SECTION 1. EXTENSION AND MODIFICATION OF TREATMENT OF QUALIFIED ZONE 
              ACADEMY BONDS.

    (a) Extension and Allocation of Credit Authority.--
            (1) Extension.--Paragraph (1) of section 1397E(e) of the 
        Internal Revenue Code of 1986 is amended by striking ``and 
        2005'' and inserting ``2005, 2006, and 2007''.
            (2) Allocation of limitation.--Section 1397E(e)(2) of such 
        Code is amended to read as follows:
            ``(2) Allocation of limitation.--
                    ``(A) Allocation among states.--
                            ``(i) Limitation before 2006.--The national 
                        zone academy bond limitations for calendar 
                        years 1998, 1999, 2000, 2001, 2002, 2003, 2004, 
                        and 2005 shall be allocated by the Secretary 
                        among the States on the basis of their 
                        respective populations of individuals below the 
                        poverty line (as defined by the Office of 
                        Management and Budget).
                            ``(ii) Limitation after 2005.--
                                    ``(I) In general.--The national 
                                zone academy bond limitation for any 
                                calendar year after 2005 shall be 
                                allocated by the Secretary among the 
                                States in proportion to the respective 
                                amounts each such State received for 
                                basic grants under subpart 2 of part A 
                                of title I of the Elementary and 
                                Secondary Education Act of 1965 (20 
                                U.S.C. 6331 et seq.) for the most 
                                recent fiscal year ending before such 
                                calendar year.
                                    ``(II) Minimum allocation.--The 
                                allocation under subclause (I) to any 
                                State shall in no event be less than 1 
                                percent of the national zone academy 
                                bond limitation. The Secretary shall 
                                ratably reduce the allocations of 
                                States to which this subclause does not 
                                apply by the amount required to offset 
                                increases in allocations of other 
                                States under this subclause.
                    ``(B) Allocation to academies.--The limitation 
                amount allocated to a State under subparagraph (A) 
                shall be allocated by the State to qualified zone 
                academies within such State.
                    ``(C) Designation subject to limitation amount.--
                The maximum aggregate face amount of bonds issued 
                during any calendar year which may be designated under 
                subsection (a) with respect to any qualified zone 
                academy shall not exceed the limitation amount 
                allocated to such academy under subparagraph (B) for 
                such calendar year.''.
            (3) Unused authority.--Section 1397E(e) of such Code 
        (relating to limitation on amount of bonds designated) is 
        amended--
                    (A) by striking ``If'' in paragraph (4) and 
                inserting ``Except as provided in paragraph (5), if'', 
                and
                    (B) by adding at the end the following:
            ``(5) Reallocation for amounts unused for two years.--
        Notwithstanding paragraph (4), rules similar to the rules of 
        section 42(h)(3)(D) shall apply for purposes of this 
        section.''.
    (b) Proceeds of Bonds May Be Used for Construction.--Paragraph (5) 
of section 1397E(d) of the Internal Revenue Code of 1986 (defining 
qualified purpose) is amended--
            (1) by striking ``rehabilitating or repairing'' in 
        subparagraph (A) and inserting ``constructing, rehabilitating, 
        or repairing'', and
            (2) by redesignating subparagraphs (B), (C), and (D) as 
        subparagraphs (C), (D), and (E), respectively, and by inserting 
        after subparagraph (A) the following:
                    ``(B) acquiring the land on which the facility is 
                to be constructed,''.
    (c) Repeal of Limitation on Taxpayers Eligible for Credit.--
            (1) In general.--Section 1397E(a) of the Internal Revenue 
        Code of 1986 (relating to allowance of credit) is amended by 
        striking ``an eligible taxpayer'' and inserting ``a taxpayer''.
            (2) Conforming amendment.--Section 1397E(d)(6) of such Code 
        is amended to read as follows:
            ``(6) Bonds held by regulated investment companies.--If any 
        qualified zone academy bond is held by a regulated investment 
        company, the credit determined under subsection (a) shall be 
        allowed to shareholders of such company under procedures 
        prescribed by the Secretary.''.
    (d) Credits May Be Stripped.--Section 1397E of the Internal Revenue 
Code of 1986 is amended by adding at the end the following new 
subsection:
    ``(j) Credits May Be Stripped.--Under regulations prescribed by the 
Secretary--
            ``(1) In general.--There may be a separation (including at 
        issuance) of the ownership of a qualified zone academy bond and 
        the entitlement to the credit under this section with respect 
        to such bond. In case of any such separation, the credit under 
        this section shall be allowed to the person who on the credit 
        allowance date holds the instrument evidencing the entitlement 
        to the credit and not to the holder of the bond.
            ``(2) Certain rules to apply.--In the case of a separation 
        described in paragraph (1), the rules of section 1286 shall 
        apply to the qualified zone academy bond as if it were a 
        stripped bond and to the credit under this section as if it 
        were a stripped coupon.''
    (e) Effective Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        obligations issued after December 31, 2005.
            (2) Repeal of restriction on zone academy bond holders.--In 
        the case of bonds to which section 1397E of the Internal 
        Revenue Code of 1986 (as in effect before the date of the 
        enactment of this Act) applies, the limitation of such section 
        to eligible taxpayers (as defined in subsection (d)(6) of such 
        section) shall not apply after the date of the enactment of 
        this Act.
Amends the Internal Revenue Code to modify the tax credit allowed to holders of qualified zone academy bonds to: (1) extend through 2007 the authority for issuing such bonds and the national limitation amounts for such bonds; (2) allocate, after 2005, the bond limitation among states based upon grant amounts received by such states for disadvantaged students under the Elementary and Secondary Education Act of 1965; (3) permit the use of such bonds for constructing public school facilities and for the acquisition of land for such facilities; (4) permit all taxpayers to qualify for the tax credit (currently restricted to banks, finance and insurance companies); and (5) allow the ownership of such bonds and the credit entitlement for holding such bonds to be separate.
A bill to amend the Internal Revenue Code of 1986 to extend and modify the tax credit for holders of qualified zone academy bonds.