rule shall apply when the bond is redeemed or 
matures. 
‘‘(3) LIMITATION
BASED
ON
AMOUNT
OF 
TAX.—The credit allowed under paragraph (1) for 
any taxable year shall not exceed the excess of— 
‘‘(A) the sum of the regular tax liability 
(as defined in section 26(b)) plus the tax im-
posed by section 55, over 
‘‘(B) the sum of the credits allowable 
under part IV of subchapter A (other than sub-
part C and this subsection). 
‘‘(4) GULF TAX CREDIT BOND.—For purposes 
of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘Gulf tax 
credit bond’ means any bond issued as part of 
an issue if— 
‘‘(i) the bond is issued by the State of 
Alabama, Louisiana, or Mississippi, 
‘‘(ii) 95 percent or more of the pro-
ceeds of such issue are to be used to— 
‘‘(I) pay principal, interest, or 
premiums on qualified bonds issued 
by such State or any political subdivi-
sion of such State, or
‘‘(II) make a loan to any political 
subdivision of such State to pay prin-
cipal, interest, or premiums on quali-
fied bonds issued by such political 
subdivision, 
‘‘(iii) the Governor of such State des-
ignates such bond for purposes of this sub-
section, 
‘‘(iv) the bond is a general obligation 
of such State and is in registered form 
(within the meaning of section 149(a)), 
‘‘(v) the maturity of such bond does 
not exceed 2 years, and 
‘‘(vi) the bond is issued after Decem-
ber 31, 2005, and before January 1, 2007. 
‘‘(B) STATE MATCHING REQUIREMENT.—A 
bond shall not be treated as a Gulf tax credit 
bond unless— 
‘‘(i) the issuer of such bond pledges as 
of the date of the issuance of the issue an 
amount equal to the face amount of such 
bond to be used for payments described in 
subclause (I) of subparagraph (A)(ii), or 
loans described in subclause (II) of such 
subparagraph, as the case may be, with re-
spect to the issue of which such bond is a 
part, and 
‘‘(ii) any such payment or loan is 
made in equal amounts from the proceeds 
of such issue and from the amount pledged 
under clause (i). 
The requirement of clause (ii) shall be treated 
as met with respect to any such payment or 
loan made during the 1-year period beginning 
on the date of the issuance (or any successor 1- 
year period) if such requirement is met when 
applied with respect to the aggregate amount of 
such payments and loans made during such pe-
riod. 
‘‘(C) AGGREGATE
LIMIT
ON
BOND
DES-
IGNATIONS.—The maximum aggregate face 
amount of bonds which may be designated 
under this subsection by the Governor of a 
State shall not exceed— 
‘‘(i) $200,000,000 in the case of the 
State of Louisiana, 
‘‘(ii) $100,000,000 in the case of the 
State of Mississippi, and 
‘‘(iii) $50,000,000 in the case of the 
State of Alabama.
‘‘(D) SPECIAL RULES RELATING TO ARBI-
TRAGE.—A bond which is part of an issue shall 
not be treated as a Gulf tax credit bond unless, 
with respect to the issue of which the bond is 
a part, the issuer satisfies the arbitrage require-
ments of section 148 with respect to proceeds 
of the issue and any loans made with such pro-
ceeds. 
‘‘(5) QUALIFIED BOND.—For purposes of this 
subsection— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
bond’ means any obligation of a State or polit-
ical subdivision thereof which was outstanding 
on August 28, 2005. 
‘‘(B) EXCEPTION FOR PRIVATE ACTIVITY 
BONDS.—Such term shall not include any pri-
vate activity bond. 
‘‘(C) 
EXCEPTION
FOR
ADVANCE 
REFUNDINGS.—Such term shall not include any 
bond— 
‘‘(i) which is designated as an advance 
refunding bond under subsection (b)(1), or 
‘‘(ii) with respect to which there is 
any outstanding bond to refund such bond.
‘‘(6) CREDIT INCLUDED IN GROSS INCOME.— 
Gross income includes the amount of the credit al-
lowed to the taxpayer under this subsection (deter-
mined without regard to paragraph (3)) and the 
amount so included shall be treated as interest in-
come. 
‘‘(7) 
OTHER
DEFINITIONS
AND
SPECIAL 
RULES.—For purposes of this subsection— 
‘‘(A) BOND.—The term ‘bond’ includes 
any obligation. 
‘‘(B) PARTNERSHIP; S CORPORATION; AND 
OTHER PASS-THRU ENTITIES.— 
‘‘(i) IN GENERAL.—Under regulations 
prescribed by the Secretary, in the case of 
a partnership, trust, S corporation, or 
other pass-thru entity, rules similar to the 
rules of section 41(g) shall apply with re-
spect to the credit allowable under para-
graph (1). 
‘‘(ii) NO BASIS ADJUSTMENT.—In the 
case of a bond held by a partnership or an 
S corporation, rules similar to the rules 
under section 1397E(i) shall apply. 
‘‘(C) BONDS
HELD
BY
REGULATED
IN-
VESTMENT COMPANIES.—If any Gulf tax credit