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INTERNAL REVENUE CODE OF 1954 1
[The United States Code citations for the following Internal Revenue Code sections
correspond to the section numbers given below.)
Subtitle A-Income Taxes
CHAPTER 1-NORMAL TAXES AND SURTAXES
Subchapter B-Computation of Taxable Income
PART III-ITEMS SPECIFICALLY EXCLUDED FROM GROSS
SEC. 103. INTEREST ON CERTAIN GOVERNMENTAL OBLIGATIONS. (a) GENERAL RULE.-Gross income does not include interest on
(1) the obligations of a State, a Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia; and
(2) qualified scholarship funding bonds. (b) INDUSTRIAL DEVELOPMENT BONDS.
(1) SUBSECTION (a)(1) OR (2) NOT TO APPLY.-Except as otherwise provided in this subsection, any industrial development bond shall be treated as an obligation not described in subsection (a)(1) or (2).
(2) INDUSTRIAL DEVELOPMENT BOND.- For purposes of this section, the term “industrial development bond” means any obligation,
(A) which is issued as part of an issue all or a major portion of the proceeds of which are to be used directly or indirectly in any trade or business carried on by any person who is not an except person (within the meaning of paragraph (3)), and
1 The following provisions of the Internal Revenue Code of 1954 do not reflect extensive amendments made by the Tax Reform Act of 1986 (and later amendments). The amended provi. sions do not contain the definitions and other matters to which references are made in the securities laws. For current provisions of the Internal Revenue Code of 1986 corresponding to these provisions, see title 26, U.S.C.
(B) the payment of the principal or interest on which (under the terms of such obligation or any underlying arrangement) is, in whole or in major part
(i) secured by any interest in property used or to be used in a trade or business or in payments in respect of such property, or
(ii) to be derived from payments in respect of property, or borrowed money, used or to be used in a trade of
business. (3) EXEMPT PERSON.- For purposes of paragraph (2)(A), the term "exempt person” means
(A) a governmental unit, or
(B) an organization described in section 501(c)(3) and exempt from tax under section 501(a) (but only with respect to a trade or business carried on by such organization which is not an unrelated trade or business, deter
mined by applying section 513(a) to such organization). (4) CERTAIN EXEMPT ACTIVITIES.–Paragraph (1) shall not apply to any obligation which is issued as part of an issue substantially all of the proceeds of which are to be used to provide
(A) projects for residential rental property if at all times during the qualified project period
(i) 15 percent or more in the case of targeted area projects, or
(ii) 20 percent or more in the case of any other
(B) sports facilities,
(D) airports, docks, wharves, mass commuting facilities, parking facilities, or storage or training facilities directly related to any of the foregoing,
(E) sewage or solid waste disposal facilities or facilities for the local furnishing of electric energy or gas,
(F) air or water pollution control facilities,
(G) facilities for the furnishing of water for any purpose if—
(i) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users), and
(ii) either the facilities are operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of
any State or political subdivision thereof,
For purposes of subparagraph (E), the local furnishing of electric energy or gas from a facility shall include furnishing solely within the area consisting of a city and 1 contiguous county. For purposes of subparagraph (A), any property shall not be treated as failing to be residential rental property merely because part of the building in which such property is located is used for purposes other than residential rental purposes.
(5) INDUSTRIAL PARKS.—Paragraph (1) shall not apply to any obligation issued as part of an issue substantially all of the proceeds of which are to be used for the acquisition or develop ment of land as the site for an industrial park. For purposes of the preceding sentence, the term "development of land" includes the provision of water, sewage, drainage, or similar facilities, or of transportation, power, or communication facilities, which are incidental to use of the site as an industrial park, but, except with respect to such facilities, does not include the provision of structures or buildings. (6) EXEMPTION FOR CERTAIN SMALL ISSUES.
(A) IN GENERAL.-Paragraph (1) shall not apply to any obligation issued as part of an issue the aggregate authorized face amount of which is $1,000,000 or less and substantially all of the proceeds of which are to be used (i) for the acquisition, construction, reconstruction, or improvement of land or property of a character subject to the allowance for depreciation, or (ii) to redeem part or all of a prior issue which was issued for purposes described in clause (i) or this clause. (B) CERTAIN PRIOR ISSUES TAKEN INTO ACCOUNT.-If
(i) the proceeds of two or more issues of obligations (whether or not the issuer of each such issue is the same) are or will be used primarily with respect to facilities located in the same incorporated municipality or located in the same county (but not in any incorporated municipality),
(ii) the principal user of such facilities is or will be the same person or two or more related persons, and
(iii) but for this subparagraph, subparagraph (A)
would apply to each such issue, then, for purposes of subparagraph (A), in determining the aggregate face amount of any later issue there shall be taken into account the face amount of obligations issued under all prior such issues and outstanding at the time of such later issue (not including as outstanding any obligation which is to be redeemed from the proceeds of the later issue).
(C) RELATED PERSONS.-For purposes of this paragraph and paragraph (13), a person is a related person to another
(i) the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), or
(ii) such persons are members of the same controlled group of corporations (as defined in section 1563(a), except that “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears
therein). (D) $10,000,000 LIMIT IN CERTAIN CASES.—At the election of the issuer, made at such time and in such manner as the Secretary shall by regulations prescribe, with respect to any issue this paragraph shall be applied
(i) by substituting "$10,000,000" for "$1,000,000" in subparagraph (A), and
(ii) in determining the aggregate face amount of such issue, by taking into account not only the amount described in subparagraph (B), but also the aggregate amount of capital expenditures with respect to facilities described in subparagraph (E) paid or incurred during the 6-year period beginning 3 years before the date of such issue and ending 3 years after such date (and financed otherwise than out of the proceeds of outstanding issues to which subparagraph (A) applied), as if the aggregate amount of such capital expenditures constituted the face amount of a prior out
standing issue described in subparagraph (B). (E) FACILITIES TAKEN INTO ACCOUNT.-For purposes of subparagraph (D)(ii), the facilities described in this subparagraph are facilities,
(i) located in the same incorporated municipality or located in the same county (but not in any incorporated municipality), and
(ii) the principal user of which is or will be the same
person or two or more related persons. For purposes of clause (i), the determination of whether or not facilities are located in the same governmental unit shall be made as of the date of issue of the issue in question.
(F) CERTAIN CAPITAL EXPENDITURES NOT TAKEN INTO ACCOUNT.–For purposes of subparagraph (D)(ii), any capital expenditure
(i) to replace property destroyed or damaged by fire, storm, or other casualty, to the extent of the fair market value of the property replaced,
(ii) required by a change made after the date of issue of the issue in question in a Federal or State law or local ordinance of general application or required by a change made after such date in rules and regulations of general application issued under such a law or ordinance,
(iii) required by circumstances which could not be reasonably foreseen on such date of issue or arising out of a mistake of law or fact (but the aggregate amount of expenditures not taken into account under this clause with respect to any issue shall not exceed $1,000,000), or
(iv) described in clause (i) or (ii) of section 30(b)(2)(A) for which a deduction was allowed under section
174(a), shall not be taken into account.
(G) LIMITATION ON LOSS OF TAX EXEMPTION.-In applying subparagraph (D)(ii) with respect to capital expenditures made after the date of any issue, no obligation issued as a part of such issue shall be treated as an obligation not de scribed in subsection (aX1) by reason of any such expenditure for any period before the date on which such expenditure is paid or incurred.
(H) CERTAIN REFINANCING ISSUES.- In the case of any issue described in subparagraph (A)(ii), an election may be made under subparagraph (D) only if all of the prior issues being redeemed are issues to which subparagraph (A) applies. In applying subparagraph (D)(ii) with respect to such a refinancing issue, capital expenditures shall be taken into account only for purposes of determining whether the prior issues being redeemed qualified (and would have continued to qualify) under subparagraph (A).
(I) AGGREGATE AMOUNT OF CAPITAL EXPENDITURES WHERE THERE IS URBAN DEVELOPMENT ACTION GRANT.-In the case of any issue substantially all of the proceeds of which are to be used to provide facilities with respect to which an urban development action grant has been made under section 119 of the Housing and Community Development Act of 1974, capital expenditures of not to exceed $10,000,000 shall not be taken into account for purposes of applying subparagraph (DXii).
(J) ISSUES FOR RESIDENTIAL PURPOSES.—This paragraph shall not apply to any obligation which is issued as a part of an issue a significant portion of the proceeds of which are to be used directly or indirectly to provide residential real property for family units.
(K) LIMITATIONS ON TREATMENT OF OBLIGATIONS AS PART OF THE SAME ISSUE.- For purposes of this paragraph, separate lots of obligations which (but for this subparagraph) would be treated as part of the same issue shall be treated as separate issues unless the proceeds of such lots are to be used with respect to 2 or more facilities,
(i) which are located in more than 1 State, or
(ii) which have, or will have, as the same principal user the same person or related persons. (L) FRANCHISES. -For purposes of subparagraph (K), a person (other than a governmental unit) shall be considered a principal user of a facility if such person (or a group of related persons which includes such person)
(i) guarantees, arranges, participates in, or assists with the issuance (or pays any portion of the cost of issuance) of any obligation the proceeds of which are to be used to finance or refinance such facility, and
(ii) provides any property, or any franchise, trademark, or trade name (within the meaning of section