(d) Advance refundings
(1) In general
Nothing in section 103(a) or in any other provision of law shall be construed to provide an exemption from Federal income tax for interest on any bond issued as part of an issue described in paragraph (2), (3), or (4).
(2) Certain private activity bonds
An issue is described in this paragraph if any bond (issued as part of such issue) is issued to advance refund a private activity bond (other than a qualified 501(c)(3) bond).
(3) Other bonds
(A) In general
An issue is described in this paragraph if any bond (issued as part of such issue), hereinafter in this paragraph referred to as the “refunding bond”, is issued to advance refund a bond unless—
(i)
the refunding bond is only—
(I) the 1st advance refunding of the original bond if the original bond is issued after 1985, or
(II) the 1st or 2nd advance refunding of the original bond if the original bond was issued before 1986,
(ii) in the case of refunded bonds issued before 1986, the refunded bond is redeemed not later than the earliest date on which such bond may be redeemed at par or at a premium of 3 percent or less,
(iii) in the case of refunded bonds issued after 1985, the refunded bond is redeemed not later than the earliest date on which such bond may be redeemed,
(iv)
the initial temporary period under section 148(c) ends—
(I) with respect to the proceeds of the refunding bond not later than 30 days after the date of issue of such bond, and
(II) with respect to the proceeds of the refunded bond on the date of issue of the refunding bond, and
(v)
in the case of refunded bonds to which section 148(e) did not apply, on and after the date of issue of the refunding bond, the amount of proceeds of the refunded bond invested in higher yielding investments (as defined in section 148(b)) which are nonpurpose investments (as defined in section 148(f)(6)(A)) does not exceed—
(I) the amount so invested as part of a reasonably required reserve or replacement fund or during an allowable temporary period, and
(II) the amount which is equal to the lesser of 5 percent of the proceeds of the issue of which the refunded bond is a part or $100,000 (to the extent such amount is allocable to the refunded bond).
(B) Special rules for redemptions
(i) Issuer must redeem only if debt service savings
Clause (ii) and (iii) of subparagraph (A) shall apply only if the issuer may realize present value debt service savings (determined without regard to administrative expenses) in connection with the issue of which the refunding bond is a part.
(ii) Redemptions not required before 90th day
For purposes of clauses (ii) and (iii) of subparagraph (A), the earliest date referred to in such clauses shall not be earlier than the 90th day after the date of issuance of the refunding bond.
(4) Abusive transactions prohibited
An issue is described in this paragraph if any bond (issued as part of such issue) is issued to advance refund another bond and a device is employed in connection with the issuance of such issue to obtain a material financial advantage (based on arbitrage) apart from savings attributable to lower interest rates.
(5) Advance refunding
For purposes of this part, a bond shall be treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond.
(6) Special rules for purposes of paragraph (3)
For purposes of paragraph (3), bonds issued before the date of the enactment of this subsection shall be taken into account under subparagraph (A)(i) thereof except—
(A) a refunding which occurred before 1986 shall be treated as an advance refunding only if the refunding bond was issued more than 180 days before the redemption of the refunded bond, and
(B) a bond issued before 1986, shall be treated as advance refunded no more than once before March 15, 1986.
(7) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.
(f) Treatment of certain pooled financing bonds
(1) In general
Section 103(a) shall not apply to any pooled financing bond unless, with respect to the issue of which such bond is a part, the requirements of paragraphs (2), (3), (4), and (5) are met.
(2) Reasonable expectation requirement
(A) In general
The requirements of this paragraph are met with respect to an issue if the issuer reasonably expects that—
(i) as of the close of the 1-year period beginning on the date of issuance of the issue, at least 30 percent of the net proceeds of the issue (as of the close of such period) will have been used directly or indirectly to make or finance loans to ultimate borrowers, and
(ii) as of the close of the 3-year period beginning on such date of issuance, at least 95 percent of the net proceeds of the issue (as of the close of such period) will have been so used.
(B) Certain factors may not be taken into account in determining expectations
Expectations as to changes in interest rates or in the provisions of this title (or in the regulations or rulings thereunder) may not be taken into account in determining whether expectations are reasonable for purposes of this paragraph.
(C) Net proceeds
For purposes of subparagraph (A), the term “net proceeds” has the meaning given such term by section 150 but shall not include proceeds used to finance issuance costs and shall not include proceeds necessary to pay interest (during such period) on the bonds which are part of the issue.
(D) Refunding bonds
For purposes of subparagraph (A), in the case of a refunding bond, the date of issuance taken into account is the date of issuance of the original bond.
(3) Cost of issuance payment requirements
The requirements of this paragraph are met with respect to an issue if—
(A) the payment of legal and underwriting costs associated with the issuance of the issue is not contingent, and
(B) at least 95 percent of the reasonably expected legal and underwriting costs associated with the issuance of the issue are paid not later than the 180th day after the date of the issuance of the issue.
(4) Written loan commitment requirement
(A) In general
The requirement of this paragraph is met with respect to an issue if the issuer receives prior to issuance written loan commitments identifying the ultimate potential borrowers of at least 30 percent of the net proceeds of such issue.
(B) Exception
Subparagraph (A) shall not apply with respect to any issuer which—
(i) is a State (or an integral part of a State) issuing pooled financing bonds to make or finance loans to subordinate governmental units of such State, or
(ii) is a State-created entity providing financing for water-infrastructure projects through the federally-sponsored State revolving fund program.
(5) Redemption requirement
The requirement of this paragraph is met if to the extent that less than the percentage of the proceeds of an issue required to be used under clause (i) or (ii) of paragraph (2)(A) is used by the close of the period identified in such clause, the issuer uses an amount of proceeds equal to the excess of—
(A) the amount required to be used under such clause, over
(B) the amount actually used by the close of such period,
to redeem outstanding bonds within 90 days after the end of such period.
(6) Pooled financing bond
For purposes of this subsection—
(A) In general
The term “pooled financing bond” means any bond issued as part of an issue more than $5,000,000 of the proceeds of which are reasonably expected (at the time of the issuance of the bonds) to be used (or are intentionally used) directly or indirectly to make or finance loans to 2 or more ultimate borrowers.
(B) Exceptions
Such term shall not include any bond if—
(i) section 146 applies to the issue of which such bond is a part (other than by reason of section 141(b)(5)) or would apply but for section 146(i), or
(ii) section 143(
l)(3) applies to such issue.
(7) Definition of loan; treatment of mixed use issues
(A) Loan
For purposes of this subsection, the term “loan” does not include—
(i) any loan which is a nonpurpose investment (within the meaning of section 148(f)(6)(A), determined without regard to section 148(b)(3)), and
(ii) any use of proceeds by an agency of the issuer unless such agency is a political subdivision or instrumentality of the issuer.
(B) Portion of issue to be used for loans treated as separate issue
If only a portion of the proceeds of an issue is reasonably expected (at the time of issuance of the bond) to be used (or is intentionally used) as described in paragraph (6)(A), such portion and the other portion of such issue shall be treated as separate issues for purposes of determining whether such portion meets the requirements of this subsection.
References in Text
The Northwest Power Act, referred to in subsecs. (b)(3)(A)(iii) and (c)(2)(C)(i), probably means the Pacific Northwest Electric Power Planning and Conservation Act, Pub. L. 96–501, Dec. 5, 1980, 94 Stat 2697, which is classified principally to chapter 12H (§ 839 et seq.) of Title 16, Conservation. For complete classification of this Act to the Code, see Short Title note set out under section 839 of Title 16 and Tables.
The date of the enactment of the Tax Reform Act of 1984, referred to in subsec. (b)(3)(A)(iii), is the date of enactment of Pub. L. 98–369, div. A, which was approved July 18, 1984.
The date of the enactment of this clause, referred to in subsec. (b)(3)(A)(iv), is the date of enactment of Pub. L. 110–289, which was approved July 30, 2008.
Section 11(b) of the United States Housing Act of 1937, referred to in subsecs. (b)(3)(C)(i)(I) and (c)(2)(C)(iii), is classified to section 1473i(b) of Title 42, The Public Health and Welfare.
Section 608(a)(6)(A) of Pub. L. 97–468, referred to in subsec. (c)(2)(C)(ii), is classified to section 1207(a)(6)(A) of Title 45, Railroads.
The date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (c)(2)(C)(ii), is the date of enactment of Pub. L. 99–514, which was approved Oct. 22, 1986.
The date of the enactment of this subsection, referred to in subsec. (d)(6), is the date of enactment of Pub. L. 99–514, which was approved Oct. 22, 1986.
Amendments
2010—Subsec. (a)(2). Pub. L. 111–147 inserted “or” at end of subpar. (A), substituted period for “, or” in subpar. (B), and struck out subpar. (C) which read as follows: “is described in section 163(f)(2)(B).”
2008—Subsec. (b)(3)(A)(iv). Pub. L. 110–289, § 3023(a), added cl. (iv).
Subsec. (b)(3)(E). Pub. L. 110–289, § 3023(b), added subpar. (E).
2006—Subsec. (f)(1). Pub. L. 109–222, § 508(d)(1), substituted “paragraphs (2), (3), (4), and (5)” for “paragraphs (2) and (3)”.
Subsec. (f)(2)(A). Pub. L. 109–222, § 508(a), amended subpar. (A) generally. Prior to amendment, text read as follows: “The requirements of this paragraph are met with respect to an issue if the issuer reasonably expects that as of the close of the 3-year period beginning on the date of issuance of the issue, at least 95 percent of the net proceeds of the issue (as of the close of such period) will have been used directly or indirectly to make or finance loans to ultimate borrowers.”
Subsec. (f)(4) to (6). Pub. L. 109–222, § 508(b), added pars. (4) and (5) and redesignated former par. (4) as (6). Former par. (5) redesignated (7).
Subsec. (f)(7). Pub. L. 109–222, § 508(b), redesignated par. (5) as (7).
Subsec. (f)(7)(B). Pub. L. 109–222, § 508(d)(2), substituted “paragraph (6)(A)” for “paragraph (4)(A)”.
1996—Subsec. (g)(3)(B)(iii). Pub. L. 104–188 amended cl. (iii) generally. Prior to amendment, cl. (iii) read as follows: “Investment earnings held pending reinvestment.—Investment earnings held for not more than 30 days pending reinvestment shall be treated as invested in bonds described in clause (i).”
1989—Subsec. (g). Pub. L. 101–239 added subsec. (g).
1988—Subsec. (b)(3)(A)(iii). Pub. L. 100–647, § 1013(a)(20), struck out “with respect to any bond issued before July 1, 1989” after “1984”.
Subsec. (b)(4)(A). Pub. L. 100–647, § 1013(a)(21), substituted “and a qualified student loan bond” for “a qualified student loan bond, and a qualified redevelopment bond”.
Subsec. (e)(3). Pub. L. 100–647, § 1013(a)(22), substituted “the failure to file in a timely fashion is not due to willful neglect” for “there is reasonable cause for the failure to file such statement in a timely fashion”.
Subsec. (f). Pub. L. 100–647, § 5051(a), added subsec. (f).
Change of Name
Reference to Veterans’ Administration deemed to refer to Department of Veterans Affairs pursuant to section 10 of Pub. L. 100–527, set out as a Department of Veterans Affairs Act note under section 301 of Title 38, Veterans’ Benefits.
Effective Date of 2010 Amendment
Pub. L. 111–147, title V, § 502(f), Mar. 18, 2010, 124 Stat. 108, provided that:
“The amendments made by this section [amending this section, sections 163, 165, 871, 881, 1287, and 4701 of this title, and
section 3121 of Title 31, Money and Finance] shall apply to obligations issued after the date which is 2 years after the date of the enactment of this Act [Mar. 18, 2010].”
Effective Date of 2008 Amendment
Pub. L. 110–289, div. C, title I, § 3023(c), July 30, 2008, 122 Stat. 2895, provided that:
“The amendments made by this section [amending this section] shall apply to guarantees made after the date of the enactment of this Act [July 30, 2008].”
Effective Date of 2006 Amendment
Amendment by Pub. L. 109–222 applicable to bonds issued after May 17, 2006, see section 508(e) of Pub. L. 109–222, set out as a note under section 54 of this title.
Effective Date of 1996 Amendment
Pub. L. 104–188, title I, § 1704(b)(2), Aug. 20, 1996, 110 Stat. 1878, provided that:
“The amendment made by paragraph (1) [amending this section] shall take effect as if included in the amendments made by section 7651 of the Omnibus Budget Reconciliation Act of 1989 [
Pub. L. 101–239].”
Effective Date of 1989 Amendment
Pub. L. 101–239, title VII, § 7651(b), Dec. 19, 1989, 103 Stat. 2385, provided that:
“(1) In general.— Except as otherwise provided in this subsection, the amendment made by subsection (a) [amending this section] shall apply to bonds issued after September 14, 1989.
“(2) Bonds sold before september 15, 1989.— The amendment made by subsection (a) shall not apply to any bond sold before September 15, 1989, and issued before October 15, 1989.
“(3) Bonds with respect to which preliminary offering materials mailed.— The amendment made by subsection (a) shall not apply to any issue issued after the date of the enactment of this Act [Dec. 19, 1989] if the preliminary offering materials with respect to such issue were mailed (or otherwise delivered) to members of the underwriting syndicate before September 15, 1989.
“(4) Certain other bonds.— In the case of a bond issued before January 1, 1991, with respect to which official action was taken (or a series of official actions were taken), or other comparable preliminary approval was given, before November 18, 1989, demonstrating an intent to issue such bonds in a maximum specified amount for such issue or with a maximum specified amount of net proceeds of such issue, the issuer may elect to apply section 149(g)(2) of the Internal Revenue Code of 1986 (as added by this section) by substituting ‘15 percent’ for ‘10 percent’ in subparagraph (A) and ‘50 percent’ for ‘60 percent’ in subparagraph (C).
“(5) Bonds issued to finance self-insurance funds.— The amendment made by subsection (a) shall not apply to any bonds issued before July 1, 1990, to finance a self-insurance fund if official action was taken (or a series of official actions were taken), or other comparable preliminary approval was given, before September 15, 1989, demonstrating an intent to issue such bonds in a maximum specified amount for such issue or with a maximum specified amount of net proceeds of such issue.”
Effective Date of 1988 Amendment
Amendment by section 1013(a)(20)–(22) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Pub. L. 100–647, title V, § 5051(b), Nov. 10, 1988, 102 Stat. 3677, provided that:
“(1) In general.— The amendment made by subsection (a) [amending this section] shall apply to bonds issued after October 21, 1988.
“(2) Special rule for refunding bonds.—
In the case of a bond issued to refund a bond issued before October 22, 1988—
“(A) if the 3-year period described in section 149(f)(2)(A) of the 1986 Code would (but for this paragraph) expire on or before October 22, 1989, such period shall expire on October 21, 1990, and
“(B) if such period expires after October 22, 1989, the portion of the proceeds of the issue of which the refunded bond is a part which is available (on the date of issuance of the refunding issue) to provide loans shall be treated as proceeds of a separate issue (issued after October 21, 1988) for purposes of applying section 149(f) of the 1986 Code.”
Effective Date
Subsec. (e) applicable to bonds issued after Dec. 31, 1986, see section 1311(d) of Pub. L. 99–514, as amended, set out as an Effective Date; Transitional Rules note under section 141 of this title.
Transfer of Functions
Federal Savings and Loan Insurance Corporation abolished and its functions transferred, see sections 401 to 406 of Pub. L. 101–73 set out as a note under section 1437 of Title 12, Banks and Banking.