327 
56(g)(4) is amended by adding at the end the following 
new clause: 
‘‘(iv) TAX
EXEMPT
INTEREST
ON 
BONDS ISSUED IN 2009 AND 2010.—Clause 
(i) shall not apply in the case of any inter-
est on a bond issued after December 31, 
2008, and before January 1, 2011. For 
purposes of the preceding sentence, a re-
funding bond (whether a current or ad-
vance refunding) shall be treated as issued 
on the date of the issuance of the refunded 
bond (or in the case of a series of 
refundings, the original bond).’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to obligations issued after Decem-
ber 31, 2008. 
PART 2—TAX CREDIT BONDS FOR SCHOOLS 
SEC. 1511. QUALIFIED SCHOOL CONSTRUCTION BONDS. 
(a) IN GENERAL.—Subpart I of part IV of sub-
chapter A of chapter 1 is amended by adding at the end 
the following new section: 
‘‘SEC. 54F. QUALIFIED SCHOOL CONSTRUCTION BONDS. 
‘‘(a) QUALIFIED SCHOOL CONSTRUCTION BOND.— 
For purposes of this subchapter, the term ‘qualified school
328 
construction bond’ means any bond issued as part of an 
issue if— 
‘‘(1) 100 percent of the available project pro-
ceeds of such issue are to be used for the construc-
tion, rehabilitation, or repair of a public school facil-
ity or for the acquisition of land on which such a fa-
cility is to be constructed with part of the proceeds 
of such issue, 
‘‘(2) the bond is issued by a State or local gov-
ernment within the jurisdiction of which such school 
is located, and 
‘‘(3) the issuer designates such bond for pur-
poses of this section. 
‘‘(b) LIMITATION
ON AMOUNT
OF BONDS DES-
IGNATED.—The maximum aggregate face amount of 
bonds issued during any calendar year which may be des-
ignated under subsection (a) by any issuer shall not exceed 
the sum of— 
‘‘(1) the limitation amount allocated under sub-
section (d) for such calendar year to such issuer, 
and 
‘‘(2) if such issuer is a large local educational 
agency (as defined in subsection (e)(4)) or is issuing 
on behalf of such an agency, the limitation amount
329 
allocated under subsection (e) for such calendar year 
to such agency. 
‘‘(c) NATIONAL LIMITATION ON AMOUNT OF BONDS 
DESIGNATED.—There is a national qualified school con-
struction bond limitation for each calendar year. Such lim-
itation is— 
‘‘(1) $11,000,000,000 for 2009, 
‘‘(2) $11,000,000,000 for 2010, and 
‘‘(3) except as provided in subsection (f), zero 
after 2010. 
‘‘(d) 60 PERCENT
OF
LIMITATION
ALLOCATED 
AMONG STATES.— 
‘‘(1) IN GENERAL.—60 percent of the limitation 
applicable under subsection (c) for any calendar year 
shall be allocated by the Secretary among the States 
in proportion to the respective numbers of children 
in each State who have attained age 5 but not age 
18 for the most recent fiscal year ending before such 
calendar year. The limitation amount allocated to a 
State under the preceding sentence shall be allocated 
by the State to issuers within such State. 
‘‘(2) MINIMUM ALLOCATIONS TO STATES.— 
‘‘(A) IN
GENERAL.—The Secretary shall 
adjust the allocations under this subsection for
330 
any calendar year for each State to the extent 
necessary to ensure that the sum of— 
‘‘(i) the amount allocated to such 
State under this subsection for such year, 
and 
‘‘(ii) the aggregate amounts allocated 
under subsection (e) to large local edu-
cational agencies in such State for such 
year, 
is not less than an amount equal to such 
State’s adjusted minimum percentage of the 
amount to be allocated under paragraph (1) for 
the calendar year. 
‘‘(B) ADJUSTED MINIMUM PERCENTAGE.— 
A State’s adjusted minimum percentage for any 
calendar year is the product of— 
‘‘(i) the minimum percentage de-
scribed in section 1124(d) of the Elemen-
tary and Secondary Education Act of 1965 
(20 U.S.C. 6334(d)) for such State for the 
most recent fiscal year ending before such 
calendar year, multiplied by 
‘‘(ii) 1.68. 
‘‘(3) 
ALLOCATIONS
TO
CERTAIN
POSSES-
SIONS.—The amount to be allocated under para-
331 
graph (1) to any possession of the United States 
other than Puerto Rico shall be the amount which 
would have been allocated if all allocations under 
paragraph (1) were made on the basis of respective 
populations of individuals below the poverty line (as 
defined by the Office of Management and Budget). 
In making other allocations, the amount to be allo-
cated under paragraph (1) shall be reduced by the 
aggregate amount allocated under this paragraph to 
possessions of the United States. 
‘‘(4) ALLOCATIONS FOR INDIAN SCHOOLS.—In 
addition to the amounts otherwise allocated under 
this subsection, $200,000,000 for calendar year 
2009, and $200,000,000 for calendar year 2010, 
shall be allocated by the Secretary of the Interior for 
purposes of the construction, rehabilitation, and re-
pair of schools funded by the Bureau of Indian Af-
fairs. In the case of amounts allocated under the 
preceding sentence, Indian tribal governments (as 
defined in section 7701(a)(40)) shall be treated as 
qualified issuers for purposes of this subchapter. 
‘‘(e) 40 PERCENT
OF
LIMITATION
ALLOCATED 
AMONG LARGEST SCHOOL DISTRICTS.— 
‘‘(1) IN GENERAL.—40 percent of the limitation 
applicable under subsection (c) for any calendar year
332 
shall be allocated under paragraph (2) by the Sec-
retary among local educational agencies which are 
large local educational agencies for such year. 
‘‘(2) ALLOCATION FORMULA.—The amount to 
be allocated under paragraph (1) for any calendar 
year shall be allocated among large local educational 
agencies in proportion to the respective amounts 
each such agency received for Basic Grants under 
subpart 2 of part A of title I of the Elementary and 
Secondary Education Act of 1965 (20 U.S.C. 6331 
et seq.) for the most recent fiscal year ending before 
such calendar year. 
‘‘(3) ALLOCATION OF UNUSED LIMITATION TO 
STATE.—The amount allocated under this subsection 
to a large local educational agency for any calendar 
year may be reallocated by such agency to the State 
in which such agency is located for such calendar 
year. Any amount reallocated to a State under the 
preceding sentence may be allocated as provided in 
subsection (d)(1). 
‘‘(4) LARGE LOCAL EDUCATIONAL AGENCY.— 
For purposes of this section, the term ‘large local 
educational agency’ means, with respect to a cal-
endar year, any local educational agency if such 
agency is—
333 
‘‘(A) among the 100 local educational 
agencies with the largest numbers of children 
aged 5 through 17 from families living below 
the poverty level, as determined by the Sec-
retary using the most recent data available 
from the Department of Commerce that are 
satisfactory to the Secretary, or 
‘‘(B) 1 of not more than 25 local edu-
cational agencies (other than those described in 
subparagraph (A)) that the Secretary of Edu-
cation determines (based on the most recent 
data available satisfactory to the Secretary) are 
in particular need of assistance, based on a low 
level of resources for school construction, a high 
level of enrollment growth, or such other factors 
as the Secretary deems appropriate. 
‘‘(f) CARRYOVER OF UNUSED LIMITATION.—If for 
any calendar year— 
‘‘(1) the amount allocated under subsection (d) 
to any State, exceeds 
‘‘(2) the amount of bonds issued during such 
year which are designated under subsection (a) pur-
suant to such allocation, 
the limitation amount under such subsection for such 
State for the following calendar year shall be increased
334 
by the amount of such excess. A similar rule shall apply 
to the amounts allocated under subsection (d)(4) or (e).’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 54A(d) is amended 
by striking ‘‘or’’ at the end of subparagraph (C), by 
inserting ‘‘or’’ at the end of subparagraph (D), and 
by inserting after subparagraph (D) the following 
new subparagraph: 
‘‘(E) 
a 
qualified 
school 
construction 
bond,’’. 
(2) Subparagraph (C) of section 54A(d)(2) is 
amended by striking ‘‘and’’ at the end of clause (iii), 
by striking the period at the end of clause (iv) and 
inserting ‘‘, and’’, and by adding at the end the fol-
lowing new clause: 
‘‘(v) in the case of a qualified school 
construction bond, a purpose specified in 
section 54F(a)(1).’’. 
(3) The table of sections for subpart I of part 
IV of subchapter A of chapter 1 is amended by add-
ing at the end the following new item: 
‘‘Sec. 54F. Qualified school construction bonds.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to obligations issued after Decem-
ber 31, 2008.
335 
SEC. 1512. EXTENSION AND EXPANSION OF QUALIFIED 
ZONE ACADEMY BONDS. 
(a) IN GENERAL.—Section 54E(c)(1) is amended by 
striking ‘‘and 2009’’ and inserting ‘‘and $1,400,000,000 
for 2009 and 2010’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to obligations issued after Decem-
ber 31, 2008. 
PART 3—TAXABLE BOND OPTION FOR 
GOVERNMENTAL BONDS 
SEC. 1521. TAXABLE BOND OPTION FOR GOVERNMENTAL 
BONDS. 
(a) IN GENERAL.—Part IV of subchapter A of chap-
ter 1 is amended by adding at the end the following new 
subpart: 
‘‘Subpart J—Taxable Bond Option for Governmental 
Bonds 
‘‘Sec. 54AA. Taxable bond option for governmental bonds. 
‘‘SEC. 54AA. TAXABLE BOND OPTION FOR GOVERNMENTAL 
BONDS. 
‘‘(a) IN GENERAL.—If a taxpayer holds a taxable 
governmental bond on one or more interest payment dates 
of the bond during any taxable year, there shall be allowed 
as a credit against the tax imposed by this chapter for 
the taxable year an amount equal to the sum of the credits
336 
determined under subsection (b) with respect to such 
dates. 
‘‘(b) AMOUNT OF CREDIT.—The amount of the credit 
determined under this subsection with respect to any in-
terest payment date for a taxable governmental bond is 
35 percent of the amount of interest payable by the issuer 
with respect to such date. 
‘‘(c) LIMITATION BASED ON AMOUNT OF TAX.— 
‘‘(1) IN GENERAL.—The credit allowed under 
subsection (a) 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 this part (other than subpart C and this 
subpart). 
‘‘(2) CARRYOVER OF UNUSED CREDIT.—If the 
credit allowable under subsection (a) exceeds the 
limitation imposed by paragraph (1) for such taxable 
year, such excess shall be carried to the succeeding 
taxable year and added to the credit allowable under 
subsection (a) for such taxable year (determined be-
fore the application of paragraph (1) for such suc-
ceeding taxable year).
338 
‘‘(e) INTEREST PAYMENT DATE.—For purposes of 
this section, the term ‘interest payment date’ means any 
date on which the holder of record of the taxable govern-
mental bond is entitled to a payment of interest under 
such bond. 
‘‘(f) SPECIAL RULES.— 
‘‘(1) INTEREST ON TAXABLE GOVERNMENTAL 
BONDS
INCLUDIBLE
IN
GROSS
INCOME
FOR
FED-
ERAL INCOME TAX PURPOSES.—For purposes of this 
title, interest on any taxable governmental bond 
shall be includible in gross income. 
‘‘(2) APPLICATION OF CERTAIN RULES.—Rules 
similar to the rules of subsections (f), (g), (h), and 
(i) of section 54A shall apply for purposes of the 
credit allowed under subsection (a). 
‘‘(g) SPECIAL RULE FOR QUALIFIED BONDS ISSUED 
BEFORE 2011.—In the case of a qualified bond issued be-
fore January 1, 2011— 
‘‘(1) ISSUER
ALLOWED
REFUNDABLE
CRED-
IT.—In lieu of any credit allowed under this section 
with respect to such bond, the issuer of such bond 
shall be allowed a credit as provided in section 6432. 
‘‘(2) QUALIFIED BOND.—For purposes of this 
subsection, the term ‘qualified bond’ means any tax-
339 
able governmental bond issued as part of an issue 
if— 
‘‘(A) 100 percent of the available project 
proceeds (as defined in section 54A) of such 
issue are to be used for capital expenditures, 
and 
‘‘(B) the issuer makes an irrevocable elec-
tion to have this subsection apply. 
‘‘(h) REGULATIONS.—The Secretary may prescribe 
such regulations and other guidance as may be necessary 
or appropriate to carry out this section and section 
6432.’’. 
(b) CREDIT FOR QUALIFIED BONDS ISSUED BEFORE 
2011.—Subchapter B of chapter 65, as amended by this 
Act, is amended by adding at the end the following new 
section: 
‘‘SEC. 6432. CREDIT FOR QUALIFIED BONDS ALLOWED TO 
ISSUER. 
‘‘(a) IN GENERAL.—In the case of a qualified bond 
issued before January 1, 2011, the issuer of such bond 
shall be allowed a credit with respect to each interest pay-
ment under such bond which shall be payable by the Sec-
retary as provided in subsection (b). 
‘‘(b) PAYMENT OF CREDIT.—The Secretary shall pay 
(contemporaneously with each interest payment date
340 
under such bond) to the issuer of such bond (or to any 
person who makes such interest payments on behalf of the 
issuer) 35 percent of the interest payable under such bond 
on such date. 
‘‘(c) APPLICATION OF ARBITRAGE RULES.—For pur-
poses of section 148, the yield on a qualified bond shall 
be reduced by the credit allowed under this section. 
‘‘(d) INTEREST PAYMENT DATE.—For purposes of 
this subsection, the term ‘interest payment date’ means 
each date on which interest is payable by the issuer under 
the terms of the bond. 
‘‘(e) QUALIFIED BOND.—For purposes of this sub-
section, the term ‘qualified bond’ has the meaning given 
such term in section 54AA(h).’’. 
(c) CONFORMING AMENDMENTS.— 
(1) Section 1324(b)(2) of title 31, United 
States Code, is amended by striking ‘‘or 6428’’ and 
inserting ‘‘6428, or 6432,’’. 
(2) Section 54A(c)(1)(B) is amended by strik-
ing ‘‘subpart C’’ and inserting ‘‘subparts C and J’’. 
(3) 
Sections 
54(c)(2), 
1397E(c)(2), 
and 
1400N(l)(3)(B) are each amended by striking ‘‘and 
I’’ and inserting ‘‘, I, and J’’. 
(4) Section 6401(b)(1) is amended by striking 
‘‘and I’’ and inserting ‘‘I, and J’’.
341 
(5) The table of subparts for part IV of sub-
chapter A of chapter 1 is amended by adding at the 
end the following new item: 
‘‘Subpart J. Taxable bond option for governmental bonds.’’. 
(6) The table of sections for subchapter B of 
chapter 65, as amended by this Act, is amended by 
adding at the end the following new item: 
‘‘Sec. 6432. Credit for qualified bonds allowed to issuer on advance basis.’’. 
(d) TRANSITIONAL
COORDINATION
WITH
STATE 
LAW.—Except as otherwise provided by a State after the 
date of the enactment of this Act, the interest on any tax-
able governmental bond (as defined in section 54AA of 
the Internal Revenue Code of 1986, as added by this sec-
tion) and the amount of any credit determined under such 
section with respect to such bond shall be treated for pur-
poses of the income tax laws of such State as being exempt 
from Federal income tax. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to obligations issued after the date 
of the enactment of this Act. 
PART 4—RECOVERY ZONE BONDS 
SEC. 1531. RECOVERY ZONE BONDS. 
(a) IN GENERAL.—Subchapter Y of chapter 1 is 
amended by adding at the end the following new part: 
‘‘PART III—RECOVERY ZONE BONDS 
‘‘Sec. 1400U–1. Allocation of recovery zone bonds.
342 
‘‘Sec. 1400U–2. Recovery zone economic development bonds. 
‘‘Sec. 1400U–3. Recovery zone facility bonds. 
‘‘SEC. 1400U–1. ALLOCATION OF RECOVERY ZONE BONDS. 
‘‘(a) ALLOCATIONS.— 
‘‘(1) IN GENERAL.—The Secretary shall allo-
cate the national recovery zone economic develop-
ment bond limitation and the national recovery zone 
facility bond limitation among the States in the pro-
portion that each such State’s 2008 State employ-
ment decline bears to the aggregate of the 2008 
State employment declines for all of the States. 
‘‘(2) 2008 STATE EMPLOYMENT DECLINE.—For 
purposes of this subsection, the term ‘2008 State 
employment decline’ means, with respect to any 
State, the excess (if any) of— 
‘‘(A) the number of individuals employed 
in such State determined for December 2007, 
over 
‘‘(B) the number of individuals employed 
in such State determined for December 2008. 
‘‘(3) ALLOCATIONS BY STATES.— 
‘‘(A) IN GENERAL.—Each State with re-
spect to which an allocation is made under 
paragraph (1) shall reallocate such allocation 
among the counties and large municipalities in 
such State in the proportion the each such
343 
county’s or municipality’s 2008 employment de-
cline bears to the aggregate of the 2008 em-
ployment declines for all the counties and mu-
nicipalities in such State. 
‘‘(B) LARGE
MUNICIPALITIES.—For pur-
poses of subparagraph (A), the term ‘large mu-
nicipality’ means a municipality with a popu-
lation of more than 100,000. 
‘‘(C) DETERMINATION OF LOCAL EMPLOY-
MENT DECLINES.—For purposes of this para-
graph, the employment decline of any munici-
pality or county shall be determined in the 
same manner as determining the State employ-
ment decline under paragraph (2), except that 
in the case of a municipality any portion of 
which is in a county, such portion shall be 
treated as part of such municipality and not 
part of such county. 
‘‘(4) NATIONAL LIMITATIONS.— 
‘‘(A) RECOVERY ZONE ECONOMIC DEVEL-
OPMENT BONDS.—There is a national recovery 
zone economic development bond limitation of 
$10,000,000,000.