II

105TH CONGRESS

1ST SESSION S. 121

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

JANUARY 21, 1997

Mr. MOYNIHAN (for himself, Mr. CHAFEE, Mr. KENNEDY, and Ms. MOSELEYBRAUN) 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 ‘‘Higher Education

5 Bond Parity Act’’.

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

7 GOVERNMENTAL BONDS.

8 (a) IN GENERAL.—Section 150(a) of the Internal

9 Revenue Code of 1986 (relating to definitions and special
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1 rules) is amended by striking paragraphs (2) and (4), by

2 redesignating paragraphs (5) and (6) as paragraphs (4)

3 and (5), respectively, and by inserting after paragraph (1)

4 the following:

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24 1986 (relating to qualified 501(c)(3) bonds) is repealed.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) Section 141(b)(3) of the Internal Revenue

2 Code of 1986 is amended—

3 (A) in subparagraphs (A)(ii)(I) and

4 (B)(ii), by striking ‘‘government use’’ and in5 serting ‘‘exempt person use’’;

6 (B) in subparagraph (B), by striking ‘‘a

7 government use’’ and inserting ‘‘an exempt per8 son use’’;

9 (C) in subparagraphs (A)(ii)(II) and (B),

10 by striking ‘‘related business use’’ and inserting

11 ‘‘related private business use’’;

12 (D) in the heading of subparagraph (B),

13 by striking ‘‘RELATED BUSINESS USE’’ and in14 serting ‘‘RELATED PRIVATE BUSINESS USE’’;

15 and

16 (E) in the heading thereof, by striking

17 ‘‘GOVERNMENT USE’’ and inserting ‘‘EXEMPT

18 PERSON USE’’.

19 (2) Section 141(b)(6)(A) of such Code is

20 amended by striking ‘‘a governmental unit’’ and in21 serting ‘‘an exempt person’’.

22 (3) Section 141(b)(7) of such Code is amend23 ed—

24 (A) by striking ‘‘government use’’ and in25 serting ‘‘exempt person use’’; and
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1 (B) in the heading thereof, by striking

2 ‘‘GOVERNMENT USE’’ and inserting ‘‘EXEMPT

3 PERSON USE’’.

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

5 striking paragraph (9).

6 (5) Section 141(c)(1) of such Code is amended

7 by striking ‘‘governmental units’’ and inserting ‘‘ex8 empt 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:

12 ‘‘(e) CERTAIN ISSUES USED TO PROVIDE RESIDEN13 TIAL RENTAL HOUSING FOR FAMILY UNITS.—

14 ‘‘(1) IN GENERAL.—Except as provided in para15 graph (2), for purposes of this title, the term ‘pri16 vate activity bond’ includes any bond issued as part

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

18 issue are to be used (directly or indirectly) by an ex19 empt person described in section 150(a)(2)(A)(ii) to

20 provide residential rental property for family units.

21 This paragraph shall not apply if the bond would

22 not be a private activity bond if the section

23 501(c)(3) organization were not an exempt person.

24 ‘‘(2) EXCEPTION FOR BONDS USED TO PROVIDE

25 QUALIFIED RESIDENTIAL RENTAL PROJECTS.—
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1 Paragraph (1) shall not apply to any bond issued as

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

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

4 used to provide—

5 ‘‘(A) a residential rental property for fam6 ily units if the first use of such property is pur7 suant to such issue,

8 ‘‘(B) qualified residential rental projects

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

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

11 rehabilitated in a rehabilitation beginning with12 in the 2-year period ending 1 year after the

13 date of the acquisition of such property.

14 ‘‘(3) SUBSTANTIAL REHABILITATION.—

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

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

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

18 for purposes of paragraph (2)(C) whether prop19 erty is substantially rehabilitated.

20 ‘‘(B) EXCEPTION.—For purposes of sub21 paragraph (A), clause (ii) of section 47(c)(1)(C)

22 shall not apply, but the Secretary may extend

23 the 24-month period in section 47(c)(1)(C)(i)

24 where appropriate due to circumstances not

25 within the control of the owner.
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1 ‘‘(4) CERTAIN PROPERTY TREATED AS NEW

2 PROPERTY.—Solely for purposes of determining

3 under paragraph (2)(A) whether the 1st use of prop4 erty is pursuant to tax-exempt financing—

5 ‘‘(A) IN GENERAL.—If—

6 ‘‘(i) the 1st use of property is pursu7 ant to taxable financing,

8 ‘‘(ii) there was a reasonable expecta9 tion (at the time such taxable financing

10 was provided) that such financing would be

11 replaced by tax-exempt financing, and

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

13 so replaced within a reasonable period

14 after the taxable financing was provided,

15 then the 1st use of such property shall be treat16 ed as being pursuant to the tax-exempt financ17 ing.

18 ‘‘(B) SPECIAL RULE WHERE NO OPERAT19 ING STATE OR LOCAL PROGRAM FOR TAX-EX20 EMPT FINANCING.—If, at the time of the 1st

21 use of property, there was no operating State or

22 local program for tax-exempt financing of the

23 property, the 1st use of the property shall be

24 treated as pursuant to the 1st tax-exempt fi25 nancing of the property.
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1 ‘‘(C) DEFINITIONS.—For purposes of this

2 paragraph—

3 ‘‘(i) TAX-EXEMPT FINANCING.—The

4 term ‘tax-exempt financing’ means financ5 ing provided by tax-exempt bonds.

6 ‘‘(ii) TAXABLE FINANCING.—The

7 term ‘taxable financing’ means financing

8 which is not tax-exempt financing.’’.

9 (7) Section 141(f) of such Code, as redesig10 nated by paragraph (6), is amended—

11 (A) at the end of subparagraph (E), by

12 adding ‘‘or’’;

13 (B) at the end of subparagraph (F), by

14 striking ‘‘, or’’ and inserting a period; and

15 (C) by striking subparagraph (G).

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

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

18 and all that follows to the period.

19 (9) Section 144(c)(2)(C)(ii) of such Code is

20 amended by striking ‘‘a governmental unit’’ and in21 serting ‘‘an exempt person’’.

22 (10) Section 146(g) of such Code is amended—

23 (A) by striking paragraph (2);

24 (B) by redesignating paragraphs (3) and

25 (4) as paragraphs (2) and (3), respectively; and
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1 (C) by striking ‘‘Paragraph (4)’’ and in2 serting ‘‘Paragraph (3)’’.

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

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

5 inserting ‘‘EXEMPT PERSON’’.

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

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

8 inserting ‘‘EXEMPT PERSON’’.

9 (13) Section 147(b) of such Code is amended

10 by striking paragraph (4) and by redesignating

11 paragraph (5) as paragraph (4).

12 (14) Section 147(h) of such Code is amended to

13 read as follows:

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

15 REVENUE BONDS AND QUALIFIED STUDENT LOAN

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

17 to any qualified mortgage bond, qualified veterans’ mort18 gage bond, or qualified student loan bond.’’.

19 (15) Section 148(d)(3)(F) of such Code is

20 amended—

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

22 501(c)(3) bond’’; and

23 (B) in the heading thereof, by striking

24 ‘‘GOVERNMENTAL USE BONDS AND QUALIFIED

25 501(c)(3)’’ and inserting ‘‘EXEMPT PERSON’’.
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1 (16) Section 148(f)(4)(B)(ii)(II) of such Code

2 is amended by striking ‘‘(other than a qualified

3 501(c)(3) bond)’’.

4 (17) Section 148(f)(4)(C)(iv) of such Code is

5 amended—

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

7 501(c)(3) organization’’ both places it appears

8 and inserting ‘‘an exempt person’’;

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

10 bonds,’’; and

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

12 activity bonds’’ the first place it appears.

13 (18) Section 148(f)(7)(A) of such Code is

14 amended by striking ‘‘(other than a qualified

15 501(c)(3) bond)’’.

16 (19) Section 149(d)(2) of such Code is amend17 ed—

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

19 501(c)(3) bond)’’; and

20 (B) in the heading thereof, by striking

21 ‘‘CERTAIN PRIVATE’’ and inserting ‘‘PRIVATE’’.

22 (20) Section 149(e)(2) of such Code is amend23 ed—

24 (A) in the second sentence, by striking

25 ‘‘which is not a private activity bond’’ and in-
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1 S6201 serting ‘‘which is a bond issued for an exempt

2 person described in section 150(a)(2)(A)(i)’’;

3 and

4 (B) by adding at the end the following:

5 ‘‘Subparagraph (D) shall not apply to any bond

6 which is not a private activity bond but which

7 would be such a bond if the 501(c)(3) organiza8 tion using the proceeds thereof were not an ex9 empt person.’’.

10 (21) The heading of section 150(b) of such

11 Code is amended by striking ‘‘TAX-EXEMPT PRI12 VATE ACTIVITY BONDS’’ and inserting ‘‘CERTAIN

13 TAX-EXEMPT BONDS’’.

14 (22) Section 150(b)(3) of such Code is amend15 ed—

16 (A) in subparagraph (A), by inserting

17 ‘‘owned by a 501(c)(3) organization’’ after ‘‘any

18 facility’’;

19 (B) in subparagraph (A), by striking ‘‘any

20 private activity bond which, when issued, pur21 ported to be a tax-exempt qualified 501(c)(3)

22 bond’’ and inserting ‘‘any bond which, when is23 sued, purported to be a tax-exempt bond, and

24 which would be a private activity bond if the
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1 501(c)(3) organization using the proceeds

2 thereof were not an exempt person’’; and

3 (C) by striking the heading thereof and in4 serting ‘‘BONDS FOR EXEMPT PERSONS OTHER

5 THAN GOVERNMENTAL UNITS.—’’.

6 (23) Section 150(b)(5) of such Code is amend7 ed—

8 (A) in subparagraph (A), by striking ‘‘pri9 vate activity’’;

10 (B) in subparagraph (A), by inserting

11 ‘‘and which would be a private activity bond if

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

13 thereof were not an exempt person’’ after ‘‘tax14 exempt bond’’;

15 (C) by striking subparagraph (B) and in16 serting the following:

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

18 by an exempt person, and’’; and

19 (D) in the heading thereof, by striking

20 ‘‘GOVERNMENTAL UNITS OR 501(c)(3) ORGANIZA21 TIONS’’ and inserting ‘‘EXEMPT PERSONS’’.

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

23 adding at the end the following:

24 ‘‘(f) CERTAIN RULES TO APPLY TO BONDS FOR EX25 EMPT PERSONS OTHER THAN GOVERNMENTAL UNITS.—
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1 ‘‘(1) IN GENERAL.—Nothing in section 103(a)

2 or any other provision of law shall be construed to

3 provide an exemption from Federal income tax for

4 interest on any bond which would be a private activ5 ity bond if the 501(c)(3) organization using the pro6 ceeds thereof were not an exempt person unless such

7 bond satisfies the requirements of subsections (b)

8 and (f) of section 147.

9 ‘‘(2) SPECIAL RULE FOR POOLED FINANCING

10 OF 501(c)(3) ORGANIZATION.—

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

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

13 be treated as meeting the requirements of sec14 tion 147(b) if such bond meets the require15 ments of subparagraph (B).

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

17 requirements of this subparagraph if—

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

19 proceeds of the issue of which such bond is

20 a part are to be used to make or finance

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

22 or governmental units for acquisition of

23 property to be used by such organizations,

24 ‘‘(ii) each loan described in clause (i)

25 satisfies the requirements of section 147(b)
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1 (determined by treating each loan as a sep2 arate issue),

3 ‘‘(iii) before such bond is issued, a de4 mand survey was conducted which shows a

5 demand for financing greater than an

6 amount equal to 120 percent of the

7 lendable proceeds of such issue, and

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

9 proceeds of such issue are to be loaned to

10 501(c)(3) organizations or governmental

11 units within 1 year of issuance and, to the

12 extent there are any unspent proceeds

13 after such 1-year period, bonds issued as

14 part of such issue are to be redeemed as

15 soon as possible thereafter (and in no

16 event later than 18 months after issuance).

17 A bond shall not meet the requirements of this

18 subparagraph if the maturity date of any bond

19 issued as part of such issue is more than 30

20 years after the date on which the bond was is21 sued (or, in the case of a refunding or series of

22 refundings, the date on which the original bond

23 was issued).’’.

24 (25) Section 1302 of the Tax Reform Act of

25 1986 is repealed.
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1 (26) Section 57(a)(5)(C) of such Code is

2 amended by striking clause (ii) and by redesignating

3 clauses (iii) and (iv) as clauses (ii) and (iii), respec4 tively.

5 (27) Section 103(b)(3) of such Code is amend6 ed by inserting ‘‘and section 150(f)’’ after ‘‘section

7 149’’.

8 (28) Section 265(b)(3) of such Code is amend9 ed—

10 (A) in subparagraph (B), by striking

11 clause (ii) and inserting the following:

12 ‘‘(ii) CERTAIN BONDS NOT TREATED

13 AS PRIVATE ACTIVITY BONDS.—For pur14 poses of clause (i)(II), there shall not be

15 treated as a private activity bond any obli16 gation issued to refund (or which is part of

17 a series of obligations issued to refund) an

18 obligation issued before August 8, 1986,

19 which was not an industrial development

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

21 effect on the day before the date of the en22 actment of the Tax Reform Act of 1986)

23 or a private loan bond (as defined in sec24 tion 103(o)(2)(A), as so in effect, but with25 out regard to any exemption from such
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1 definition other than section

2 103(o)(2)(A)).’’; and

3 (B) in subparagraph (C)(ii)(I), by striking

4 ‘‘(other than a qualified 501(c)(3) bond, as de5 fined in section 145)’’.

6 (d) EFFECTIVE DATES.—

7 (1) IN GENERAL.—Except as provided in para8 graph (2), the amendments made by this section

9 shall apply to bonds (including refunding bonds) is10 sued with respect to capital expenditures made on or

11 after the date of the enactment of this Act.

12 (2) EXCEPTION.—The amendments made by

13 this section shall not apply to bonds issued before

14 January 1, 1997, for purposes of applying section

15 148(f)(4)(D) of the Internal Revenue Code of 1986.

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