I
105TH CONGRESS
1ST SESSION
H. R. 197
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 HOUSE OF REPRESENTATIVES
JANUARY 7, 1997
Mr. HOUGHTON (for himself and Mr. MATSUI) 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 provide
for 501(c)(3) bonds a tax treatment similar to govern-
mental bonds, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Nonprofit Organiza-
tions Tax-Exempt Bond Reform Act of 1997’’.
SEC. 2. TAX TREATMENT OF 501(c)(3) BONDS SIMILAR TO
GOVERNMENTAL BONDS.
(a) IN GENERAL.—Subsection (a) of section 150 of
the Internal Revenue Code of 1986 (relating to definitions
and special rules) is amended by striking paragraphs (2)
and (4), by redesignating paragraphs (5) and (6) as para-
graphs (4) and (5), respectively, and by inserting after
paragraph (1) the following new paragraph:
‘‘(2) EXEMPT PERSON.—
‘‘(A) IN GENERAL.—The term ‘exempt per-
son’ means—
‘‘(i) a governmental unit, or
‘‘(ii) a 501(c)(3) organization, but
only with respect to its activities which do
not constitute unrelated trades or busi-
nesses as determined by applying section
513(a).
‘‘(B) GOVERNMENTAL
UNIT
NOT
TO
IN-
CLUDE
FEDERAL
GOVERNMENT.—The term
‘governmental unit’ does not include the United
States or any agency or instrumentality thereof.
‘‘(C) 501(c)(3) ORGANIZATION.—The term
‘501(c)(3) organization’ means any organization
described in section 501(c)(3) and exempt from
tax under section 501(a).’’
(b) REPEAL OF QUALIFIED 501(c)(3) BOND DES-
IGNATION.—Section 145 of the Internal Revenue Code of
1986 (relating to qualified 501(c)(3) bonds) is repealed.
(c) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 141(b) of the In-
ternal Revenue Code of 1986 is amended—
(A) by striking ‘‘government use’’ in sub-
paragraph (A)(ii)(I) and subparagraph (B)(ii)
and inserting ‘‘exempt person use’’,
(B) by striking ‘‘a government use’’ in sub-
paragraph (B) and inserting ‘‘an exempt person
use’’,
(C) by striking ‘‘related business use’’ in
subparagraph (A)(ii)(II) and subparagraph (B)
and inserting ‘‘related private business use’’,
(D) by striking ‘‘RELATED BUSINESS USE’’
in the heading of subparagraph (B) and insert-
ing ‘‘RELATED PRIVATE BUSINESS USE’’, and
(E) by striking ‘‘GOVERNMENT USE’’ in the
heading thereof and inserting ‘‘EXEMPT PERSON
USE’’.
(2) Subparagraph (A) of section 141(b)(6) of
such Code is amended by striking ‘‘a governmental
unit’’ and inserting ‘‘an exempt person’’.
(3) Paragraph (7) of section 141(b) of such
Code is amended—
(A) by striking ‘‘government use’’ and in-
serting ‘‘exempt person use’’, and
(B) by striking ‘‘GOVERNMENT
USE’’ in
the heading thereof and inserting ‘‘EXEMPT
PERSON USE’’.
(4) Section 141(b) of such Code is amended by
striking paragraph (9).
(5) Paragraph (1) of section 141(c) of such
Code is amended by striking ‘‘governmental units’’
and inserting ‘‘exempt persons’’.
(6) Section 141 of such Code is amended by re-
designating subsection (e) as subsection (f) and by
inserting after subsection (d) the following new sub-
section:
‘‘(e) CERTAIN ISSUES USED TO PROVIDE RESIDEN-
TIAL RENTAL HOUSING FOR FAMILY UNITS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), for purposes of this title, the term ‘pri-
vate activity bond’ includes any bond issued as part
of an issue if any portion of the net proceeds of the
issue are to be used (directly or indirectly) by an ex-
empt person described in section 150(a)(2)(A)(ii) to
provide residential rental property for family units.
This paragraph shall not apply if the bond would
not be a private activity bond if the section
501(c)(3) organization were not an exempt person.
‘‘(2) EXCEPTION FOR BONDS USED TO PROVIDE
QUALIFIED
RESIDENTIAL
RENTAL
PROJECTS.—
Paragraph (1) shall not apply to any bond issued as
part of an issue if the portion of such issue which
is to be used as described in paragraph (1) is to be
used to provide—
‘‘(A) a residential rental property for fam-
ily units if the first use of such property is pur-
suant to such issue,
‘‘(B) qualified residential rental projects
(as defined in section 142(d)), or
‘‘(C) property which is to be substantially
rehabilitated in a rehabilitation beginning with-
in the 2-year period ending 1 year after the
date of the acquisition of such property.
‘‘(3) SUBSTANTIAL REHABILITATION.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), rules similar to the rules of
section 47(c)(1)(C) shall apply in determining
for purposes of paragraph (2)(C) whether prop-
erty is substantially rehabilitated.
‘‘(B) EXCEPTION.—For purposes of sub-
paragraph (A), clause (ii) of section 47(c)(1)(C)
shall not apply, but the Secretary may extend
the 24-month period in section 47(c)(1)(C)(i)
where appropriate due to circumstances not
within the control of the owner.
‘‘(4) CERTAIN
PROPERTY
TREATED
AS
NEW
PROPERTY.—Solely for purposes of determining
under paragraph (2)(A) whether the 1st use of prop-
erty is pursuant to tax-exempt financing—
‘‘(A) IN GENERAL.—If—
‘‘(i) the 1st use of property is pursu-
ant to taxable financing,
‘‘(ii) there was a reasonable expecta-
tion (at the time such taxable financing
was provided) that such financing would be
replaced by tax-exempt financing, and
‘‘(iii) the taxable financing is in fact
so replaced within a reasonable period
after the taxable financing was provided,
then the 1st use of such property shall be treat-
ed as being pursuant to the tax-exempt financ-
ing.
‘‘(B) SPECIAL RULE WHERE NO OPERAT-
ING STATE OR LOCAL PROGRAM FOR TAX-EX-
EMPT FINANCING.—If, at the time of the 1st
use of property, there was no operating State or
local program for tax-exempt financing of the
property, the 1st use of the property shall be
treated as pursuant to the 1st tax-exempt fi-
nancing of the property.
‘‘(C) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) TAX-EXEMPT
FINANCING.—The
term ‘tax-exempt financing’ means financ-
ing provided by tax-exempt bonds.
‘‘(ii) 
TAXABLE
FINANCING.—The
term ‘taxable financing’ means financing
which is not tax-exempt financing.’’
(7) Section 141(f) of such Code, as redesig-
nated by paragraph (6), is amended—
(A) by adding ‘‘or’’ at the end of subpara-
graph (E),
(B) by striking ‘‘, or’’ at the end of sub-
paragraph (F), and inserting in lieu thereof a
period, and
(C) by striking subparagraph (G).
(8) The last sentence of section 144(b)(1) of
such Code is amended by striking ‘‘(determined’’
and all that follows to the period.
(9) Clause (ii) of section 144(c)(2)(C) of such
Code is amended by striking ‘‘a governmental unit’’
and inserting ‘‘an exempt person’’.
(10) Section 146(g) of such Code is amended—
(A) by striking paragraph (2), and
(B) by redesignating the remaining para-
graphs after paragraph (1) as paragraphs (2)
and (3), respectively.
(11) The heading of section 146(k)(3) of such
Code is amended by striking ‘‘GOVERNMENTAL’’ and
inserting ‘‘EXEMPT PERSON’’.
(12) The heading of section 146(m) of such
Code is amended by striking ‘‘GOVERNMENT’’ and
inserting ‘‘EXEMPT PERSON’’.
(13) Subsection (h) of section 147 of such Code
is amended to read as follows:
‘‘(h) CERTAIN RULES NOT TO APPLY TO MORTGAGE
REVENUE
BONDS
AND
QUALIFIED
STUDENT
LOAN
BONDS.—Subsections (a), (b), (c), and (d) shall not apply
to any qualified mortgage bond, qualified veterans’ mort-
gage bond, or qualified student loan bond.’’
(14) Section 147 of such Code is amended by
striking paragraph (4) of subsection (b) and redesig-
nating paragraph (5) of such subsection as para-
graph (4).
(15) Subparagraph (F) of section 148(d)(3) of
such Code is amended—
(A) by striking ‘‘or which is a qualified
501(c)(3) bond’’, and
(B) by striking ‘‘GOVERNMENTAL
USE
BONDS AND QUALIFIED 501(c)(3)’’ in the heading
thereof and inserting ‘‘EXEMPT PERSON’’.
(16) Subclause (II) of section 148(f)(4)(B)(ii)
of such Code is amended by striking ‘‘(other than a
qualified 501(c)(3) bond)’’.
(17) Clause (iv) of section 148(f)(4)(C) of such
Code is amended—
(A) by striking ‘‘a governmental unit or a
501(c)(3) organization’’ each place it appears
and inserting ‘‘an exempt person’’,
(B) 
by 
striking 
‘‘qualified 
501(c)(3)
bonds,’’, and
(C) by striking the comma after ‘‘private
activity bonds’’ the first place it appears.
(18) Subparagraph (A) of section 148(f)(7) of
such Code is amended by striking ‘‘(other than a
qualified 501(c)(3) bond)’’.
(19) Paragraph (2) of section 149(d) of such
Code is amended—
(A) by striking ‘‘(other than a qualified
501(c)(3) bond)’’, and
(B) by striking ‘‘CERTAIN PRIVATE’’ in the
heading thereof and inserting ‘‘PRIVATE’’.
(20) Section 149(e)(2) of such Code is amend-
ed—
(A) by striking ‘‘which is not a private ac-
tivity bond’’ in the second sentence and insert-
ing ‘‘which is a bond issued for an exempt per-
son described in section 150(a)(2)(A)(i)’’, and
(B) by adding at the end the following new
sentence: ‘‘Subparagraph (D) shall not apply to
any bond which is not a private activity bond
but which would be such a bond if the
501(c)(3) organization using the proceeds
thereof were not an exempt person.’’
(21) The heading of subsection (b) of section
150 of such Code is amended by striking ‘‘TAX-EX-
EMPT PRIVATE ACTIVITY BONDS’’ and inserting
‘‘CERTAIN TAX-EXEMPT BONDS’’.
(22) Paragraph (3) of section 150(b) of such
Code is amended—
(A) by inserting ‘‘owned by a 501(c)(3) or-
ganization’’ after ‘‘any facility’’ in subpara-
graph (A),
(B) by striking ‘‘any private activity bond
which, when issued, purported to be a tax-ex-
empt qualified 501(c)(3) bond’’ in subpara-
graph (A) and inserting ‘‘any bond which, when
issued, purported to be a tax-exempt bond, and
which would be a private activity bond if the
501(c)(3) organization using the proceeds
thereof were not an exempt person’’, and
(C) by striking the heading thereof and in-
serting ‘‘BONDS FOR EXEMPT PERSONS OTHER
THAN GOVERNMENTAL UNITS.—’’.
(23) Paragraph (5) of section 150(b) of such
Code is amended—
(A) by striking ‘‘private activity’’ in sub-
paragraph (A),
(B) by inserting ‘‘and which would be a
private activity bond if the 501(c)(3) organiza-
tion using the proceeds thereof were not an ex-
empt person’’ after ‘‘tax-exempt bond’’ in sub-
paragraph (A),
(C) by striking subparagraph (B) and in-
serting the following new subparagraph:
‘‘(B) such facility is required to be owned
by an exempt person, and’’, and
(D) by striking ‘‘GOVERNMENTAL
UNITS
OR
501(c)(3)
ORGANIZATIONS’’ in the heading
thereof and inserting ‘‘EXEMPT PERSONS’’.
(24) Section 150 of such Code is amended by
adding at the end the following new subsection:
‘‘(f) CERTAIN RULES TO APPLY TO BONDS FOR EX-
EMPT PERSONS OTHER THAN GOVERNMENTAL UNITS.—
‘‘(1) IN GENERAL.—Nothing in section 103(a)
or any other provision of law shall be construed to
provide an exemption from Federal income tax for
interest on any bond which would be a private activ-
ity bond if the 501(c)(3) organization using the pro-
ceeds thereof were not an exempt person unless such
bond satisfies the requirements of subsections (b)
and (f) of section 147.
‘‘(2) SPECIAL RULE FOR POOLED FINANCING
OF 501(c)(3) ORGANIZATION.—
‘‘(A) IN GENERAL.—At the election of the
issuer, a bond described in paragraph (1) shall
be treated as meeting the requirements of sec-
tion 147(b) if such bond meets the require-
ments of subparagraph (B).
‘‘(B) REQUIREMENTS.—A bond meets the
requirements of this subparagraph if—
‘‘(i) 95 percent or more of the net
proceeds of the issue of which such bond is
a part are to be used to make or finance
loans to 2 or more 501(c)(3) organizations
or governmental units for acquisition of
property to be used by such organizations,
‘‘(ii) each loan described in clause (i)
satisfies the requirements of section 147(b)
(determined by treating each loan as a sep-
arate issue),
‘‘(iii) before such bond is issued, a de-
mand survey was conducted which shows a
demand for financing greater than an
amount equal to 120 percent of the
lendable proceeds of such issue, and
‘‘(iv) 95 percent or more of the net
proceeds of such issue are to be loaned to
501(c)(3) organizations or governmental
units within 1 year of issuance and, to the
extent there are any unspent proceeds
after such 1-year period, bonds issued as
part of such issue are to be redeemed as
soon as possible thereafter (and in no
event later than 18 months after issuance).
A bond shall not meet the requirements of this
subparagraph if the maturity date of any bond
issued as part of such issue is more than 30
years after the date on which the bond was is-
sued (or, in the case of a refunding or series of
refundings, the date on which the original bond
was issued).’’