Internal Revenue Code – Section 148

Sec. 148. Arbitrage

-STATUTE-

(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,

(D) any investment-type property, or

(E) in the case of a bond other than a private activity bond,

any residential rental property for family units which is not

located within the jurisdiction of the issuer and which is not

acquired to implement a court ordered or approved housing

desegregation plan.

(3) Alternative minimum tax bonds treated as investment property

in certain cases

(A) In general

Except as provided in subparagraph (B), the term "investment

property" does not include any tax-exempt bond.

(B) Exception

With respect to an issue other than an issue a part of which

is a specified private activity bond (as defined in section

57(a)(5)(C)), the term "investment property" includes a

specified private activity bond (as so defined).

(4) Safe harbor for prepaid natural gas

(A) In general

The term "investment-type property" does not include a

prepayment under a qualified natural gas supply contract.

(B) Qualified natural gas supply contract

For purposes of this paragraph, the term "qualified natural

gas supply contract" means any contract to acquire natural gas

for resale by a utility owned by a governmental unit if the

amount of gas permitted to be acquired under the contract by

the utility during any year does not exceed the sum of -

(i) the annual average amount during the testing period of

natural gas purchased (other than for resale) by customers of

such utility who are located within the service area of such

utility, and

(ii) the amount of natural gas to be used to transport the

prepaid natural gas to the utility during such year.

(C) Natural gas used to generate electricity

Natural gas used to generate electricity shall be taken into

account in determining the average under subparagraph (B)(i) -

(i) only if the electricity is generated by a utility owned

by a governmental unit, and

(ii) only to the extent that the electricity is sold (other

than for resale) to customers of such utility who are located

within the service area of such utility.

(D) Adjustments for changes in customer base

(i) New business customers

If -

(I) after the close of the testing period and before the

date of issuance of the issue, the utility owned by a

governmental unit enters into a contract to supply natural

gas (other than for resale) for a business use at a

property within the service area of such utility, and

(II) the utility did not supply natural gas to such

property during the testing period or the ratable amount of

natural gas to be supplied under the contract is

significantly greater than the ratable amount of gas

supplied to such property during the testing period,

 

then a contract shall not fail to be treated as a qualified

natural gas supply contract by reason of supplying the

additional natural gas under the contract referred to in

subclause (I).

(ii) Lost customers

The average under subparagraph (B)(i) shall not exceed the

annual amount of natural gas reasonably expected to be

purchased (other than for resale) by persons who are located

within the service area of such utility and who, as of the

date of issuance of the issue, are customers of such utility.

(E) Ruling requests

The Secretary may increase the average under subparagraph

(B)(i) for any period if the utility owned by the governmental

unit establishes to the satisfaction of the Secretary that,

based on objective evidence of growth in natural gas

consumption or population, such average would otherwise be

insufficient for such period.

(F) Adjustment for natural gas otherwise on hand

(i) In general

The amount otherwise permitted to be acquired under the

contract for any period shall be reduced by -

(I) the applicable share of natural gas held by the

utility on the date of issuance of the issue, and

(II) the natural gas (not taken into account under

subclause (I)) which the utility has a right to acquire

during such period (determined as of the date of issuance

of the issue).

(ii) Applicable share

For purposes of the clause (i), the term "applicable share"

means, with respect to any period, the natural gas allocable

to such period if the gas were allocated ratably over the

period to which the prepayment relates.

(G) Intentional acts

Subparagraph (A) shall cease to apply to any issue if the

utility owned by the governmental unit engages in any

intentional act to render the volume of natural gas acquired by

such prepayment to be in excess of the sum of -

(i) the amount of natural gas needed (other than for

resale) by customers of such utility who are located within

the service area of such utility, and

(ii) the amount of natural gas used to transport such

natural gas to the utility.

(H) Testing period

For purposes of this paragraph, the term "testing period"

means, with respect to an issue, the most recent 5 calendar

years ending before the date of issuance of the issue.

(I) Service area

For purposes of this paragraph, the service area of a utility

owned by a governmental unit shall be comprised of -

(i) any area throughout which such utility provided at all

times during the testing period -

(I) in the case of a natural gas utility, natural gas

transmission or distribution services, and

(II) in the case of an electric utility, electricity

distribution services,

 

(ii) any area within a county contiguous to the area

described in clause (i) in which retail customers of such

utility are located if such area is not also served by

another utility providing natural gas or electricity

services, as the case may be, and

(iii) any area recognized as the service area of such

utility under State or Federal law.

(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) 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.

(C) Bonds used to provide construction financing

In the case of an issue described in subparagraph (A) any

portion of which is used to make or finance loans for

construction expenditures (within the meaning of subsection

(f)(4)(C)(iv)) -

(i) rules similar to the rules of subsection (f)(4)(C)(v)

shall apply, and

(ii) subparagraph (A) shall be applied with respect to such

portion by substituting "2 years" for "6 months".

(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 reserve or replacement fund

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).

(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 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. A series

of issues which are redeemed during a 6-month period (or such

longer period as the Secretary may prescribe) shall be treated

(at the election of the issuer) as 1 issue for purposes of the

preceding sentence if no bond which is part of any issue in such

series has a maturity of more than 270 days or is a private

activity bond. In the case of a tax and revenue anticipation

bond, the last installment shall not be required to be made

before the date 8 months after the date of issuance of the issue

of which the bond is a part.

(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) 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.

 

In the case of an issue no bond of which is a private activity

bond, clause (ii) shall be applied without regard to the dollar

limitation therein if the average maturity of the issue

(determined in accordance with section 147(b)(2)(A)) is at

least 5 years and the rates of interest on bonds which are part

of the issue do not vary during the term of the issue.

(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 -

(I) the gross proceeds of such issue are expended for the

governmental purposes for which the issue was issued no

later than the day which is 6 months after the date of

issuance of the issue, and

(II) the requirements of paragraph (2) are met with

respect to amounts not required to be spent as provided in

subclause (I) (other than earnings on amounts in any bona

fide debt service fund).

 

Gross proceeds which are held in a bona fide debt service

fund or a reasonably required reserve or replacement fund,

and gross proceeds which arise after such 6 months and which

were not reasonably anticipated as of the date of issuance,

shall not be considered gross proceeds for purposes of

subclause (I) 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 "1 year" for "6

months" each place it appears 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

5 percent of the proceeds of the issue.

(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 proceeds 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 earlier of the date

6 months after such date of issuance or the date of the

computation of cumulative cash flow deficit.

(iv) Payments of principal not to affect requirements

For purposes of this subparagraph, payments of principal on

the bonds which are part of an issue shall not be treated as

expended for the governmental purposes of the issue.

(C) Exception from rebate for certain proceeds to be used to

finance construction expenditures

(i) In general

In the case of a construction issue, paragraph (2) shall

not apply to the available construction proceeds of such

issue if the spending requirements of clause (ii) are met.

(ii) Spending requirements

The spending requirements of this clause are met if at

least -

(I) 10 percent of the available construction proceeds of

the construction issue are spent for the governmental

purposes of the issue within the 6-month period beginning

on the date the bonds are issued,

(II) 45 percent of such proceeds are spent for such

purposes within the 1-year period beginning on such date,

(III) 75 percent of such proceeds are spent for such

purposes within the 18-month period beginning on such date,

and

(IV) 100 percent of such proceeds are spent for such

purposes within the 2-year period beginning on such date.

(iii) Exception for reasonable retainage

The spending requirement of clause (ii)(IV) shall be

treated as met if -

(I) such requirement would be met at the close of such 2-

year period but for a reasonable retainage (not exceeding

5 percent of the available construction proceeds of the

construction issue), and

(II) 100 percent of the available construction proceeds

of the construction issue are spent for the governmental

purposes of the issue within the 3-year period beginning on

the date the bonds are issued.

(iv) Construction issue

For purposes of this subparagraph, the term "construction

issue" means any issue if -

(I) at least 75 percent of the available construction

proceeds of such issue are to be used for construction

expenditures with respect to property which is to be owned

by a governmental unit or a 501(c)(3) organization, and

(II) all of the bonds which are part of such issue are

qualified 501(c)(3) bonds, bonds which are not private

activity bonds, or private activity bonds issued to finance

property to be owned by a governmental unit or a 501(c)(3)

organization.

 

For purposes of this subparagraph, the term "construction"

includes reconstruction and rehabilitation, and rules similar

to the rules of section 142(b)(1)(B) shall apply.

(v) Portions of issues used for construction

If -

(I) all of the construction expenditures to be financed

by an issue are to be financed from a portion thereof, and

(II) the issuer elects to treat such portion as a

construction issue for purposes of this subparagraph,

 

then, for purposes of this subparagraph and subparagraph (B),

such portion shall be treated as a separate issue.

(vi) Available construction proceeds

For purposes of this subparagraph -

(I) In general

The term "available construction proceeds" means the

amount equal to the issue price (within the meaning of

sections 1273 and 1274) of the construction issue,

increased by earnings on the issue price, earnings on

amounts in any reasonably required reserve or replacement

fund not funded from the issue, and earnings on all of the

foregoing earnings, and reduced by the amount of the issue

price in any reasonably required reserve or replacement

fund and the issuance costs financed by the issue.

(II) Earnings on reserve included only for certain periods

The term "available construction proceeds" shall not

include amounts earned on any reasonably required reserve

or replacement fund after the earlier of the close of the 2-

year period described in clause (ii) or the date the

construction is substantially completed.

(III) Payments on acquired purpose obligations excluded

The term "available construction proceeds" shall not

include payments on any obligation acquired to carry out

the governmental purposes of the issue and shall not

include earnings on such payments.

(IV) Election to rebate on earnings on reserve

At the election of the issuer, the term "available

construction proceeds" shall not include earnings on any

reasonably required reserve or replacement fund.

(vii) Election to pay penalty in lieu of rebate

(I) In general

At the election of the issuer, paragraph (2) shall not

apply to available construction proceeds which do not meet

the spending requirements of clause (ii) if the issuer pays

a penalty, with respect to each 6-month period after the

date the bonds were issued, equal to 1 1/2  percent of the

amount of the available construction proceeds of the issue

which, as of the close of such 6-month period, is not spent

as required by clause (ii).

(II) Termination

The penalty imposed by this clause shall cease to apply

only as provided in clause (viii) or after the latest

maturity date of any bond in the issue (including any

refunding bond with respect thereto).

(viii) Election to terminate 1 1/2  percent penalty

At the election of the issuer (made not later than 90 days

after the earlier of the end of the initial temporary period

or the date the construction is substantially completed), the

penalty under clause (vii) shall not apply to any 6-month

period after the initial temporary period under subsection

(c) if the requirements of subclauses (I), (II), and (III)

are met.

(I) 3 percent penalty

The requirement of this subclause is met if the issuer

pays a penalty equal to 3 percent of the amount of

available construction proceeds of the issue which is not

spent for the governmental purposes of the issue as of the

close of such initial temporary period multiplied by the

number of years (including fractions thereof) in the

initial temporary period.

(II) Yield restriction at close of temporary period

The requirement of this subclause is met if the amount of

the available construction proceeds of the issue which is

not spent for the governmental purposes of the issue as of

the close of such initial temporary period is invested at a

yield not exceeding the yield on the issue or which is

invested in any tax-exempt bond which is not investment

property.

(III) Redemption of bonds at earliest call date

The requirement of this subclause is met if the amount of

the available construction proceeds of the issue which is

not spent for the governmental purposes of the issue as of

the earliest date on which bonds may be redeemed is used to

redeem bonds on such date.

(ix) Election to terminate 1 1/2  percent penalty before end

of temporary period

If -

(I) the construction to be financed by a construction

issue is substantially completed before the end of the

initial temporary period,

(II) the issuer identifies an amount of available

construction proceeds which will not be spent for the

governmental purposes of the issue,

(III) the issuer has made the election under clause

(viii), and

(IV) the issuer makes an election under this clause

before the close of the initial temporary period and not

later than 90 days after the date the construction is

substantially completed,

 

then clauses (vii) and (viii) shall be applied to the

available construction proceeds so identified as if the

initial temporary period ended as of the date the election is

made.

(x) Failure to pay penalties

In the case of a failure (which is not due to willful

neglect) to pay any penalty required to be paid under clause

(vii) or (viii) in the amount or at the time prescribed

therefor, the Secretary may treat such failure as not

occurring if, in addition to paying such penalty, the issuer

pays a penalty equal to the sum of -

(I) 50 percent of the amount which was not paid in

accordance with clauses (vii) and (viii), 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 for the period beginning on such

date.

 

The Secretary may waive all or any portion of the penalty

under this clause. Bonds which are part of an issue with

respect to which there is a failure to pay the amount

required under this clause (and any refunding bond with

respect thereto) shall be treated as not being, and as never

having been, tax-exempt bonds.

(xi) Election for pooled financing bonds

At the election of the issuer of an issue the proceeds of

which are to be used to make or finance loans (other than

nonpurpose investments) to 2 or more persons, the periods

described in clauses (ii) and (iii) shall begin on -

(I) the date the loan is made, in the case of loans made

within the 1-year period after the date the bonds are

issued, and

(II) the date following such 1-year period, in the case

of loans made after such 1-year period.

 

If such an election applies to an issue, the requirements of

paragraph (2) shall apply to amounts earned before the

beginning of the periods determined under the preceding

sentence.

(xii) Payments of principal not to affect requirements

For purposes of this subparagraph, payments of principal on

the bonds which are part of the construction issue shall not

be treated as an expenditure of the available construction

proceeds of the issue.

(xiii) Refunding bonds

(I) In general

Except as provided in this clause, clause (vii)(II), and

the last sentence of clause (x), this subparagraph shall

not apply to any refunding bond and no proceeds of a

refunded bond shall be treated for purposes of this

subparagraph as proceeds of a refunding bond.

(II) Determination of construction portion of issue

For purposes of clause (v), any portion of an issue which

is used to refund any issue (or portion thereof) shall be

treated as a separate issue.

(III) Coordination with rebate requirement on refunding

bonds

The requirements of paragraph (2) shall be treated as met

with respect to earnings for any period if a penalty is

paid under clause (vii) or (viii) with respect to such

earnings for such period.

(xiv) Determination of initial temporary period

For purposes of this subpargraph,(!1) the end of the

initial temporary period shall be determined without regard

to section 149(d)(3)(A)(iv).

 

(xv) Elections

Any election under this subparagraph (other than clauses

(viii) and (ix)) shall be made on or before the date the

bonds are issued; and, once made, shall be irrevocable.

(xvi) Time for payment of penalties

Any penalty under this subparagraph shall be paid to the

United States not later than 90 days after the period to

which the penalty relates.

(xvii) Treatment of bona fide debt service funds

If the spending requirements of clause (ii) are met with

respect to the available construction proceeds of a

construction issue, then paragraph (2) shall not apply to

earnings on a bona fide debt service fund for such issue.

(D) Exception for governmental units issuing $5,000,000 or less

of bonds

(i) In general

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

during the calendar year in which such issue is issued is

not reasonably expected to exceed $5,000,000.

(ii) Aggregation of issuers

For purposes of subclause (IV) of clause (i) -

(I) an issuer and all entities which issue bonds on

behalf of such issuer shall be treated as 1 issuer,

(II) all bonds issued by a subordinate entity shall, for

purposes of applying such subclause to each other entity to

which such entity is subordinate, be treated as issued by

such other entity, and

(III) an entity formed (or, to the extent provided by the

Secretary, availed of) to avoid the purposes of such

subclause (IV) and all other entities benefiting thereby

shall be treated as 1 issuer.

(iii) Certain refunding bonds not taken into account in

determining small issuer status

There shall not be taken into account under subclause (IV)

of clause (i) any bond issued to refund (other than to

advance refund) any bond to the extent the amount of the

refunding bond does not exceed the outstanding amount of the

refunded bond.

(iv) Certain issues issued by subordinate governmental units,

etc., exempt from rebate requirement

An issue issued by a subordinate entity of a governmental

unit with general taxing powers shall be treated as described

in clause (i)(I) if the aggregate face amount of such issue

does not exceed the lesser of -

(I) $5,000,000, or

(II) the amount which, when added to the aggregate face

amount of other issues issued by such entity, does not

exceed the portion of the $5,000,000 limitation under

clause (i)(IV) which such governmental unit allocates to

such entity.

 

For purposes of the preceding sentence, an entity which

issues bonds on behalf of a governmental unit with general

taxing powers shall be treated as a subordinate entity of

such unit. An allocation shall be taken into account under

subclause (II) only if it is irrevocable and made before the

issuance date of such issue and only to the extent that the

limitation so allocated bears a reasonable relationship to

the benefits received by such governmental unit from issues

issued by such entity.

(v) Determination of whether refunding bonds eligible for

exception from rebate requirement

If any portion of an issue is issued to refund other bonds,

such portion shall be treated as a separate issue which does

not meet the requirements of paragraphs (2) and (3) by reason

of this subparagraph unless -

(I) the aggregate face amount of such issue does not

exceed $5,000,000,

(II) each refunded bond was issued as part of an issue

which was treated as meeting the requirements of paragraphs

(2) and (3) by reason of this subparagraph,

(III) the average maturity date of the refunding bonds

issued as part of such issue is not later than the average

maturity date of the bonds to be refunded by such issue,

and

(IV) no refunding bond has a maturity date which is later

than the date which is 30 years after the date the original

bond was issued.

 

Subclause (III) shall not apply if the average maturity of

the issue of which the original bond was a part (and of the

issue of which the bonds to be refunded are a part) is 3

years or less. For purposes of this clause, average maturity

shall be determined in accordance with section 147(b)(2)(A).

(vi) Refundings of bonds issued under law prior to Tax Reform

Act of 1986

If section 141(a) did not apply to any refunded bond, the

issue of which such refunded bond was a part shall be treated

as meeting the requirements of subclause (II) of clause (v)

if -

(I) such issue was issued by a governmental unit with

general taxing powers,

(II) no bond issued as part of such issue was an

industrial development bond (as defined in section

103(b)(2), but without regard to subparagraph (B) of

section 103(b)(3)) or a private loan bond (as defined in

section 103(o)(2)(A), but without regard to any exception

from such definition other than section 103(o)(2)(C)), and

(III) the aggregate face amount of all tax-exempt bonds

(other than bonds described in subclause (II)) issued by

such unit during the calendar year in which such issue was

issued did not exceed $5,000,000.

 

References in subclause (II) to section 103 shall be to such

section as in effect on the day before the date of the

enactment of the Tax Reform Act of 1986. Rules similar to the

rules of clauses (ii) and (iii) shall apply for purposes of

subclause (III). For purposes of subclause (II) of clause

(i), bonds described in subclause (II) of this clause to

which section 141(a) does not apply shall not be treated as

private activity bonds.

(vii) Increase in exception for bonds financing public school

capital expenditures

Each of the $5,000,000 amounts in the preceding provisions

of this subparagraph shall be increased by the lesser of

$10,000,000 or so much of the aggregate face amount of the

bonds as are attributable to financing the construction

(within the meaning of subparagraph (C)(iv)) of public school

facilities.

(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 not due 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.

 

-SOURCE-

(Added Pub. L. 99-514, title XIII, Sec. 1301(b), Oct. 22, 1986, 100

Stat. 2641; amended Pub. L. 100-647, title I, Sec. 1013(a)(14)-

(16)(A), (17)(A), (B), (18), (19), (43)(A), (B), title IV, Sec.

4005(d)(2), title V, Sec. 5053(b), title VI, Secs. 6177(a), (b),

6181(a), (b), 6183(a), Nov. 10, 1988, 102 Stat. 3539, 3540, 3542,

3545, 3646, 3678, 3726, 3727, 3729; Pub. L. 101-239, title VII,

Secs. 7652(a)-(d), 7814(c)(2), 7816(r), (t), Dec. 19, 1989, 103

Stat. 2385-2387, 2413, 2423; Pub. L. 101-508, title XI, Sec.

11701(j)(1)-(6), Nov. 5, 1990, 104 Stat. 1388-508 to 1388-513; Pub.

L. 105-34, title II, Sec. 223(a), title XIV, Secs. 1441-1444, Aug.

5, 1997, 111 Stat. 818, 1053, 1054; Pub. L. 107-16, title IV, Sec.

421(a), June 7, 2001, 115 Stat. 64; Pub. L. 109-58, title XIII,

Sec. 1327(a), Aug. 8, 2005, 119 Stat. 1017; Pub. L. 109-222, title

V, Sec. 508(c), May 17, 2006, 120 Stat. 362.)

 

 

-STATAMEND-

AMENDMENT OF SECTION

For termination of amendment by section 901 of Pub. L. 107-16,

see Effective and Termination Dates of 2001 Amendment note below.

 

-REFTEXT-

REFERENCES IN TEXT

The date of the enactment of the Tax Reform Act of 1986, referred

to in subsec. (f)(4)(C)(vi), is the date of enactment of Pub. L. 99-

514, which was approved Oct. 22, 1986.

Section 438 of the Higher Education Act of 1965, referred to in

subsec. (g), is classified to section 1087-1 of Title 20,

Education.

 

 

-MISC1-

AMENDMENTS

2006 - Subsec. (f)(4)(D)(ii)(II) to (IV). Pub. L. 109-222

redesignated subcls. (III) and (IV) as (II) and (III),

respectively, and struck out former subcl. (II) which read as

follows: "all bonds issued by a governmental unit to make loans to

other governmental units with general taxing powers not subordinate

to such unit shall, for purposes of applying such subclause to such

unit, be treated as not issued by such unit."

2005 - Subsec. (b)(4). Pub. L. 109-58 added par. (4).

2001 - Subsec. (f)(4)(D)(vii). Pub. L. 107-16, Secs. 421(a), 901,

temporarily substituted "the lesser of $10,000,000" for "the lesser

of $5,000,000". See Effective and Termination Dates of 2001

Amendment note below.

1997 - Subsec. (c)(2)(B) to (E). Pub. L. 105-34, Sec. 1444(a),

redesignated subpars. (C) to (E) as (B) to (D), respectively, and

struck out heading and text of former subpar. (B). Text read as

follows: "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."

Subsec. (d)(3). Pub. L. 105-34, Sec. 1443, struck out par. (3)

which related to limitations on investment in nonpurpose

investments.

Subsec. (f)(4)(B)(ii)(I). Pub. L. 105-34, Sec. 1441, substituted

"5 percent of the proceeds of the issue" for "the lesser of 5

percent of the proceeds of the issue or $100,000".

Subsec. (f)(4)(C)(xvii). Pub. L. 105-34, Sec. 1442, added cl.

(xvii).

Subsec. (f)(4)(D)(vii). Pub. L. 105-34, Sec. 223(a), added cl.

(vii).

Subsec. (f)(4)(E). Pub. L. 105-34, Sec. 1444(b), struck out

subpar. (E) which related to exception for certain qualified

student loan bonds.

1990 - Subsec. (c)(2)(D). Pub. L. 101-508, Sec. 11701(j)(5),

substituted "subsection (f)(4)(C)(iv)" for "subsection

(f)(4)(B)(iv)(IV)" in introductory provisions and "subsection

(f)(4)(C)(v)" for "subsection (f)(4)(B)(iv)(VIII)" in cl. (i).

Subsec. (c)(2)(D), (E). Pub. L. 101-508, Sec. 11701(j)(6), made

technical amendment to Pub. L. 101-239, Sec. 7652(c). See 1989

Amendment note below.

Subsec. (f)(4)(B)(i). Pub. L. 101-508, Sec. 11701(j)(2),

substituted in last sentence "replacement fund, and gross proceeds

which arise after such 6 months and which were not reasonably

anticipated as of the date of issuance, shall not be considered

gross proceeds for purposes of subclause (I) only" for "replacement

fund shall not be considered gross proceeds for purposes of this

subparagraph only" in concluding provisions.

Subsec. (f)(4)(B)(i)(II). Pub. L. 101-508, Sec. 11701(j)(1),

amended subcl. (II) generally. Prior to amendment, subcl. (II) read

as follows: "the requirements of paragraph (2) are met after such 6

months with respect to earnings on amounts in any reasonably

required reserve or replacement fund."

Subsec. (f)(4)(B)(iv). Pub. L. 101-508, Sec. 11701(j)(4), amended

cl. (iv) generally, substituting present provisions for provisions

which provided for a special rule to be applied during a 2-year

period for certain construction bonds from issues in which at least

75 percent of the net proceeds of the issue were to be used for

construction expenditures with respect to property which was owned

by a governmental unit or a 501(c)(3) organization.

Subsec. (f)(4)(C) to (E). Pub. L. 101-508, Sec. 11701(j)(3)(A),

(B), added subpar. (C) and redesignated former subpars. (C) and (D)

as (D) and (E), respectively.

1989 - Subsec. (c)(2)(D), (E). Pub. L. 101-239, Sec. 7652(c), as

amended by Pub. L. 101-508, Sec. 11701(j)(6), added subpar. (D) and

redesignated former subpar. (D) as (E).

Subsec. (d)(3)(E)(ii). Pub. L. 101-239, Sec. 7814(c)(2), struck

out "a qualified mortgage bond or" after "in the case of".

Subsec. (f)(4)(B)(i). Pub. L. 101-239, Sec. 7652(a), amended cl.

(i) generally. Prior to amendment, cl. (i) read as follows: "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."

Subsec. (f)(4)(B)(ii)(I). Pub. L. 101-239, Sec. 7652(d), inserted

"each place it appears" after " '6 months' ".

Subsec. (f)(4)(B)(iii)(III). Pub. L. 101-239, Sec. 7816(r),

substituted "such date of issuance or the date" for "such date of

issuance. or the date".

Subsec. (f)(4)(B)(iv). Pub. L. 101-239, Sec. 7652(b), added cl.

(iv).

Subsec. (f)(4)(C)(ii)(II). Pub. L. 101-239, Sec. 7816(t),

substituted "to make loans to" for "on behalf of".

1988 - Subsec. (b)(2). Pub. L. 100-647, Sec. 1013(a)(43)(B),

struck out at end "Such term shall not include any tax-exempt

bond."

Subsec. (b)(2)(E). Pub. L. 100-647, Sec. 5053(b), added subpar.

(E).

Subsec. (b)(3). Pub. L. 100-647, Sec. 1013(a)(43)(A), added par.

(3).

Subsec. (d)(2). Pub. L. 100-647, Sec. 1013(a)(14), substituted

"any reserve or replacement fund" for "any fund described in

paragraph (1)".

Subsec. (f)(1). Pub. L. 100-647, Sec. 4005(d)(2), struck out

"qualified mortgage bond or" after "apply to any".

Subsec. (f)(3). Pub. L. 100-647, Sec. 6177(b), inserted at end

"In the case of a tax and revenue anticipation bond, the last

installment shall not be required to be made before the date 8

months after the date of issuance of the issue of which the bond is

a part."

Pub. L. 100-647, Sec. 1013(a)(15), inserted "A series of issues

which are redeemed during a 6-month period (or such longer period

as the Secretary may prescribe) shall be treated (at the election

of the issuer) as 1 issue for purposes of the preceding sentence if

no bond which is part of any issue in such series has a maturity of

more than 270 days or is a private activity bond."

Subsec. (f)(4)(A). Pub. L. 100-647, Sec. 6181(a), (b), struck out

"unless the issuer otherwise elects," before "any amount earned" in

cl. (ii) and inserted at end of subpar. (A) "In the case of an

issue no bond of which is a private activity bond, clause (ii)

shall be applied without regard to the dollar limitation therein if

the average maturity of the issue (determined in accordance with

section 147(b)(2)(A)) is at least 5 years and the rates of interest

on bonds which are part of the issue do not vary during the term of

the issue."

Subsec. (f)(4)(B)(iii)(I). Pub. L. 100-647, Sec. 1013(a)(16)(A),

substituted "proceeds" for "aggregate face amount".

Subsec. (f)(4)(B)(iii)(III). Pub. L. 100-647, Sec. 6177(a),

substituted "the earlier of the date 6 months after such date of

issuance." for "the earliest of the maturity date of the issue, the

date 6 months after such date of issuance,".

Subsec. (f)(4)(C). Pub. L. 100-647, Sec. 1013(a)(17)(A), in

heading substituted "governmental units issuing $5,000,000 or less

of bonds" for "small governmental units", designated existing

provision as cl. (i), inserted heading "In general", redesignated

existing cls. (i) to (iv) as subcls. (I) to (IV) and realigned

their margins, struck out last sentence providing that cl. (iv) 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, and added cls.

(ii) to (vi).

Subsec. (f)(4)(C)(i)(IV). Pub. L. 100-647, Sec. 1013(a)(17)(B),

struck out "(and all subordinate entities thereof)" after "such

unit".

Subsec. (f)(4)(C)(ii). Pub. L. 100-647, Sec. 6183(a), added

subcl. (II) and redesignated former subcls. (II) and (III) as (III)

and (IV), respectively.

Subsec. (f)(4)(D)(i). Pub. L. 100-647, Sec. 1013(a)(18), inserted

"for a program" before "described in section 144(b)(1)(A)" in

introductory text, substituted "such program" for "such a program"

in subcl. (I), and inserted at end "Amounts designated as interest

on student loans shall not be taken into account in determining

whether the issuer is reimbursed for such costs. Except as

otherwise hereafter provided in regulations prescribed by the

Secretary, costs described in subclause (I) paid from amounts

earned as described in the first sentence of this clause may also

be taken into account in determining the yield on the student loans

under a program described in section 144(b)(1)(A)."

Subsec. (f)(7)(B). Pub. L. 100-647, Sec. 1013(a)(19), substituted

"not due" for "due to reasonable cause and not".

 

EFFECTIVE DATE OF 2006 AMENDMENT

Amendment by Pub. L. 109-222 applicable to bonds issued after May

17, 2006, see section 508(e) of Pub. L. 109-222, set out as a note

under section 54 of this title.

 

EFFECTIVE DATE OF 2005 AMENDMENT

Amendment by Pub. L. 109-58 applicable to obligations issued

after Aug. 8, 2005, see section 1327(d) of Pub. L. 109-58, set out

as a note under section 141 of this title.

 

EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT

Pub. L. 107-16, title IV, Sec. 421(b), June 7, 2001, 115 Stat.

65, provided that: "The amendment made by subsection (a) [amending

this section] shall apply to obligations issued in calendar years

beginning after December 31, 2001."

Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or

limitation years beginning after Dec. 31, 2012, and the Internal

Revenue Code of 1986 to be applied and administered to such years

as if such amendment had never been enacted, see section 901 of

Pub. L. 107-16, set out as a note under section 1 of this title.

 

EFFECTIVE DATE OF 1997 AMENDMENT

Section 223(b) of Pub. L. 105-34 provided that: "The amendments

made by this section [amending this section] shall apply to bonds

issued after December 31, 1997."

Section 1445 of title XIV of Pub. L. 105-34 provided that: "The

amendments made by this subtitle [subtitle B (Secs. 1441-1445) of

title XIV of Pub. L. 105-34, amending this section] shall apply to

bonds issued after the date of the enactment of this Act [Aug. 5,

1997]."

 

EFFECTIVE DATE OF 1990 AMENDMENT

Amendment by Pub. L. 101-508 effective, except as otherwise

provided, as if included in the provision of the Revenue

Reconciliation Act of 1989, Pub. L. 101-239, title VII, to which

such amendment relates, see section 11701(n) of Pub. L. 101-508,

set out as a note under section 42 of this title.

Section 11701(j)(8) of Pub. L. 101-508 provided that: "Section

148(f)(4)(C)(xiii)(II) of such Code (as added by this subsection)

shall apply only to refunding bonds issued after August 3, 1990."

 

EFFECTIVE DATE OF 1989 AMENDMENT

Section 7652(e) of Pub. L. 101-239 provided that: "The amendments

made by this section [amending this section] shall apply to bonds

issued after the date of the enactment of this Act [Dec. 19,

1989]."

Amendment by sections 7814(c)(2) and 7816(r), (t) of Pub. L. 101-

239 effective, except as otherwise provided, as if included in the

provision of the Technical and Miscellaneous Revenue Act of 1988,

Pub. L. 100-647, to which such amendment relates, see section 7817

of Pub. L. 101-239, set out as a note under section 1 of this

title.

 

EFFECTIVE DATE OF 1988 AMENDMENT

Section 1013(a)(16)(B) of Pub. L. 100-647 provided that: "The

amendment made by subparagraph (A) [amending this section] shall

apply to bonds issued after June 30, 1987."

Section 1013(a)(17)(C) of Pub. L. 100-647 provided that:

"(i) Except as provided in clause (ii), the amendments made by

this paragraph [amending this section] shall apply to bonds issued

after June 30, 1987.

"(ii) At the election of an issuer (made at such time and in such

manner as the Secretary of the Treasury or his delegate may

prescribe), the amendments made by this paragraph shall apply to

such issuer as if included in the amendments made by section

1301(a) of the Tax Reform Act of 1986 [amending section 103 of this

title]."

Section 1013(a)(43)(C) of Pub. L. 100-647 provided that: "The

amendments made by this paragraph [amending this section] shall

apply to obligations issued after March 31, 1988."

Amendment by section 1013(a)(14), (15), (18), (19) of Pub. L. 100-

647 effective, except as otherwise provided, as if included in the

provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which

such amendment relates, see section 1019(a) of Pub. L. 100-647, set

out as a note under section 1 of this title.

Amendment by section 4005(d)(2) of Pub. L. 100-647 applicable to

bonds issued, and nonissued bond amounts elected, after Dec. 31,

1988, see section 4005(h)(1) of Pub. L. 100-647, set out as a note

under section 143 of this title.

Amendment by section 5053(b) of Pub. L. 100-647 applicable, with

certain exceptions, to obligations issued after Oct. 21, 1988, see

section 5053(c) of Pub. L. 100-647, set out as a note under section

145 of this title.

Section 6177(c) of Pub. L. 100-647 provided that: "The amendments

made by this section [amending this section] shall apply to bonds

issued after the date of the enactment of this Act [Nov. 10,

1988]."

Section 6181(c) of Pub. L. 100-647 provided that:

"(1) In general. - The amendments made by this section [amending

this section] shall apply to bonds issued after the date of the

enactment of this Act [Nov. 10, 1988].

"(2) Election for outstanding bonds. - Any issue of bonds other

than private activity bonds outstanding as of the date of the

enactment of this Act shall be allowed a 1-time election to apply

the amendments made by subsection (b) [amending this section] to

amounts deposited after such date in bona fide debt service funds

of such bonds.

"(3) Definition of private activity bond. - For purposes of this

section and the last sentence of section 148(f)(4)(A) of the 1986

Code (as added by subsection (b)), the term 'private activity bond'

shall include any qualified 501(c)(3) bond (as defined under

section 145 of the 1986 Code)."

Section 6183(b) of Pub. L. 100-647 provided that: "The amendment

made by subsection (a) [amending this section] shall apply to bonds

issued after December 31, 1988."

 

EFFECTIVE DATE

Subpart applicable to bonds issued after Aug. 15, 1986, except as

otherwise provided, see sections 1311 to 1318 of Pub. L. 99-514,

set out as an Effective Date; Transitional Rules note under section

141 of this title.

 

EXTENSION OF PERIOD TO ELECT TO TERMINATE PERCENT PENALTY FOR BONDS

ISSUED BEFORE NOVEMBER 5, 1990

Section 11701(j)(7) of Pub. L. 101-508 provided that: "In the

case of a bond issued before the date of the enactment of this Act

[Nov. 5, 1990], the period for making the election under section

148(f)(4)(C)(viii) of the Internal Revenue Code of 1986 (as added

by this subsection) shall not expire before the date which is 180

days after such date of enactment."

 

AMENDMENT TO ARBITRAGE REGULATIONS

Section 1301(c) of Pub. L. 99-514 provided that: "The provision

in the Federal income tax regulations relating to the arbitrage

requirements which permits a higher yield on acquired obligations

if the issuer elects to waive the benefits of the temporary period

provisions shall not apply to bonds issued after August 31, 1986."

 

-FOOTNOTE-

(!1) So in original. Probably should be "subparagraph,".

 

 

-End-