I

103D CONGRESS

1ST SESSION H. R. 2022

To amend the Internal Revenue Code of 1986 to generally treat bonds

issued for section 501(c)(3) organizations in a manner similar to governmental bonds.

IN THE HOUSE OF REPRESENTATIVES

MAY 6, 1993

Mr. MATSUI (for himself, Mr. RANGEL, Mr. JACOBS, Mrs. KENNELLY, Mr.

CARDIN, Mr. NEAL of Massachusetts, and Mr. MINETA) introduced the

following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to generally

treat bonds issued for section 501(c)(3) organizations

in a manner similar to governmental bonds.

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 ‘‘Nonprofit Organiza5 tions Tax-Exempt Bond Reform Act of 1993’’.

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

7 GOVERNMENTAL BONDS.

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

9 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OF QUALIFIED 501(c)(3) BOND DES23 IGNATION.—Section 145 of such Code (relating to quali24 fied 501(c)(3) bonds) is repealed.

25 (c) CONFORMING AMENDMENTS.—
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1 (1) Paragraph (3) of section 141(b) of such

2 Code 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

12 subsection:

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 ‘‘(2) EXCEPTION FOR BONDS USED TO PROVIDE

23 QUALIFIED RESIDENTIAL RENTAL PROJECTS.—

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

25 part of an issue if the portion of such issue which
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1 is to be used as described in paragraph (1) is to be

2 used to provide—

3 ‘‘(A) a residential rental property for fam4 ily units if the first use of such property is pur5 suant to such issue,

6 ‘‘(B) qualified residential rental projects

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

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

9 rehabilitated in a rehabilitation beginning with10 in the 2-year period ending 1 year after the

11 date of the acquisition of such property.

12 ‘‘(3) SUBSTANTIAL REHABILITATION.—

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

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

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

16 for purposes of paragraph (2)(C) whether prop17 erty is substantially rehabilitated.

18 ‘‘(B) EXCEPTION.—For purposes of sub19 paragraph (A), clause (ii) of section 47(c)(1)(C)

20 shall not apply, but the Secretary may extend

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

22 where appropriate due to circumstances not

23 within the control of the owner.

24 ‘‘(4) CERTAIN PROPERTY TREATED AS NEW

25 PROPERTY.—Solely for purposes of determining
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1 under paragraph (2)(A) whether the 1st use of prop2 erty is pursuant to tax-exempt financing—

3 ‘‘(A) IN GENERAL.—If—

4 ‘‘(i) the 1st use of property is pursu5 ant to taxable financing,

6 ‘‘(ii) there was a reasonable expecta7 tion (at the time such taxable financing

8 was provided) that such financing would be

9 replaced by tax-exempt financing, and

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

11 so replaced within a reasonable period

12 after the taxable financing was provided,

13 then the 1st use of such property shall be treat14 ed as being pursuant to the tax-exempt financ15 ing.

16 ‘‘(B) SPECIAL RULE WHERE NO OPERAT17 ING STATE OR LOCAL PROGRAM FOR TAX-EX18 EMPT FINANCING.—If, at the time of the 1st

19 use of property, there was no operating State or

20 local program for tax-exempt financing of the

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

22 treated as pursuant to the 1st tax-exempt fi23 nancing of the property.

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

25 paragraph—
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1 ‘‘(i) TAX-EXEMPT FINANCING.—The

2 term ‘tax-exempt financing’ means financ3 ing provided by tax-exempt bonds.

4 ‘‘(ii) TAXABLE FINANCING.—The

5 term ‘taxable financing’ means financing

6 which is not tax-exempt financing.’’

7 (7) Section 141(f) of such Code, as redesig8 nated by paragraph (6), is amended—

9 (A) by adding ‘‘or’’ at the end of subpara10 graph (E),

11 (B) by striking ‘‘, or’’ at the end of sub12 paragraph (F), and inserting in lieu thereof a

13 period, and

14 (C) by striking subparagraph (G).

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

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

17 and all that follows to the period.

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

19 Code is amended by striking ‘‘governmental unit’’

20 and inserting ‘‘exempt person’’.

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

22 (A) by striking paragraph (2), and

23 (B) by redesignating the remaining para24 graphs after paragraph (1) as paragraphs (2)

25 and (3), respectively.
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1 (11) The heading of section 146(k)(3) of such

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

3 inserting ‘‘EXEMPT PERSON’’.

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

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

6 inserting ‘‘EXEMPT PERSON’’.

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

8 is amended to read as follows:

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

10 REVENUE BONDS AND QUALIFIED STUDENT LOAN

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

12 to any qualified mortgage bond, qualified veterans’ mort13 gage bond, or qualified student loan bond.’’

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

15 striking paragraph (4) of subsection (b) and redesig16 nating paragraph (5) of such subsection as para17 graph (4).

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

19 such Code is amended—

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

21 501(c)(3) bond’’, and

22 (B) by striking ‘‘GOVERNMENTAL USE

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

24 thereof and inserting ‘‘EXEMPT PERSON’’.
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1 (16) Subclause (II) of section 148(f)(4)(B)(ii)

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

3 qualified 501(c)(3) bond)’’.

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

5 Code is amended—

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

7 501(c)(3) organization’’ each place it appears

8 and inserting ‘‘an exempt person’’, and

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

10 bonds,’’.

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

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

13 qualified 501(c)(3) bond)’’.

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

15 Code is amended—

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

17 501(c)(3) bond)’’, and

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

19 heading thereof and inserting in lieu thereof

20 ‘‘PRIVATE’’.

21 (20) Section 149(e)(2) of such Code is amend22 ed—

23 (A) by striking ‘‘which is not a private ac24 tivity bond’’ in the second sentence and insert-
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1 ing ‘‘which is a bond issued for an exempt per2 son described in section 150(a)(2)(A)(i)’’, and

3 (B) by adding at the end thereof the fol4 lowing new sentence: ‘‘Subparagraph (D) shall

5 not apply to any bond which is not a private ac6 tivity bond but which would be such a bond if

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

8 thereof were not an exempt person.’’

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

10 150 of such Code is amended by striking ‘‘TAX-EX11 EMPT PRIVATE ACTIVITY BONDS’’ and inserting

12 ‘‘CERTAIN TAX-EXEMPT BONDS’’.

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

14 Code is amended—

15 (A) by inserting ‘‘owned by a 501(c)(3) or16 ganization’’ after ‘‘any facility’’ in subpara17 graph (A),

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

19 which, when issued, purported to be a tax-ex20 empt qualified 501(c)(3) bond’’ in subpara21 graph (A) and inserting ‘‘any bond which, when

22 issued, purported to be a tax-exempt bond, and

23 which would be a private activity bond if the

24 501(c)(3) organization using the proceeds

25 thereof were not an exempt person’’, and
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1 (C) by striking the heading thereof and in2 serting ‘‘BONDS FOR EXEMPT PERSONS OTHER

3 THAN GOVERNMENTAL UNITS.—’’.

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

5 Code is amended—

6 (A) by striking ‘‘private activity’’ in sub7 paragraph (A),

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

9 private activity bond if the 501(c)(3) organiza10 tion using the proceeds thereof were not an ex11 empt person’’ after ‘‘tax-exempt bond’’ in sub12 paragraph (A),

13 (C) by striking subparagraph (B) and in14 serting the following new subparagraph:

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

16 by an exempt person, and’’, and

17 (D) by striking ‘‘GOVERNMENTAL UNITS

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

19 thereof and inserting ‘‘EXEMPT PERSONS’’.

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

21 adding at the end thereof the following new sub22 section:

23 ‘‘(f) CERTAIN RULES TO APPLY TO BONDS FOR EX24 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) Subparagraph (C) of section 57(a)(5) of

2 such Code is amended by striking clause (ii) and re3 designating clauses (iii) and (iv) as clauses (ii) and

4 (iii), respectively.

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

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

7 after ‘‘section 149’’.

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

9 Code is amended—

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

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

4 501(c)(3) bond, as defined in section 145)’’ in

5 subparagraph (C)(ii)(I).

6 (f) EFFECTIVE DATE; SPECIAL RULE.—

7 (1) EFFECTIVE DATE.—The amendments made

8 by this section shall apply to bonds issued after the

9 date of the enactment of this Act.

10 (2) SPECIAL RULE FOR CERTAIN BONDS ISSUED

11 AFTER DATE OF ENACTMENT.—

12 (A) IN GENERAL.—The amendments made

13 by this section shall not apply to any bond

14 which—

15 (i) is issued after the date of the en16 actment of this Act, and

17 (ii) is part of an issue which is subject

18 to any transitional rule under subtitle B of

19 title XIII of the Tax Reform Act of 1986.

20 (B) ELECTION OUT.—This paragraph shall

21 not apply to any issue with respect to which the

22 issuer elects not to have this paragraph apply.

23 (3) DELAYED EFFECTIVE DATE WITH RESPECT

24 TO SMALL ISSUER RULES.—For purposes of section

25 148(f)(4)(D) of the Internal Revenue Code of 1986,
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1 the amendments made by this section shall apply to

2 bonds issued in calendar years beginning after the

3 date of the enactment of this Act.

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