To amend the Internal Revenue Code of 1986 to authorize tax credit bonds for capital improvements for police and fire departments.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Police and Fire Station 
Modernization Act of 2008''.

SEC. 2. POLICE AND FIRE DEPARTMENT BONDS.

    (a) In General.--Part IV of subchapter A of chapter 1 of the 
Internal Revenue Code of 1986 (relating to credits against tax) is 
amended by adding at the end the following new subpart:

                ``Subpart I--Qualified Tax Credit Bonds

``Sec. 54A. Credit to holders of qualified tax credit bonds.
``Sec. 54B. Police and fire department bonds.

``SEC. 54A. CREDIT TO HOLDERS OF QUALIFIED TAX CREDIT BONDS.

    ``(a) Allowance of Credit.--If a taxpayer holds a qualified tax 
credit bond on one or more credit allowance 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 determined under subsection (b) with respect to such 
dates.
    ``(b) Amount of Credit.--
            ``(1) In general.--The amount of the credit determined 
        under this subsection with respect to any credit allowance date 
        for a qualified tax credit bond is 25 percent of the annual 
        credit determined with respect to such bond.
            ``(2) Annual credit.--The annual credit determined with 
        respect to any qualified tax credit bond is the product of--
                    ``(A) the applicable credit rate, multiplied by
                    ``(B) the outstanding face amount of the bond.
            ``(3) Applicable credit rate.--For purposes of paragraph 
        (2), the applicable credit rate is the rate which the Secretary 
        estimates will permit the issuance of qualified tax credit 
        bonds with a specified maturity or redemption date without 
        discount and without interest cost to the qualified issuer. The 
        applicable credit rate with respect to any qualified tax credit 
        bond shall be determined as of the first day on which there is 
        a binding, written contract for the sale or exchange of the 
        bond.
            ``(4) Special rule for issuance and redemption.--In the 
        case of a bond which is issued during the 3-month period ending 
        on a credit allowance date, the amount of the credit determined 
        under this subsection with respect to such credit allowance 
        date shall be a ratable portion of the credit otherwise 
        determined based on the portion of the 3-month period during 
        which the bond is outstanding. A similar rule shall apply when 
        the bond is redeemed or matures.
    ``(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 imposed 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 before the application of paragraph (1) for such 
        succeeding taxable year).
    ``(d) Qualified Tax Credit Bond.--For purposes of this section--
            ``(1) Qualified tax credit bond.--The term `qualified tax 
        credit bond' means a police and fire department bond which is 
        part of an issue that meets the requirements of paragraphs (2), 
        (3), (4), and (5).
            ``(2) Special rules relating to expenditures.--
                    ``(A) In general.--An issue shall be treated as 
                meeting the requirements of this paragraph if, as of 
                the date of issuance, the issuer reasonably expects--
                            ``(i) 100 percent or more of the available 
                        project proceeds to be spent for 1 or more 
                        qualified purposes within the 3-year period 
                        beginning on such date of issuance, and
                            ``(ii) a binding commitment with a third 
                        party to spend at least 10 percent of such 
                        available project proceeds will be incurred 
                        within the 6-month period beginning on such 
                        date of issuance.
                    ``(B) Failure to spend required amount of bond 
                proceeds within 3 years.--
                            ``(i) In general.--To the extent that less 
                        than 100 percent of the available project 
                        proceeds of the issue are expended by the close 
                        of the expenditure period for 1 or more 
                        qualified purposes, the issuer shall redeem all 
                        of the nonqualified bonds within 90 days after 
                        the end of such period. For purposes of this 
                        paragraph, the amount of the nonqualified bonds 
                        required to be redeemed shall be determined in 
                        the same manner as under section 142.
                            ``(ii) Expenditure period.--For purposes of 
                        this subpart, the term `expenditure period' 
                        means, with respect to any issue, the 3-year 
                        period beginning on the date of issuance. Such 
                        term shall include any extension of such period 
                        under clause (iii).
                            ``(iii) Extension of period.--Upon 
                        submission of a request prior to the expiration 
                        of the expenditure period (determined without 
                        regard to any extension under this clause), the 
                        Secretary may extend such period if the issuer 
                        establishes that the failure to expend the 
                        proceeds within the original expenditure period 
                        is due to reasonable cause and the expenditures 
                        for qualified purposes will continue to proceed 
                        with due diligence.
                    ``(C) Qualified purpose.--For purposes of this 
                paragraph, the term `qualified purpose' means a purpose 
                specified in section 54B(a)(1).
                    ``(D) Reimbursement.--For purposes of this 
                subtitle, available project proceeds of an issue shall 
                be treated as spent for a qualified purpose if such 
                proceeds are used to reimburse the issuer for amounts 
                paid for a qualified purpose after the date that the 
                Secretary makes an allocation of bond limitation with 
                respect to such issue, but only if--
                            ``(i) prior to the payment of the original 
                        expenditure, the issuer declared its intent to 
                        reimburse such expenditure with the proceeds of 
                        a qualified tax credit bond,
                            ``(ii) not later than 60 days after payment 
                        of the original expenditure, the issuer adopts 
                        an official intent to reimburse the original 
                        expenditure with such proceeds, and
                            ``(iii) the reimbursement is made not later 
                        than 18 months after the date the original 
                        expenditure is paid.
            ``(3) Reporting.--An issue shall be treated as meeting the 
        requirements of this paragraph if the issuer of qualified tax 
        credit bonds submits reports similar to the reports required 
        under section 149(e).
            ``(4) Special rules relating to arbitrage.--
                    ``(A) In general.--An issue shall be treated as 
                meeting the requirements of this paragraph if the 
                issuer satisfies the requirements of section 148 with 
                respect to the proceeds of the issue.
                    ``(B) Special rule for investments during 
                expenditure period.--An issue shall not be treated as 
                failing to meet the requirements of subparagraph (A) by 
                reason of any investment of available project proceeds 
                during the expenditure period.
                    ``(C) Special rule for reserve funds.--An issue 
                shall not be treated as failing to meet the 
                requirements of subparagraph (A) by reason of any fund 
                which is expected to be used to repay such issue if--
                            ``(i) such fund is funded at a rate not 
                        more rapid than equal annual installments,
                            ``(ii) such fund is funded in a manner 
                        reasonably expected to result in an amount not 
                        greater than an amount necessary to repay the 
                        issue, and
                            ``(iii) the yield on such fund is not 
                        greater than the discount rate determined under 
                        paragraph (5)(B) with respect to the issue.
            ``(5) Maturity limitation.--
                    ``(A) In general.--An issue shall not be treated as 
                meeting the requirements of this paragraph if the 
                maturity of any bond which is part of such issue 
                exceeds the maximum term determined by the Secretary 
                under subparagraph (B).
                    ``(B) Maximum term.--During each calendar month, 
                the Secretary shall determine the maximum term 
                permitted under this paragraph for bonds issued during 
                the following calendar month. Such maximum term shall 
                be the term which the Secretary estimates will result 
                in the present value of the obligation to repay the 
                principal on the bond being equal to 50 percent of the 
                face amount of such bond. Such present value shall be 
                determined using as a discount rate the average annual 
                interest rate of tax-exempt obligations having a term 
                of 10 years or more which are issued during the month. 
                If the term as so determined is not a multiple of a 
                whole year, such term shall be rounded to the next 
                highest whole year.
    ``(e) Other Definitions.--For purposes of this subchapter--
            ``(1) Credit allowance date.--The term `credit allowance 
        date' means--
                    ``(A) March 15,
                    ``(B) June 15,
                    ``(C) September 15, and
                    ``(D) December 15.
        Such term includes the last day on which the bond is 
        outstanding.
            ``(2) Bond.--The term `bond' includes any obligation.
            ``(3) State.--The term `State' includes the District of 
        Columbia and any possession of the United States.
            ``(4) Available project proceeds.--The term `available 
        project proceeds' means--
                    ``(A) the excess of--
                            ``(i) the proceeds from the sale of an 
                        issue, over
                            ``(ii) the issuance costs financed by the 
                        issue (to the extent that such costs do not 
                        exceed 2 percent of such proceeds), and
                    ``(B) the proceeds from any investment of the 
                excess described in subparagraph (A).
    ``(f) Credit Treated as Interest.--For purposes of this subtitle, 
the credit determined under subsection (a) shall be treated as interest 
which is includible in gross income.
    ``(g) S Corporations and Partnerships.--In the case of a tax credit 
bond held by an S corporation or partnership, the allocation of the 
credit allowed by this section to the shareholders of such corporation 
or partners of such partnership shall be treated as a distribution.
    ``(h) Bonds Held by Regulated Investment Companies and Real Estate 
Investment Trusts.--If any qualified tax credit bond is held by a 
regulated investment company or a real estate investment trust, the 
credit determined under subsection (a) shall be allowed to shareholders 
of such company or beneficiaries of such trust (and any gross income 
included under subsection (f) with respect to such credit shall be 
treated as distributed to such shareholders or beneficiaries) under 
procedures prescribed by the Secretary.
    ``(i) Credits May Be Stripped.--Under regulations prescribed by the 
Secretary--
            ``(1) In general.--There may be a separation (including at 
        issuance) of the ownership of a qualified tax credit bond and 
        the entitlement to the credit under this section with respect 
        to such bond. In case of any such separation, the credit under 
        this section shall be allowed to the person who on the credit 
        allowance date holds the instrument evidencing the entitlement 
        to the credit and not to the holder of the bond.
            ``(2) Certain rules to apply.--In the case of a separation 
        described in paragraph (1), the rules of section 1286 shall 
        apply to the qualified tax credit bond as if it were a stripped 
        bond and to the credit under this section as if it were a 
        stripped coupon.
    ``(j) Termination.--This section shall not apply to bonds issued 
after December 31, 2014.

``SEC. 54B. POLICE AND FIRE DEPARTMENT BONDS.

    ``(a) In General.--For purposes of this subpart, the term `police 
and fire department bond' means any bond issued as part of an issue 
if--
            ``(1) 100 percent of the available project proceeds of such 
        issue are to be used for capital expenditures incurred by a 
        State or local government for one or more police or fire 
        departments of the State or local government (as the case may 
        be),
            ``(2) the bond is issued by a State or local government, 
        and
            ``(3) the issuer designates such bond for purposes of this 
        section.
    ``(b) Limitation on Amount of Bonds Designated.--The maximum 
aggregate face amount of bonds which may be designated under subsection 
(a) by any issuer shall not exceed the limitation amount allocated to 
such issuer under subsection (d).
    ``(c) National Limitation on Amount of Bonds Designated.--There is 
a national police and fire department bond limitation of 
$3,000,000,000.
    ``(d) Allocations.--
            ``(1) In general.--The limitation applicable under 
        subsection (c) shall be allocated by the Secretary among the 
        States in proportion to the population of the States.
            ``(2) Allocations to largest local governments.--
                    ``(A) In general.--In the case of any State in 
                which there is a large local government, each such 
                local government shall be allocated a portion of such 
                State's allocation which bears the same ratio to the 
                State's allocation (determined without regard to this 
                subparagraph) as the population of such large local 
                government bears to the population of such State.
                    ``(B) Allocation of unused limitation to state.--
                The amount allocated under this subsection to a large 
                local government may be reallocated by such local 
                government to the State in which such local government 
                is located.
                    ``(C) Large local government.--For purposes of this 
                section, the term `large local government' means any 
                municipality or county if such municipality or county 
                has a population of 500,000 or more.
    ``(e) Population.--
            ``(1) In general.--The population of any State or local 
        government shall be determined for purposes of this section as 
        provided in section 146(j) for the calendar year which includes 
        the date of the enactment of this section.
            ``(2) Special rule for counties.--In determining the 
        population of any county for purposes of this section, any 
        population of such county which is taken into account in 
        determining the population of any municipality which is a large 
        local government shall not be taken into account in determining 
        the population of such county.''.
    (b) Reporting.--Subsection (d) of section 6049 of such Code 
(relating to returns regarding payments of interest) is amended by 
adding at the end the following new paragraph:
            ``(9) Reporting of credit on qualified tax credit bonds.--
                    ``(A) In general.--For purposes of subsection (a), 
                the term `interest' includes amounts includible in 
                gross income under section 54A and such amounts shall 
                be treated as paid on the credit allowance date (as 
                defined in section 54A(e)(1)).
                    ``(B) Reporting to corporations, etc.--Except as 
                otherwise provided in regulations, in the case of any 
                interest described in subparagraph (A) of this 
                paragraph, subsection (b)(4) of this section shall be 
                applied without regard to subparagraphs (A), (H), (I), 
                (J), (K), and (L)(i).
                    ``(C) Regulatory authority.--The Secretary may 
                prescribe such regulations as are necessary or 
                appropriate to carry out the purposes of this 
                paragraph, including regulations which require more 
                frequent or more detailed reporting.''.
    (c) Conforming Amendments.--
            (1) Sections 54(c)(2) and 1400N(l)(3)(B) of such Code are 
        each amended by striking ``subpart C'' and inserting ``subparts 
        C and I''.
            (2) Section 1397E(c)(2) of such Code is amended by striking 
        ``subpart H'' and inserting ``subparts H and I''.
            (3) Section 6401(b)(1) of such Code is amended by striking 
        ``and H'' and inserting ``H, and I''.
            (4) The table of subparts for part IV of subchapter A of 
        chapter 1 of such Code is amended by inserting after the item 
        relating to subpart H the following new item:

              ``subpart i. qualified tax credit bonds.''.

    (d) Effective Date.--The amendments made by this section shall 
apply to obligations issued after December 31, 2008.

SEC. 3. APPLICATION OF CERTAIN LABOR STANDARDS ON PROJECTS FINANCED 
              UNDER TAX CREDIT BONDS.

    Subchapter IV of chapter 31 of title 40, United States Code, shall 
apply to projects financed with the proceeds of any tax credit bond (as 
defined in section 54A of the Internal Revenue Code of 1986).

Summary: Police and Fire Station Modernization Act of 2008 - Amends the Internal Revenue Code to allow a tax credit for investment in bonds to finance capital expenditures for state and local police or fire departments. Terminates such credit after 2014.