Tax-Exempt Bond Requirements in the
Internal Revenue Code

Requirement

Facility must be located within the state

Issuer of qualified

Explanation

No portion of the state ceiling can be used to finance a facility outside of the state. An exception is made for water furnishing, sewage, solid waste disposal, or qualified hazardous waste facilities if the issuer establishes that the state's share of use or output will equal or exceed the state's share of PABS issued for the facility. Bonds for certain output facilities and for other exempt facilities are also excepted from this rule.

Qualified scholarship funding bonds are to be treated as scholarship funding bonds issued by a state or local issuing authority (whichever is appropriate).

Treatment of amounts allocated to private activity portion of government use bonds

Reduction for mortgage credit certificates

The volume cap shall be reduced by the amount allocated by the issuer to an issue where the private activity portion exceeds $15 million. Any advance refundings will be taken out of the volume cap to the extent that it was or would have been allocated for this purpose.

The volume cap of any issuing authority shall be reduced by the sum of the amount of qualified mortgage bonds not issued under section 25(c)(2)(A)(ii) (qualified credit certificate programs) during the year, plus the amount of any qualified mortgage bonds used for certificates that do not meet requirements in section 25(d).

Tax-Exempt Bond Requirements in the
Internal Revenue Code

Table 1.6: IRC Section 147-Other

Restrictions for PABS

Requirement
Substantial user
restriction

Maturity limits

Explanation

PABS must not be held by the person who is the substantial user of the facilities (or related person of such substantial user).

For certain bonds, the IRC restricts the maximum allowable
average maturity of bonds to 120 percent of the reasonably
expected average economic life of facilities that are being
financed. Certain special rules apply, such as the treatment of
pooled financing of 501(c)(3) bonds and Federal Housing
Administration insured loans.

Limitation on use for land The IRC provides that 25 percent or more of the proceeds
acquisition
cannot be used to acquire land and that no percentage can
be used to buy land for farm use. An exception is made for
first-time farmers and certain land acquired for environmental
purposes, such as noise abatement and wetland preservation,
or for future specified transportation facilities.

Acquisition of existing
property not permitted

Disallowed usages of
proceeds

Public approval

Cost of issuance
(2 percent and
3.5 percent)

Certain rules not to apply
to mortgage revenue
bonds, qualified student
loan bonds, and
qualified 501(c)(3)
bonds

The use of net proceeds to cover the cost of previously purchased property is not allowed, except for certain rehabilitations. A special rule applies for certain projects.

A PAB shall not be a qualified bond if it is issued as part of an issue from which any portion of the proceeds is to be used to provide an airplane, a skybox or other luxury box, a health club facility, a facility that is used primarily for gambling, or a store that is primarily in business for the sale of off-premises alcohol consumption.

A bond must be publicly approved by the appropriate governmental unit either by an applicable elected representative or by voter referendum. Special rules define the governmental unit that must approve PABS for (1) airports or high-speed intercity rail facilities and (2) scholarship funding bond issues and volunteer fire department bonds.

The IRC restricts the amount of bond proceeds that can be
used for issuance costs to 2 percent (or 3.5 percent in the
case of qualified mortgage bonds or qualified veterans'
mortgage bonds if the proceeds of the issue do not exceed
$20 million).

Certain subsections (substantial user restriction, maturity
limits, land acquisition, and acquisition of existing property) do
not apply to mortgage revenue bonds and qualified student
loan bonds; and certain subsections (substantial user
restriction, land acquisition, acquisition of existing property,
and the "health club facility" portion of the disallowed usages
restriction) do not apply to qualified 501(c)(3) bonds.

Qualified 501(c)(3) bonds. Special rules apply that result in
the nondeductibility of interest paid during the time that a
portion of a 501(c)(3) or governmentally owned unit is used in
a trade or business of any person other than a 501(c)(3)
organization or governmental unit but continues to be owned
by the 501(c)(3) organization or governmental unit. The
501(c)(3) organization will also have to recognize unrelated
trade or business income with respect to such portion in an
amount not less than its fair rental value.

Certain exempt facilities and small-issue bonds. Facilities that are financed with proceeds from exempt facility bonds or qualified small-issue bonds must be used for a purpose for which a tax-exempt bond could have been issued, or the interest is not deductible during the period that this facility is not so used.

Facilities financed by PABs required to be owned by
501(c)(3)s or governmental units. The facilities must be so
owned or the deduction of interest is not allowed during the
period that the facilities are not so owned.

Certain small-issue bonds that exceed capital expenditure limitation. In the case of financing that is provided from the proceeds of any purported small-issue bond, no deduction is allowed for interest that is accrued during the period that such a bond is not a qualified small-issue bond.

(continued)

Tax-Exempt Bond Requirements in the
Internal Revenue Code

Requirement

Exceptions and special rules for changes in use contained in subsection 150(b)

Qualified scholarship funding bond

Bonds of certain volunteer fire

departments

Explanation

Change in use requirements only apply to the portion of a facility that is financed by bond proceeds and that is not used for the exempt purpose. Proceeds that are not required to be used for the exempt purpose are excepted from the change in use restrictions. Special rules apply to the treatment of amounts other than interest.

Bonds falling within the defined meaning of qualified
scholarship funding bonds are treated as state or local bonds,
not as PABS.

These bonds are to be treated as bonds of a political
subdivision of a state if certain qualifications are met.
However, these bonds are treated as PABS for the purposes
of public approval (section 147(f)) and advance refundings
(section 149(d)).

Tax-Exempt Bond Requirements in the Internal Revenue Code