II

104TH CONGRESS

2D SESSION S. 1879

To amend the Internal Revenue Code of 1986 to provide for 501(c)(3)

bonds a tax treatment similar to governmental bonds, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 14, 1996

Mr. MOYNIHAN introduced the following bill; which was read twice and

referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

for 501(c)(3) bonds a tax treatment similar to governmental bonds, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Section 501(c)(3) Non5 profit Organizations Tax-Exempt Bond Reform Act of

6 1996’’.

7 SEC. 2. TAX TREATMENT OF 501(c)(3) BONDS SIMILAR TO

8 GOVERNMENTAL BONDS.

9 (a) IN GENERAL.—Subsection (a) of section 150 of

10 the Internal Revenue Code of 1986 (relating to definitions
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1 and special rules) is amended by striking paragraphs (2)

2 and (4), by redesignating paragraphs (5) and (6) as para3 graphs (4) and (5), respectively, and by inserting after

4 paragraph (1) the following new paragraph:

5 ‘‘(2) EXEMPT PERSON.—

6 ‘‘(A) IN GENERAL.—The term ‘exempt per7 son’ means—

8 ‘‘(i) a governmental unit, or

9 ‘‘(ii) a 501(c)(3) organization, but

10 only with respect to its activities which do

11 not constitute unrelated trades or busi12 nesses as determined by applying section

13 513(a).

14 ‘‘(B) GOVERNMENTAL UNIT NOT TO IN15 CLUDE FEDERAL GOVERNMENT.—The term

16 ‘governmental unit’ does not include the United

17 States or any agency or instrumentality thereof.

18 ‘‘(C) 501(c)(3) ORGANIZATION.—The term

19 ‘501(c)(3) organization’ means any organization

20 described in section 501(c)(3) and exempt from

21 tax under section 501(a).’’

22 (b) REPEAL OF QUALIFIED 501(c)(3) BOND DES23 IGNATION.—Section 145 of the Internal Revenue Code of

24 1986 (relating to qualified 501(c)(3) bonds) is repealed.

25 (c) CONFORMING AMENDMENTS.—
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1 (1) Paragraph (3) of section 141(b) of the In2 ternal Revenue Code of 1986 is amended—

3 (A) by striking ‘‘government use’’ in sub4 paragraph (A)(ii)(I) and subparagraph (B)(ii)

5 and inserting ‘‘exempt person use’’,

6 (B) by striking ‘‘a government use’’ in sub7 paragraph (B) and inserting ‘‘an exempt person

8 use’’,

9 (C) by striking ‘‘related business use’’ in

10 subparagraph (A)(ii)(II) and subparagraph (B)

11 and inserting ‘‘related private business use’’,

12 (D) by striking ‘‘RELATED BUSINESS USE’’

13 in the heading of subparagraph (B) and insert14 ing ‘‘RELATED PRIVATE BUSINESS USE’’, and

15 (E) by striking ‘‘GOVERNMENT USE’’ in the

16 heading thereof and inserting ‘‘EXEMPT PERSON

17 USE’’.

18 (2) Subparagraph (A) of section 141(b)(6) of

19 such Code is amended by striking ‘‘a governmental

20 unit’’ and inserting ‘‘an exempt person’’.

21 (3) Paragraph (7) of section 141(b) of such

22 Code is amended—

23 (A) by striking ‘‘government use’’ and in24 serting ‘‘exempt person use’’, and
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1 (B) by striking ‘‘GOVERNMENT USE’’ in

2 the heading thereof and inserting ‘‘EXEMPT

3 PERSON USE’’.

4 (4) Section 141(b) of such Code is amended by

5 striking paragraph (9).

6 (5) Paragraph (1) of section 141(c) of such

7 Code is amended by striking ‘‘governmental units’’

8 and inserting ‘‘exempt persons’’.

9 (6) Section 141 of such Code is amended by re10 designating subsection (e) as subsection (f) and by

11 inserting after subsection (d) the following new sub12 section:

13 ‘‘(e) CERTAIN ISSUES USED TO PROVIDE RESIDEN14 TIAL RENTAL HOUSING FOR FAMILY UNITS.—

15 ‘‘(1) IN GENERAL.—Except as provided in para16 graph (2), for purposes of this title, the term ‘pri17 vate activity bond’ includes any bond issued as part

18 of an issue if any portion of the net proceeds of the

19 issue are to be used (directly or indirectly) by an ex20 empt person described in section 150(a)(2)(A)(ii) to

21 provide residential rental property for family units.

22 This paragraph shall not apply if the bond would

23 not be a private activity bond if the section

24 501(c)(3) organization were not an exempt person.
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1 ‘‘(2) EXCEPTION FOR BONDS USED TO PROVIDE

2 QUALIFIED RESIDENTIAL RENTAL PROJECTS.—

3 Paragraph (1) shall not apply to any bond issued as

4 part of an issue if the portion of such issue which

5 is to be used as described in paragraph (1) is to be

6 used to provide—

7 ‘‘(A) a residential rental property for fam8 ily units if the first use of such property is pur9 suant to such issue,

10 ‘‘(B) qualified residential rental projects

11 (as defined in section 142(d)), or

12 ‘‘(C) property which is to be substantially

13 rehabilitated in a rehabilitation beginning with14 in the 2-year period ending 1 year after the

15 date of the acquisition of such property.

16 ‘‘(3) SUBSTANTIAL REHABILITATION.—

17 ‘‘(A) IN GENERAL.—Except as provided in

18 subparagraph (B), rules similar to the rules of

19 section 47(c)(1)(C) shall apply in determining

20 for purposes of paragraph (2)(C) whether prop21 erty is substantially rehabilitated.

22 ‘‘(B) EXCEPTION.—For purposes of sub23 paragraph (A), clause (ii) of section 47(c)(1)(C)

24 shall not apply, but the Secretary may extend

25 the 24-month period in section 47(c)(1)(C)(i)
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1 where appropriate due to circumstances not

2 within the control of the owner.

3 ‘‘(4) CERTAIN PROPERTY TREATED AS NEW

4 PROPERTY.—Solely for purposes of determining

5 under paragraph (2)(A) whether the 1st use of prop6 erty is pursuant to tax-exempt financing—

7 ‘‘(A) IN GENERAL.—If—

8 ‘‘(i) the 1st use of property is pursu9 ant to taxable financing,

10 ‘‘(ii) there was a reasonable expecta11 tion (at the time such taxable financing

12 was provided) that such financing would be

13 replaced by tax-exempt financing, and

14 ‘‘(iii) the taxable financing is in fact

15 so replaced within a reasonable period

16 after the taxable financing was provided,

17 then the 1st use of such property shall be treat18 ed as being pursuant to the tax-exempt financ19 ing.

20 ‘‘(B) SPECIAL RULE WHERE NO OPERAT21 ING STATE OR LOCAL PROGRAM FOR TAX-EX22 EMPT FINANCING.—If, at the time of the 1st

23 use of property, there was no operating State or

24 local program for tax-exempt financing of the

25 property, the 1st use of the property shall be
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1 treated as pursuant to the 1st tax-exempt fi2 nancing of the property.

3 ‘‘(C) DEFINITIONS.—For purposes of this

4 paragraph—

5 ‘‘(i) TAX-EXEMPT FINANCING.—The

6 term ‘tax-exempt financing’ means financ7 ing provided by tax-exempt bonds.

8 ‘‘(ii) TAXABLE FINANCING.—The

9 term ‘taxable financing’ means financing

10 which is not tax-exempt financing.’’

11 (7) Section 141(f) of such Code, as redesig12 nated by paragraph (6), is amended—

13 (A) by adding ‘‘or’’ at the end of subpara14 graph (E),

15 (B) by striking ‘‘, or’’ at the end of sub16 paragraph (F), and inserting in lieu thereof a

17 period, and

18 (C) by striking subparagraph (G).

19 (8) The last sentence of section 144(b)(1) of

20 such Code is amended by striking ‘‘(determined’’

21 and all that follows to the period.

22 (9) Clause (ii) of section 144(c)(2)(C) of such

23 Code is amended by striking ‘‘a governmental unit’’

24 and inserting ‘‘an exempt person’’.

25 (10) Section 146(g) of such Code is amended—
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1 (A) by striking paragraph (2), and

2 (B) by redesignating the remaining para3 graphs after paragraph (1) as paragraphs (2)

4 and (3), respectively.

5 (11) The heading of section 146(k)(3) of such

6 Code is amended by striking ‘‘GOVERNMENTAL’’ and

7 inserting ‘‘EXEMPT PERSON’’.

8 (12) The heading of section 146(m) of such

9 Code is amended by striking ‘‘GOVERNMENT’’ and

10 inserting ‘‘EXEMPT PERSON’’.

11 (13) Subsection (h) of section 147 of such Code

12 is amended to read as follows:

13 ‘‘(h) CERTAIN RULES NOT TO APPLY TO MORTGAGE

14 REVENUE BONDS AND QUALIFIED STUDENT LOAN

15 BONDS.—Subsections (a), (b), (c), and (d) shall not apply

16 to any qualified mortgage bond, qualified veterans’ mort17 gage bond, or qualified student loan bond.’’

18 (14) Section 147 of such Code is amended by

19 striking paragraph (4) of subsection (b) and redesig20 nating paragraph (5) of such subsection as para21 graph (4).

22 (15) Subparagraph (F) of section 148(d)(3) of

23 such Code is amended—

24 (A) by striking ‘‘or which is a qualified

25 501(c)(3) bond’’, and
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1 (B) by striking ‘‘GOVERNMENTAL USE

2 BONDS AND QUALIFIED 501(c)(3)’’ in the heading

3 thereof and inserting ‘‘EXEMPT PERSON’’.

4 (16) Subclause (II) of section 148(f)(4)(B)(ii)

5 of such Code is amended by striking ‘‘(other than a

6 qualified 501(c)(3) bond)’’.

7 (17) Clause (iv) of section 148(f)(4)(C) of such

8 Code is amended—

9 (A) by striking ‘‘a governmental unit or a

10 501(c)(3) organization’’ each place it appears

11 and inserting ‘‘an exempt person’’,

12 (B) by striking ‘‘qualified 501(c)(3)

13 bonds,’’, and

14 (C) by striking the comma after ‘‘private

15 activity bonds’’ the first place it appears.

16 (18) Subparagraph (A) of section 148(f)(7) of

17 such Code is amended by striking ‘‘(other than a

18 qualified 501(c)(3) bond)’’.

19 (19) Paragraph (2) of section 149(d) of such

20 Code is amended—

21 (A) by striking ‘‘(other than a qualified

22 501(c)(3) bond)’’, and

23 (B) by striking ‘‘CERTAIN PRIVATE’’ in the

24 heading thereof and inserting ‘‘PRIVATE’’.
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1 (20) Section 149(e)(2) of such Code is amend2 ed—

3 (A) by striking ‘‘which is not a private ac4 tivity bond’’ in the second sentence and insert5 ing ‘‘which is a bond issued for an exempt per6 son described in section 150(a)(2)(A)(i)’’, and

7 (B) by adding at the end the following new

8 sentence: ‘‘Subparagraph (D) shall not apply to

9 any bond which is not a private activity bond

10 but which would be such a bond if the

11 501(c)(3) organization using the proceeds

12 thereof were not an exempt person.’’

13 (21) The heading of subsection (b) of section

14 150 of such Code is amended by striking ‘‘TAX-EX15 EMPT PRIVATE ACTIVITY BONDS’’ and inserting

16 ‘‘CERTAIN TAX-EXEMPT BONDS’’.

17 (22) Paragraph (3) of section 150(b) of such

18 Code is amended—

19 (A) by inserting ‘‘owned by a 501(c)(3) or20 ganization’’ after ‘‘any facility’’ in subpara21 graph (A),

22 (B) by striking ‘‘any private activity bond

23 which, when issued, purported to be a tax-ex24 empt qualified 501(c)(3) bond’’ in subpara25 graph (A) and inserting ‘‘any bond which, when
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1 issued, purported to be a tax-exempt bond, and

2 which would be a private activity bond if the

3 501(c)(3) organization using the proceeds

4 thereof were not an exempt person’’, and

5 (C) by striking the heading thereof and in6 serting ‘‘BONDS FOR EXEMPT PERSONS OTHER

7 THAN GOVERNMENTAL UNITS.—’’.

8 (23) Paragraph (5) of section 150(b) of such

9 Code is amended—

10 (A) by striking ‘‘private activity’’ in sub11 paragraph (A),

12 (B) by inserting ‘‘and which would be a

13 private activity bond if the 501(c)(3) organiza14 tion using the proceeds thereof were not an ex15 empt person’’ after ‘‘tax-exempt bond’’ in sub16 paragraph (A),

17 (C) by striking subparagraph (B) and in18 serting the following new subparagraph:

19 ‘‘(B) such facility is required to be owned

20 by an exempt person, and’’, and

21 (D) by striking ‘‘GOVERNMENTAL UNITS

22 OR 501(c)(3) ORGANIZATIONS’’ in the heading

23 thereof and inserting ‘‘EXEMPT PERSONS’’.

24 (24) Section 150 of such Code is amended by

25 adding at the end the following new subsection:
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1 ‘‘(f) CERTAIN RULES TO APPLY TO BONDS FOR EX2 EMPT PERSONS OTHER THAN GOVERNMENTAL UNITS.—

3 ‘‘(1) IN GENERAL.—Nothing in section 103(a)

4 or any other provision of law shall be construed to

5 provide an exemption from Federal income tax for

6 interest on any bond which would be a private activ7 ity bond if the 501(c)(3) organization using the pro8 ceeds thereof were not an exempt person unless such

9 bond satisfies the requirements of subsections (b)

10 and (f) of section 147.

11 ‘‘(2) SPECIAL RULE FOR POOLED FINANCING

12 OF 501(c)(3) ORGANIZATION.—

13 ‘‘(A) IN GENERAL.—At the election of the

14 issuer, a bond described in paragraph (1) shall

15 be treated as meeting the requirements of sec16 tion 147(b) if such bond meets the require17 ments of subparagraph (B).

18 ‘‘(B) REQUIREMENTS.—A bond meets the

19 requirements of this subparagraph if—

20 ‘‘(i) 95 percent or more of the net

21 proceeds of the issue of which such bond is

22 a part are to be used to make or finance

23 loans to 2 or more 501(c)(3) organizations

24 or governmental units for acquisition of

25 property to be used by such organizations,
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1 ‘‘(ii) each loan described in clause (i)

2 satisfies the requirements of section 147(b)

3 (determined by treating each loan as a sep4 arate issue),

5 ‘‘(iii) before such bond is issued, a de6 mand survey was conducted which shows a

7 demand for financing greater than an

8 amount equal to 120 percent of the

9 lendable proceeds of such issue, and

10 ‘‘(iv) 95 percent or more of the net

11 proceeds of such issue are to be loaned to

12 501(c)(3) organizations or governmental

13 units within 1 year of issuance and, to the

14 extent there are any unspent proceeds

15 after such 1-year period, bonds issued as

16 part of such issue are to be redeemed as

17 soon as possible thereafter (and in no

18 event later than 18 months after issuance).

19 A bond shall not meet the requirements of this

20 subparagraph if the maturity date of any bond

21 issued as part of such issue is more than 30

22 years after the date on which the bond was is23 sued (or, in the case of a refunding or series of

24 refundings, the date on which the original bond

25 was issued).’’
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1 (25) Section 1302 of the Tax Reform Act of

2 1986 is repealed.

3 (26) Subparagraph (C) of section 57(a)(5) of

4 such Code is amended by striking clause (ii) and re5 designating clauses (iii) and (iv) as clauses (ii) and

6 (iii), respectively.

7 (27) Paragraph (3) of section 103(b) of such

8 Code is amended by inserting ‘‘and section 150(f)’’

9 after ‘‘section 149’’.

10 (28) Paragraph (3) of section 265(b) of such

11 Code is amended—

12 (A) by striking clause (ii) of subparagraph

13 (B) and inserting the following:

14 ‘‘(ii) CERTAIN BONDS NOT TREATED

15 AS PRIVATE ACTIVITY BONDS.—For pur16 poses of clause (i)(II), there shall not be

17 treated as a private activity bond any obli18 gation issued to refund (or which is part of

19 a series of obligations issued to refund) an

20 obligation issued before August 8, 1986,

21 which was not an industrial development

22 bond (as defined in section 103(b)(2) as in

23 effect on the day before the date of the en24 actment of the Tax Reform Act of 1986)

25 or a private loan bond (as defined in sec-
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1 tion 103(o)(2)(A), as so in effect, but with2 out regard to any exemption from such

3 definition other than section

4 103(o)(2)(A)).’’; and

5 (B) by striking ‘‘(other than a qualified

6 501(c)(3) bond, as defined in section 145)’’ in

7 subparagraph (C)(ii)(I).

8 (d) EFFECTIVE DATE.—

9 (1) IN GENERAL.—Except as provided in para10 graph (2), the amendments made by this section

11 shall apply to bonds (including refunding bonds) is12 sued and capital expenditures made on or after the

13 date of the enactment of this Act.

14 (2) EXCEPTION.—The amendments made by

15 this section shall not apply to bonds issued before

16 January 1, 1997, for purposes of applying section

17 148(f)(4)(D) of the Internal Revenue Code of 1986.

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