired with the gross proceeds of an issue, and “(ii) is not acquired in order to carry out the governmental purpose of the issue. “(B) Gross proceeds.— Except as otherwise provided by the Secretary, the gross proceeds of an issue include— “(i) amounts received (including repayments of principal) as a result of investing the original proceeds of the issue, and “(ii) amounts to be used to pay debt service on the issue. “(7) Penalty in lieu of loss of tax exemption.— In the case of an issue which would (but for this paragraph) fail to meet the requirements of paragraph (2) or (3), the Secretary may treat such issue as not failing to meet such requirements if— “(A) no bond which is part of such issue is a private activity bond (other than a qualified 501(c)(3) bond), “(B) the failure to meet such requirements is due to reasonable cause and not to willful neglect, and “(C) the issuer pays to the United States a penalty in an amount equal to the sum of— “(i) 50 percent of the amount which was not paid in accordance with paragraphs (2) and (3), plus “(ii) interest (at the underpayment rate established under section 6621) on the portion of the amount which was not paid on the date required under paragraph (3) for the period beginning on such date. The Secretary may waive all or any portion of the penalty under this paragraph. “(g) Student Loan Incentive Payments.— Except to the extent otherwise provided in regulations, payments made by the Secretary of Education pursuant to section 438 of the Higher Education Act of 1965 are not to be taken into account, for purposes of subsection (a)(1), in determining yields on student loan notes. “(h) Determinations of Yield.— For purposes of this section, the yield on an issue shall be determined on the basis of the issue price (within the meaning of sections 1273 and 1274). “(i) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section. “SEC. 149. BONDS MUST BE REGISTERED TO BE TAX EXEMPT; OTHER REQUIREMENTS. “(a) Bonds Must Be Registered To Be Tax Exempt.— “(1) General rule.— Nothing in section 103(a) or in any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any registration-required bond unless such bond is in registered form. “(2) Registration-required bond.— For purposes of paragraph (1), the term ‘registration-required bond’ means any bond other than a bond which— “(A) is not of a type offered to the public, “(B) has a maturity (at issue) of not more than 1 year, or “(C) is described in section 163(1)(2)(8). “(3) Special rules.— “(A) Book entries permitted.— For purposes of paragraph (1), a book entry bond shall be treated as in registered form if the right to the principal of, and stated interest on, such bond may be transferred only through a book entry consistent with regulations prescribed by the Secretary. “(B) Nominees.— The Secretary shall prescribe such regulations as may be necessary to carry out the purpose of paragraph (1) where there is a nominee or chain of nominees. “(b) Federally Guaranteed Bond Is Not Tax Exempt.— “(1) In general.— Section 103(a) shall not apply to any State or local bond if such bond is federally guaranteed. “(2) Federally guaranteed defined.— For purposes of paragraph (1), a bond is federally guaranteed if— “(A) the payment of principal or interest with respect to such bond is guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof), “(B) such bond is issued as part of an issue and 5 percent or more of the proceeds of such issue is to be— “(i) used in making loans the payment of principal or interest with respect to which are to be guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof), or “(ii) invested (directly or indirectly) in federally insured deposits or accounts, or “(C) the payment of principal or interest on such bond is otherwise indirectly guaranteed (in whole or in part) by the United States (or an agency or instrumentality thereof). “(3) Exceptions.— “(A) Certain insurance programs.— A bond shall not be treated as federally guaranteed by reason of— “(i) any guarantee by the Federal Housing Administration, the Veterans’ Administration, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association, “(ii) any guarantee of student loans and any guarantee by the Student Loan Marketing Association to finance student loans, or “(iii) any guarantee by the Bonneville Power Authority pursuant to the Northwest Power Act (16 U.S.C. 839d) as in effect on the date of the enactment of the Tax Reform Act of 1984 with respect to any bond issued before July 1, 1989. “(B) Debt service, etc.— Paragraph (1) shall not apply to— “(i) proceeds of the issue invested for an initial temporary period until such proceeds are needed for the purpose for which such issue was issued, “(ii) investments of a bona fide debt service fund, “(iii) investments of a reserve which meet the requirements of section 148(d), “(iv) investments in bonds issued by the United States Treasury, or “(v) other investments permitted under regulations. “(C) Exception for housing programs.— “(i) In general.— Except as provided in clause (ii), paragraph (1) shall not apply to— “(I) a private activity bond for a qualified residential rental project or a housing program obligation under section 11(b) of the United States Housing Act of 1937, “(II) a qualified mortgage bond, or “(III) a qualified veterans’ mortgage bond. “(ii) Exception not to apply where bond invested in federally insured deposits or accounts.— Clause (i) shall not apply to any bond which is federally guaranteed within the meaning of paragraph (2)(B)(ii). “(D) Loans to, or guarantees by, financial institutions.— Except as provided in paragraph (2)(B)(ii), a bond which is issued as part of an issue shall not be treated as federally guaranteed merely by reason of the fact that the proceeds of such issue are used in making loans to a financial institution or there is a guarantee by a financial institution unless such guarantee constitutes a federally insured deposit or account. “(4) Definitions.— For purposes of this subsection— “(A) Treatment of certain entities with authority to borrow from united states.— To the extent provided in regulations prescribed by the Secretary, any entity with statutory authority to borrow from the United States shall be treated as an instrumentality of the United States. Except in the case of an exempt facility bond, a qualified small issue bond, a qualified student loan bond, and a qualified redevelopment bond, nothing in the preceding sentence shall be construed as treating the District of Columbia or any possession of the United States as an instrumentality of the United States. “(B) Federally insured deposit or account.— The term ‘federally insured deposit or account’ means any deposit or account in a financial institution to the extent such deposit or account is insured under Federal law by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, the National Credit Union Administration, or any similar federally chartered corporation. “(c) Tax Exemption Must Be Derived From This Title.— “(1) General rule.— Except as provided in paragraph (2), no interest on any bond shall be exempt from taxation under this title unless such interest is exempt from tax under this title without regard to any provision of law which is not contained in this title and which is not contained in a revenue Act. “(2) Certain prior exemptions.— “(A) Prior exemptions continued.— For purposes of this title, notwithstanding any provision of this part, any bond the interest on which is exempt from taxation under this title by reason of any provision of law (other than a provision of this title) which is in effect on January 6, 1983, shall be treated as a bond described in section 103(a). “(B) Additional requirements for bonds issued after 1983.— Subparagraph (A) shall not apply to a bond (not described in subparagraph (C)) issued after 1983 if the appropriate requirements of this part (or the corresponding provisions of prior law) are not met with respect to such bond. “(C) Description of bond.— A bond is described in this subparagraph (and treated as described in subparagraph (A)) if— “(i) such bond is issued pursuant to the Northwest Power Act (16 U.S.C. 839d), as in effect on July 18, 1984; “(ii) such bond is issued pursuant to section 608(a)(6)(A) of Public Law 97–468, as in effect on the date of the enactment of the Tax Reform Act of 1986; or “(iii) such bond is issued before June 19, 1984 under section 11(b) of the United States Housing Act of 1937. “(d) Advance Refundings.— “(1) In general.— Nothing in section 103(a) or in any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond issued as part of an issue described in paragraph (2), (3), or (4). “(2) Certain private activity bonds.— An issue is described in this paragraph if any bond (issued as part of such issue) is issued to advance refund a private activity bond (other than a qualified 501(c)(3) bond). “(3) Other bonds.— “(A) In general.— An issue is described in this paragraph if any bond (issued as part of such issue), hereinafter in this paragraph referred to as the ‘refunding bond’, is issued to advance refund a bond unless— “(i) the refunding bond is only— “(I) the 1st advance refunding of the original bond if the original bond is issued after 1985, or “(II) the 1st or 2nd advance refunding of the original bond if the original bond was issued before 1986, “(ii) in the case of refunded bonds issued before 1986, the refunded bond is redeemed not later than the earliest date on which such bond may be redeemed at par or at a premium of 3 percent or less, “(iii) in the case of refunded bonds issued after 1985, the refunded bond is redeemed not later than the earliest date on which such bond may be redeemed, “(iv) the initial temporary period under section 148(c) ends— “(I) with respect to the proceeds of the refunding bond not later than 30 days after the date of issue of such bond, and “(II) with respect to the proceeds of the refunded bond on the date of issue of the refunding bond, and “(v) in the case of refunded bonds to which section 148(e) did not apply, on and after the date of issue of the refunding bond, the amount of proceeds of the refunded bond invested in higher yielding investments (as defined in section 148(b)) which are nonpurpose investments (as defined in section 148(f)(6)(A)) does not exceed— “(I) the amount so invested as part of a reasonably required reserve or replacement fund or during an allowable temporary period, and “(II) the amount which is equal to the lesser of 5 percent of the proceeds of the issue of which the refunded bond is a part or $100,000 (to the extent such amount is allocable to the refunded bond). “(B) Special rules for redemptions.— “(i) Issuer must redeem only if debt service savings.— Clause (ii) and (iii) of subparagraph (A) shall apply only if the issuer may realize present value debt service savings (determined without regard to administrative expenses) in connection with the issue of which the refunding bond is a part. “(ii) Redemptions not required before 90th day.— For purposes of clauses (ii) and (iii) of subparagraph (A), the earliest date referred to in such clauses shall not be earlier than the 90th day after the date of issuance of the refunding bond. “(4) Abusive transactions prohibited.— An issue is described in this paragraph if any bond (issued as part of such issue) is issued to advance refund another bond and a device is employed in connection with the issuance of such issue to obtain a material financial advantage (based on arbitrage) apart from savings attributable to lower interest rates. “(5) Advance refunding.— For purposes of this part, a bond shall be treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond. “(6) Special rules for purposes of paragraph (3).— For purposes of paragraph (3), bonds issued before the date of the enactment of this subsection shall be taken into account under subparagraph (A)(i) thereof except— “(A) a refunding which occurred before 1986 shall be treated as an advance refunding only if the refunding bond was issued more than 180 days before the redemption of the refunded bond, and “(B) a bond issued before 1986, shall be treated as advance refunded no more than once before March 15, 1986. “(7) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. “(e) Information Reporting.— “(1) In general.— Nothing in section 103(a) or any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond unless such bond satisfies the requirements of paragraph (2). “(2) Information reporting requirements.— A bond satisfies the requirements of this paragraph if the issuer submits to the Secretary, not later than the 15th day of the 2d calendar month after the close of the calendar quarter in which the bond is issued (or such later time as the Secretary may prescribe with respect to any portion of the statement), a statement concerning the issue of which the bond is a part which contains— “(A) the name and address of the issuer, “(B) the date of issue, the amount of net proceeds of the issue, the stated interest rate, term, and face amount of each bond which is part of the issue, the amount of issuance costs of the issue, and the amount of reserves of the issue, “(C) where required, the name of the applicable elected representative who approved the issue, or a description of the voter referendum by which the issue was approved, “(D) the name, address, and employer identification number of— “(i) each initial principal user of any facility provided with the proceeds of the issue, “(ii) the common parent of any affiliated group of corporations (within the meaning of section 1504(a)) of which such initial principal user is a member, and “(iii) if the issue is treated as a separate issue under section 144(a)(6)(A), any person treated as a principal user under section 144(a)(6)(B), “(E) a description of any property to be financed from the proceeds of the issue, “(F) a certification by a State official designated by State law (or, where there is no such official, the Governor) that the bond meets the requirements of section 146 (relating to cap on private activity bonds), if applicable, and “(G) such other information as the Secretary may require. Subparagraphs (C) and (D) shall not apply to any bond which is not a private activity bond. The Secretary may provide that certain information specified in the 1st sentence need not be included in the statement with respect to an issue where the inclusion of such information is not necessary to carry out the purposes of this subsection. “(3) Extension of time.— The Secretary may grant an extension of time for the filing of any statement required under paragraph (2) if there is reasonable cause for the failure to file such statement in a timely fashion. “Subpart C— Definitions and Special Rules “Sec. 150. Definitions and special rules. “SEC. 150. DEFINITIONS AND SPECIAL RULES. “(a) General Rule.— For purposes of this part— “(1) Bond.— The term ‘bond’ includes any obligation. “(2) Governmental unit not to include federal government.— The term ‘governmental unit’ does not include the United States or any agency or instrumentality thereof. “(3) Net proceeds.— The term ‘net proceeds’ means, with respect to any issue, the proceeds of such issue reduced by amounts in a reasonably required reserve or replacement fund. “(4) 501(c)(3) organization.— The term ‘501(c)(3) organization’ means any organization described in section 501(c)(3) and exempt from tax under section 501(a). “(5) Ownership of property.— Property shall be treated as owned by a governmental unit if it is owned on behalf of such unit. “(6) Tax-exempt bond.— The term ‘tax-exempt’ means, with respect to any bond (or issue), that the interest on such bond (or on the bonds issued as part of such issue) is excluded from gross income. “(b) Change in Use of Facilities Financed With Tax-Exempt Private Activity Bonds.— “(1) Mortgage revenue bonds.— “(A) In general.— In the case of any residence with respect to which financing is provided from the proceeds of a qualified mortgage bond or qualified veterans’ mortgage bond, if there is a continuous period of at least 1 year during which such residence is not the principal residence of at least 1 of the mortgagors who received such financing, then no deduction shall be allowed under this chapter for interest on such financing which accrues on or after the date such period began. “(B) Exception.— Subparagraph (A) shall not apply to the extent the Secretary determines that its application would result in undue hardship and that the failure to meet the requirements of subparagraph (A) resulted from circumstances beyond the mortgagor’s control. “(2) Qualified residential rental projects.— In the case of any project for residential rental property— “(A) with respect to which financing is provided from the proceeds of any private activity bond which, when issued, purported to be a tax-exempt bond described paragraph (7) of section 142(a), and “(B) which does not meet the requirements of section 142(d), no deduction shall be allowed under this chapter for interest on such financing which accrues during the period beginning on the 1st day of the taxable year in which such project fails to meet such requirements and ending on the date such project meets such requirements. “(3) Qualified 501(c)(3) bonds.— “(A) In general.— In the case of any facility with respect to which financing is provided from the proceeds of any private activity bond which, when issued, purported to be a tax-exempt qualified 501(c)(3) bond, if any portion of such facility— “(i) is used in a trade or business of any person other than a 501(c)(3) organization or a governmental unit, but “(ii) continues to be owned by a 501(c)(3) organization, then the owner of such portion shall be treated for purposes of this title as engaged in an unrelated trade or business (as defined in section 513) with respect to such portion. The amount of gross income attributable to such portion for any period shall not be less than the fair rental value of such portion for such period. “(B) Denial of deduction for interest.— No deduction shall be allowed under this chapter for interest on financing described in subparagraph (A) which accrues during the period beginning on the date such facility is used as de-scribed in subparagraph (A)(i) and ending on the date such facility is not so used. “(4) Certain exempt facility bonds.— “(A) In general.— In the case of any facility with respect to which financing is provided from the proceeds of any private activity bond to which this paragraph applies, if such facility is not used for a purpose for which a tax-exempt bond could be issued on the date of such issue, no deduction shall be allowed under this chapter for interest on such financing which accrues during the period beginning on the date such facility is not so used and ending on the date such facility is so used. “(B) Bonds to which paragraph applies.— This paragraph applies to any private activity bond which, when issued, purported to be a tax-exempt exempt facility bond described in a paragraph (other than paragraph (7)) of section 142(a). “(5) Facilities required to be owned by governmental units or 501(c)(3) organizations.— If— “(A) financing is provided with respect to any facility from the proceeds of any private activity bond which, when issued, purported to be a tax-exempt bond, “(B) such facility is required to be owned by a governmental unit or a 501(c)(3) organization as a condition of such tax exemption, and “(C) such facility is not so owned, then no deduction shall be allowed under this chapter for interest on such financing which accrues during the period beginning on the date such facility is not so owned and ending on the date such facility is so owned. “(c) Exception and Special Rules for Purposes of Subsection (b).— For purposes of subsection (b)— “(1) Exception.— Any use with respect to facilities financed with proceeds of an issue which are not required to be used for the exempt purpose of such issue shall not be taken into account. “(2) Treatment of amounts other than interest.— If the amounts payable for the use of a facility are not interest, subsection (b) shall apply to such amounts as if they were interest but only to the extent such amounts for any period do not exceed the amount of interest accrued on the bond financing for such period. “(3) Use of portion of facility.— In the case of any person which uses only a portion of the facility, only the interest accruing on the financing allocable to such portion shall be taken into account by such person. “(4) Cessation with respect to portion of facility.— In the case of any facility where part but not all of the facility is not used for an exempt purpose, only the interest accruing on the financing allocable to such part shall be taken into account. “(5) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and subsection (b). “(d) Qualified Scholarship Funding Bond.— For purposes of this part and section 103— “(1) Treatment as state or local bond.— A qualified scholarship funding bond shall be treated as a State or local bond. “(2) Qualified scholarship funding bond defined.— The term ‘qualified scholarship funding bond’ means a bond issued by a corporation which— “(A) is a corporation not for profit established and operated exclusively for the purpose of acquiring student loan notes incurred under the Higher Education Act of 1965, and “(B) is organized at the request of the State or 1 or more political subdivisions thereof or is requested to exercise such power by 1 or more political subdivisions and required by its corporate charter and bylaws, or required by State law, to devote any income (after payment of expenses, debt service, and the creation of reserves for the same) to the purchase of additional student loan notes or to pay over any income to the United States. “(e) Bonds of Certain Volunteer Fire Departments.— For purposes of this part and section 103— “(1) In general.— A bond of a volunteer fire department shall be treated as a bond of a political subdivision of a State if— “(A) such department is a qualified volunteer fire department with respect to an area within the jurisdiction of such political subdivision, and “(B) such bond is issued as part of an issue 95 percent or more of the net proceeds of which are to be used for the acquisition, construction, reconstruction, or improvement of a firehouse or firetruck used or to be used by such department. “(2) Qualified volunteer fire department.— For purposes of this subsection, the term ‘qualified volunteer fire department’ means, with respect to a political subdivision of a State, any organization— “(A) which is organized and operated to provide firefighting or emergency medical services for persons in an area (within the jurisdiction of such political subdivision) which is not provided with any other firefighting services, and “(B) which is required (by written agreement) by the political subdivision to furnish firefighting services in such area.”

2. 1988

   Technical and Miscellaneous Revenue Act of 1988

   Pub. L. 100–647 § 1013(a)(6) · 102 Stat. 3342

   Substituted · 26 U.S.C. § 145(b)(2)(B)(ii)(I)

   Pub. L. 100–647, § 1013(a)(6), substituted “section 103(b)(2)” for “section 103(b)”

   Source evidence

   Code amendment note
   Subsec. (b)(2)(B)(ii)(I). Pub. L. 100–647, § 1013(a)(6), substituted “section 103(b)(2)” for “section 103(b)”.

   Enacted provision · exact public law section
   (6) Subclause (I) of section 145(b)(2)(B)(ii) of the 1986 Code is amended by striking out “103(b)” and inserting in lieu thereof “103(b)(2)”.

3. 1988

   Technical and Miscellaneous Revenue Act of 1988

   Pub. L. 100–647 § 1013(a)(7) · 102 Stat. 3342

   Substituted · 26 U.S.C. § 145(b)(2)(C)(i)

   Pub. L. 100–647, § 1013(a)(7), substituted “subparagraph (B)” for “subparagraph (B)(ii)”

   Source evidence

   Code amendment note
   Subsec. (b)(2)(C)(i). Pub. L. 100–647, § 1013(a)(7), substituted “subparagraph (B)” for “subparagraph (B)(ii)”.

   Enacted provision · exact public law section
   (7) Clause (i) of section 145(b)(2)(C) of the 1986 Code is amended by striking out “subparagraph (B)(ii)” and inserting in lieu thereof “subparagraph (B)”.

4. 1988

   Technical and Miscellaneous Revenue Act of 1988

   Pub. L. 100–647 § 1013(a)(8) · 102 Stat. 3342

   Substituted · 26 U.S.C. § 145(b)(4)

   Pub. L. 100–647, § 1013(a)(8), substituted “subparagraphs (C), (D), and (E)” for “subparagraphs (C) and (D)”

   Source evidence

   Code amendment note
   Subsec. (b)(4). Pub. L. 100–647, § 1013(a)(8), substituted “subparagraphs (C), (D), and (E)” for “subparagraphs (C) and (D)”.

   Enacted provision · exact public law section
   (8) Paragraph (4) of section 145(b) of the 1986 Code is amended by striking out “subparagraphs (O and (D)” and inserting in lieu thereof “subparagraphs (O, (D), and (E)”.

5. 1988

   Technical and Miscellaneous Revenue Act of 1988

   Pub. L. 100–647 § 5053(a) · 102 Stat. 3342

   1. Added · 26 U.S.C. § 145(d); 26 U.S.C. § 145(e)

      Pub. L. 100–647, § 5053(a), added subsec. (d)

   2. Redesignated · 26 U.S.C. § 145(d); 26 U.S.C. § 145(e)

      Pub. L. 100–647, § 5053(a), redesignated former subsec. (d) as (e)

   Source evidence

   Code amendment note
   Subsecs. (d), (e). Pub. L. 100–647, § 5053(a), added subsec. (d) and redesignated former subsec. (d) as (e).

   Enacted provision · exact public law section
   (a) 501(c)(3) Bonds Used To Provide Residential Rental Housing for Family Units Must Meet Targeting Requirements.— Section 145 of the 1986 Code (defining qualified 501(c)(3) bond) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection: “(d) Restrictions on Bonds Used To Provide Residential Rental Housing for Family Units.— “(1) In general.— Except as otherwise provided in this subsection, a bond which is part of an issue shall not be a qualified 501(c)(3) bond if any portion of the net proceeds of the issue are to be used directly or indirectly to provide residential rental property for family units. “(2) Exception for bonds used to provide qualified residential rental projects.— Paragraph (1) shall not apply to any bond issued as part of an issue if the portion of such issue which is to be used as described in paragraph (1) is to be used to provide— “(A) a residential rental property for family units if the first use of such property is pursuant to such issue, “(B) qualified residential rental projects (as defined in section 142(d)), or “(C) property which is to be substantially rehabilitated in a rehabilitation beginning within the 2-year period ending 1 year after the date of the acquisition of such property “(3) Substantial rehabilitation.— “(A) In general.— Except as provided in subparagraph (B), rules similar to the rules of section 48(g)(1)(C) shall apply in determining for purposes of paragraph (2)(C) whether property is substantially rehabilitated. “(B) Exception.— For purposes of subparagraph (A), clause (ii) of section 48(g)(1)(C) shall not apply, but the Secretary may extend the 24-month period in section 48(g)(1)(C)(i) where appropriate due to circumstances not within the control of the owner.”

6. 1989

   Revenue Reconciliation Act of 1989

   Pub. L. 101–239 title VII § 7815(f) · 103 Stat. 2106

   1. Added · 26 U.S.C. § 145(d)(3); 26 U.S.C. § 145(d)(4)

      Pub. L. 101–239 added par. (3)

   2. Redesignated · 26 U.S.C. § 145(d)(3); 26 U.S.C. § 145(d)(4)

      Pub. L. 101–239 redesignated former par. (3) as (4)

   Source evidence

   Code amendment note
   Subsec. (d)(3), (4). Pub. L. 101–239 added par. (3) and redesignated former par. (3) as (4).

   Enacted provision · exact public law section
   (f) Amendment Related to Section 5053 of the 1988 Act.— Subsection (d) of section 145 is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph: (3) Certain property treated as new property.— Solely for purposes of determining under paragraph (2)(A) whether the 1st use of property is pursuant to tax-exempt financing— “(A) In general.— If— “(i) the 1st use of property is pursuant to taxable financing, “(ii) there was a reasonable expectation (at the time such taxable financing was provided) that such financing would be replaced by tax-exempt financing, and “(iii) the taxable financing is in fact so replaced within a reasonable period after the taxable financing was provided, then the 1st use of such property shall be treated as being pursuant to the tax-exempt financing. “(B) Special rule where no operating state or local program for tax-exempt financing.— If, at the time of the 1st use of property, there was no operating State or local program for tax-exempt financing of the property, the 1st use of the property shall be treated as pursuant to the 1st tax-exempt financing of the property. “(C) Definitions.— For purposes of this paragraph— “(i) Tax-exempt financing.— The term ‘tax-exempt financing’ means financing provided by tax-exempt bonds. “(ii) Taxable financing.— The term ‘taxable financing’ means financing which is not tax-exempt financing.”

7. 1990

   Revenue Reconciliation Act of 1990

   Pub. L. 101–508 title XI § 11813(b)(7) · 104 Stat. 1388

   1. Substituted · 26 U.S.C. § 145(d)(4)

      Pub. L. 101–508 substituted “section 47(c)(1)(C)” for “section 48(g)(1)(C)”

   2. Substituted · 26 U.S.C. § 145(d)(4)

      Pub. L. 101–508 substituted “section 47(c)(1)(C)(i)” for “section 48(g)(1)(C)(i)”

   Source evidence

   Code amendment note
   Subsec. (d)(4). Pub. L. 101–508 substituted “section 47(c)(1)(C)” for “section 48(g)(1)(C)” wherever appearing and “section 47(c)(1)(C)(i)” for “section 48(g)(1)(C)(i)”.

   Enacted provision · exact public law section
   (7) Paragraph (4) of section 145(d) is amended— (A) by striking “section 48(g)(l)(O” each place it appears and inserting “section 47(c)(l)(C)”, and (B) by striking “section 48(g)(l)(C)(i)” and inserting “section 47(c)(l)(C)(i)”.

8. 1997

   Pub. L. 105–34 title II § 222 · 111 Stat. 788

   Added · 26 U.S.C. § 145(b)(5)

   Pub. L. 105–34 added par. (5)

   Source evidence

   Code amendment note
   Subsec. (b)(5). Pub. L. 105–34 added par. (5).

   Enacted provision · exact public law section
   SEC. 222. REPEAL OF LIMITATION ON QUALIFIED 501(c)(3) BONDS OTHER THAN HOSPITAL BONDS. Section 145(b) (relating to qualified 501(c)(3) bond) is amended by adding at the end the following new paragraph: “(5) Termination of limitation.— This subsection shall not apply with respect to bonds issued after the date of the enactment of this paragraph as part of an issue 95 percent or more of the net proceeds of which are to be used to finance capital expenditures incurred after such date.”.

9. 2017

   Pub. L. 115–97 title I § 13402(b)(2) · 131 Stat. 2054

   1. Substituted · 26 U.S.C. § 145(d)(4)

      Pub. L. 115–97 substituted “of section 47(c)(1)(B)” for “of section 47(c)(1)(C)” in subpar. (B)

   2. Substituted · 26 U.S.C. § 145(d)(4)

      Pub. L. 115–97 substituted “section 47(c)(1)(B)(i)” for “section 47(c)(1)(C)(i)” in subpar. (B)

   Source evidence

   Code amendment note
   Subsec. (d)(4). Pub. L. 115–97 substituted “of section 47(c)(1)(B)” for “of section 47(c)(1)(C)” in subpars. (A) and (B) and “section 47(c)(1)(B)(i)” for “section 47(c)(1)(C)(i)” in subpar. (B).

   Enacted provision · exact public law section
   (2) Paragraph (4) of section 145(d) is amended— (A) by striking “of section 47(c)(1)(C)” each place it appears and inserting “of section 47(c)(1)(B)”, and (B) by striking “section 47(c)(1)(C)(i)” and inserting “section 47(c)(1)(B)(i)”.

   Effective date note
   Amendment by Pub. L. 115–97 applicable to amounts paid or incurred after Dec. 31, 2017, see section 13402(c) of Pub. L. 115–97, set out as a note under section 47 of this title.

13 of 13 references resolved to an enrolled provision