26 U.S.C. § 148 — Arbitrage

Page 696 TITLE 26—INTERNAL REVENUE CODE § 148 1990—Subsec. (d)(3)(B). Pub. L. 101–508 substituted ‘‘section 47(c)(2)(B)’’ for ‘‘section 48(g)(2)(B)’’. 1989—Subsec. (c)(3). Pub. L. 101–239 inserted a comma after ‘‘mass commuting facility’’ in introductory provi- sions and in subpar. (A). 1988—Subsec. (c)(3). Pub. L. 100–647, § 6180(b)(4), in- serted ‘‘high-speed intercity rail facility’’ after ‘‘mass commuting facility’’ in introductory text and in sub- par. (A). Subsec. (e). Pub. L. 100–647, § 1013(a)(11), struck out ‘‘treated as’’ after ‘‘shall not be’’. Subsec. (f)(2)(D). Pub. L. 100–647, § 1013(a)(29), sub- stituted ‘‘the average maturity date of the issue of which the refunding bond is a part is later than the av- erage maturity date of the bonds to be refunded by such issue. For purposes of the preceding sentence, av- erage maturity shall be determined in accordance with subsection (b)(2)(A)’’ for ‘‘the maturity date of such bond is later than the maturity date of the bond to be refunded’’. Subsec. (f)(2)(E)(i). Pub. L. 100–647, § 1013(a)(36), in- serted sentence at end relating to treatment of an indi- vidual appointed to fill a vacancy in the office of an elected official. Subsec. (f)(3). Pub. L. 100–647, § 6180(b)(5), inserted ‘‘or high-speed intercity rail facilities’’ after ‘‘airports’’ in heading and after ‘‘airport’’ in subpars. (A) and (B) and in last sentence. Subsec. (f)(4). Pub. L. 100–647, § 1013(a)(12), added par. (4). Subsec. (g)(1). Pub. L. 100–647, § 1013(a)(13)(A), sub- stituted ‘‘proceeds’’ for ‘‘aggregate face amount’’. Subsec. (g)(2). Pub. L. 100–647, § 1013(a)(13)(B), sub- stituted ‘‘proceeds’’ for ‘‘aggregate authorized face amount’’ and ‘‘do’’ for ‘‘does’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 11002(e) of Pub. L. 115–97, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2012 AMENDMENT Pub. L. 112–95, title XI, § 1105(b), Feb. 14, 2012, 126 Stat. 152, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall apply to obligations issued after the date of the enactment of this Act [Feb. 14, 2012].’’ EFFECTIVE DATE OF 2008 AMENDMENT Amendment of this section and repeal of Pub. L. 110–234 by Pub. L. 110–246 effective May 22, 2008, the date of enactment of Pub. L. 110–234, except as other- wise provided, see section 4 of Pub. L. 110–246, set out as an Effective Date note under section 8701 of Title 7, Agriculture. Pub. L. 110–234, title XV, § 15341(e), May 22, 2008, 122 Stat. 1517, and Pub. L. 110–246, § 4(a), title XV, § 15341(e), June 18, 2008, 122 Stat. 1664, 2279, provided that: ‘‘The amendments made by this section [amending this sec- tion] shall apply to bonds issued after the date of the enactment of this Act [June 18, 2008].’’ [Pub. L. 110–234 and Pub. L. 110–246 enacted identical provisions. Pub. L. 110–234 was repealed by section 4(a) of Pub. L. 110–246, set out as a note under section 8701 of Title 7, Agriculture.] EFFECTIVE DATE OF 2001 AMENDMENT Amendment by Pub. L. 107–16 applicable to bonds issued after Dec. 31, 2001, see section 422(f) of Pub. L. 107–16, set out as a note under section 142 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Pub. L. 104–188, title I, § 1117(c), Aug. 20, 1996, 110 Stat. 1764, provided that: ‘‘The amendments made by this section [amending this section] shall apply to bonds issued after the date of the enactment of this Act [Aug. 20, 1996].’’ EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101–508 applicable to property placed in service after Dec. 31, 1990, but not applicable to any transition property (as defined in section 49(e) of this title), any property with respect to which qualified progress expenditures were previously taken into ac- count under section 46(d) of this title, and any property described in section 46(b)(2)(C) of this title, as such sec- tions were in effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 101–508, set out as a note under section 45K of this title. EFFECTIVE DATE OF 1989 AMENDMENT Amendment by Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title I, § 1013(a)(13)(C), Nov. 10, 1988, 102 Stat. 3539, provided that: ‘‘The amendments made by this paragraph [amending this section] shall apply to bonds issued after June 30, 1987.’’ Amendment by section 1013(a)(11), (12), (29), (36) 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 re- lates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Amendment by section 6180(b)(4), (5) of Pub. L. 100–647 applicable to bonds issued after Nov. 10, 1988, see sec- tion 6180(c) of Pub. L. 100–647, set out as a note under section 142 of this title. EFFECTIVE DATE Subsec. (f) 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. SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. SUBPART B—REQUIREMENTS APPLICABLE TO ALL STATE AND LOCAL BONDS Sec. 148. Arbitrage. 149. Bonds must be registered to be tax exempt; other requirements. § 148. Arbitrage (a) Arbitrage bond defined For purposes of section 103, the term ‘‘arbi- trage bond’’ means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly— (1) to acquire higher yielding investments, or (2) to replace funds which were used directly or indirectly to acquire higher yielding invest- ments. For purposes of this subsection, a bond shall be treated as an arbitrage bond if the issuer inten- Page 697 TITLE 26—INTERNAL REVENUE CODE § 148 tionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in paragraph (1) or (2). (b) Higher yielding investments For purposes of this section— (1) In general The term ‘‘higher yielding investments’’ means any investment property which pro- duces a yield over the term of the issue which is materially higher than the yield on the issue. (2) Investment property The term ‘‘investment property’’ means— (A) any security (within the meaning of section 165(g)(2)(A) or (B)), (B) any obligation, (C) any annuity contract, (D) any investment-type property, or (E) in the case of a bond other than a pri- vate activity bond, any residential rental property for family units which is not lo- cated within the jurisdiction of the issuer and which is not acquired to implement a court ordered or approved housing desegre- gation plan. (3) Alternative minimum tax bonds treated as investment property in certain cases (A) In general Except as provided in subparagraph (B), the term ‘‘investment property’’ does not in- clude any tax-exempt bond. (B) Exception With respect to an issue other than an issue a part of which is a specified private activity bond (as defined in section 57(a)(5)(C)), the term ‘‘investment property’’ includes a specified private activity bond (as so defined). (4) Safe harbor for prepaid natural gas (A) In general The term ‘‘investment-type property’’ does not include a prepayment under a qualified natural gas supply contract. (B) Qualified natural gas supply contract For purposes of this paragraph, the term ‘‘qualified natural gas supply contract’’ means any contract to acquire natural gas for resale by a utility owned by a govern- mental unit if the amount of gas permitted to be acquired under the contract by the utility during any year does not exceed the sum of— (i) the annual average amount during the testing period of natural gas purchased (other than for resale) by customers of such utility who are located within the service area of such utility, and (ii) the amount of natural gas to be used to transport the prepaid natural gas to the utility during such year. (C) Natural gas used to generate electricity Natural gas used to generate electricity shall be taken into account in determining the average under subparagraph (B)(i)— (i) only if the electricity is generated by a utility owned by a governmental unit, and (ii) only to the extent that the elec- tricity is sold (other than for resale) to customers of such utility who are located within the service area of such utility. (D) Adjustments for changes in customer base (i) New business customers If— (I) after the close of the testing period and before the date of issuance of the issue, the utility owned by a govern- mental unit enters into a contract to supply natural gas (other than for resale) for a business use at a property within the service area of such utility, and (II) the utility did not supply natural gas to such property during the testing period or the ratable amount of natural gas to be supplied under the contract is significantly greater than the ratable amount of gas supplied to such property during the testing period, then a contract shall not fail to be treated as a qualified natural gas supply contract by reason of supplying the additional nat- ural gas under the contract referred to in subclause (I). (ii) Lost customers The average under subparagraph (B)(i) shall not exceed the annual amount of nat- ural gas reasonably expected to be pur- chased (other than for resale) by persons who are located within the service area of such utility and who, as of the date of issuance of the issue, are customers of such utility. (E) Ruling requests The Secretary may increase the average under subparagraph (B)(i) for any period if the utility owned by the governmental unit establishes to the satisfaction of the Sec- retary that, based on objective evidence of growth in natural gas consumption or popu- lation, such average would otherwise be in- sufficient for such period. (F) Adjustment for natural gas otherwise on hand (i) In general The amount otherwise permitted to be acquired under the contract for any period shall be reduced by— (I) the applicable share of natural gas held by the utility on the date of issuance of the issue, and (II) the natural gas (not taken into ac- count under subclause (I)) which the utility has a right to acquire during such period (determined as of the date of issuance of the issue). (ii) Applicable share For purposes of the clause (i), the term ‘‘applicable share’’ means, with respect to any period, the natural gas allocable to such period if the gas were allocated rat- ably over the period to which the prepay- ment relates. Page 698 TITLE 26—INTERNAL REVENUE CODE § 148 (G) Intentional acts Subparagraph (A) shall cease to apply to any issue if the utility owned by the govern- mental unit engages in any intentional act to render the volume of natural gas acquired by such prepayment to be in excess of the sum of— (i) the amount of natural gas needed (other than for resale) by customers of such utility who are located within the service area of such utility, and (ii) the amount of natural gas used to transport such natural gas to the utility. (H) Testing period For purposes of this paragraph, the term ‘‘testing period’’ means, with respect to an issue, the most recent 5 calendar years end- ing before the date of issuance of the issue. (I) Service area For purposes of this paragraph, the service area of a utility owned by a governmental unit shall be comprised of— (i) any area throughout which such util- ity provided at all times during the testing period— (I) in the case of a natural gas utility, natural gas transmission or distribution services, and (II) in the case of an electric utility, electricity distribution services, (ii) any area within a county contiguous to the area described in clause (i) in which retail customers of such utility are located if such area is not also served by another utility providing natural gas or electricity services, as the case may be, and (iii) any area recognized as the service area of such utility under State or Federal law. (c) Temporary period exception (1) In general For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that the proceeds of the issue of which such bond is a part may be in- vested in higher yielding investments for a reasonable temporary period until such pro- ceeds are needed for the purpose for which such issue was issued. (2) Limitation on temporary period for pooled financings (A) In general The temporary period referred to in para- graph (1) shall not exceed 6 months with re- spect to the proceeds of an issue which are to be used to make or finance loans (other than nonpurpose investments) to 2 or more persons. (B) Shorter temporary period for loan repay- ments, etc. Subparagraph (A) shall be applied by sub- stituting ‘‘3 months’’ for ‘‘6 months’’ with respect to the proceeds from the sale or re- payment of any loan which are to be used to make or finance any loan. For purposes of the preceding sentence, a nonpurpose invest- ment shall not be treated as a loan. (C) Bonds used to provide construction fi- nancing In the case of an issue described in sub- paragraph (A) any portion of which is used to make or finance loans for construction expenditures (within the meaning of sub- section (f)(4)(C)(iv))— (i) rules similar to the rules of sub- section (f)(4)(C)(v) shall apply, and (ii) subparagraph (A) shall be applied with respect to such portion by sub- stituting ‘‘2 years’’ for ‘‘6 months’’. (D) Exception for mortgage revenue bonds This paragraph shall not apply to any qualified mortgage bond or qualified vet- erans’ mortgage bond. (d) Special rules for reasonably required reserve or replacement fund (1) In general For purposes of subsection (a), a bond shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the pro- ceeds of the issue of which such bond is a part may be invested in higher yielding invest- ments which are part of a reasonably required reserve or replacement fund. The amount re- ferred to in the preceding sentence shall not exceed 10 percent of the proceeds of such issue unless the issuer establishes to the satisfac- tion of the Secretary that a higher amount is necessary. (2) Limitation on amount in reserve or replace- ment fund which may be financed by issue A bond issued as part of an issue shall be treated as an arbitrage bond if the amount of the proceeds from the sale of such issue which is part of any reserve or replacement fund ex- ceeds 10 percent of the proceeds of the issue (or such higher amount which the issuer estab- lishes is necessary to the satisfaction of the Secretary). (e) Minor portion may be invested in higher yielding investments Notwithstanding subsections (a), (c), and (d), a bond issued as part of an issue shall not be treated as an arbitrage bond solely by reason of the fact that an amount of the proceeds of such issue (in addition to the amounts under sub- sections (c) and (d)) is invested in higher yield- ing investments if such amount does not exceed the lesser of— (1) 5 percent of the proceeds of the issue, or (2) $100,000. (f) Required rebate to the United States (1) In general A bond which is part of an issue shall be treated as an arbitrage bond if the require- ments of paragraphs (2) and (3) are not met with respect to such issue. The preceding sen- tence shall not apply to any qualified vet- erans’ mortgage bond. (2) Rebate to United States An issue shall be treated as meeting the re- quirements of this paragraph only if an amount equal to the sum of— (A) the excess of— Page 699 TITLE 26—INTERNAL REVENUE CODE § 148 (i) the amount earned on all nonpurpose investments (other than investments at- tributable to an excess described in this subparagraph), over (ii) the amount which would have been earned if such nonpurpose investments were invested at a rate equal to the yield on the issue, plus (B) any income attributable to the excess described in subparagraph (A), is paid to the United States by the issuer in accordance with the requirements of para- graph (3). (3) Due date of payments under paragraph (2) Except to the extent provided by the Sec- retary, the amount which is required to be paid to the United States by the issuer shall be paid in installments which are made at least once every 5 years. Each installment shall be in an amount which ensures that 90 percent of the amount described in paragraph (2) with respect to the issue at the time pay- ment of such installment is required will have been paid to the United States. The last in- stallment shall be made no later than 60 days after the day on which the last bond of the issue is redeemed and shall be in an amount sufficient to pay the remaining balance of the amount described in paragraph (2) with re- spect to such issue. A series of issues which are redeemed during a 6-month period (or such longer period as the Secretary may prescribe) shall be treated (at the election of the issuer) as 1 issue for purposes of the preceding sen- tence if no bond which is part of any issue in such series has a maturity of more than 270 days or is a private activity bond. In the case of a tax and revenue anticipation bond, the last installment shall not be required to be made before the date 8 months after the date of issuance of the issue of which the bond is a part. (4) Special rules for applying paragraph (2) (A) In general In determining the aggregate amount earned on nonpurpose investments for pur- poses of paragraph (2)— (i) any gain or loss on the disposition of a nonpurpose investment shall be taken into account, and (ii) any amount earned on a bona fide debt service fund shall not be taken into account if the gross earnings on such fund for the bond year is less than $100,000. In the case of an issue no bond of which is a private activity bond, clause (ii) shall be ap- plied without regard to the dollar limitation therein if the average maturity of the issue (determined in accordance with section 147(b)(2)(A)) is at least 5 years and the rates of interest on bonds which are part of the issue do not vary during the term of the issue. (B) Temporary investments Under regulations prescribed by the Sec- retary— (i) In general An issue shall, for purposes of this sub- section, be treated as meeting the require- ments of paragraph (2) if— (I) the gross proceeds of such issue are expended for the governmental purposes for which the issue was issued no later than the day which is 6 months after the date of issuance of the issue, and (II) the requirements of paragraph (2) are met with respect to amounts not re- quired to be spent as provided in sub- clause (I) (other than earnings on amounts in any bona fide debt service fund). Gross proceeds which are held in a bona fide debt service fund or a reasonably re- quired reserve or replacement fund, and gross proceeds which arise after such 6 months and which were not reasonably an- ticipated as of the date of issuance, shall not be considered gross proceeds for pur- poses of subclause (I) only. (ii) Additional period for certain bonds (I) In general In the case of an issue described in sub- clause (II), clause (i) shall be applied by substituting ‘‘1 year’’ for ‘‘6 months’’ each place it appears with respect to the portion of the proceeds of the issue which are not expended in accordance with clause (i) if such portion does not exceed 5 percent of the proceeds of the issue. (II) Issues to which subclause (I) applies An issue is described in this subclause if no bond which is part of such issue is a private activity bond (other than a qualified 501(c)(3) bond) or a tax or rev- enue anticipation bond. (iii) Safe harbor for determining when pro- ceeds of tax and revenue anticipation bonds are expended (I) In general For purposes of clause (i), in the case of an issue of tax or revenue anticipation bonds, the net proceeds of such issue (in- cluding earnings thereon) shall be treat- ed as expended for the governmental pur- pose of the issue on the 1st day after the date of issuance that the cumulative cash flow deficit to be financed by such issue exceeds 90 percent of the proceeds of such issue. (II) Cumulative cash flow deficit For purposes of subclause (I), the term ‘‘cumulative cash flow deficit’’ means, as of the date of computation, the excess of the expenses paid during the period de- scribed in subclause (III) which would or- dinarily be paid out of or financed by an- ticipated tax or other revenues over the aggregate amount available (other than from the proceeds of the issue) during such period for the payment of such ex- penses. Page 700 TITLE 26—INTERNAL REVENUE CODE § 148 (III) Period involved For purposes of subclause (II), the pe- riod described in this subclause is the pe- riod beginning on the date of issuance of the issue and ending on the earlier of the date 6 months after such date of issuance or the date of the computation of cumu- lative cash flow deficit. (iv) Payments of principal not to affect re- quirements For purposes of this subparagraph, pay- ments of principal on the bonds which are part of an issue shall not be treated as ex- pended for the governmental purposes of the issue. (C) Exception from rebate for certain pro- ceeds to be used to finance construction expenditures (i) In general In the case of a construction issue, para- graph (2) shall not apply to the available construction proceeds of such issue if the spending requirements of clause (ii) are met. (ii) Spending requirements The spending requirements of this clause are met if at least— (I) 10 percent of the available construc- tion proceeds of the construction issue are spent for the governmental purposes of the issue within the 6-month period beginning on the date the bonds are issued, (II) 45 percent of such proceeds are spent for such purposes within the 1-year period beginning on such date, (III) 75 percent of such proceeds are spent for such purposes within the 18- month period beginning on such date, and (IV) 100 percent of such proceeds are spent for such purposes within the 2-year period beginning on such date. (iii) Exception for reasonable retainage The spending requirement of clause (ii)(IV) shall be treated as met if— (I) such requirement would be met at the close of such 2-year period but for a reasonable retainage (not exceeding 5 percent of the available construction proceeds of the construction issue), and (II) 100 percent of the available con- struction proceeds of the construction issue are spent for the governmental pur- poses of the issue within the 3-year pe- riod beginning on the date the bonds are issued. (iv) Construction issue For purposes of this subparagraph, the term ‘‘construction issue’’ means any issue if— (I) at least 75 percent of the available construction proceeds of such issue are to be used for construction expenditures with respect to property which is to be owned by a governmental unit or a 501(c)(3) organization, and (II) all of the bonds which are part of such issue are qualified 501(c)(3) bonds, bonds which are not private activity bonds, or private activity bonds issued to finance property to be owned by a gov- ernmental unit or a 501(c)(3) organiza- tion. For purposes of this subparagraph, the term ‘‘construction’’ includes reconstruc- tion and rehabilitation, and rules similar to the rules of section 142(b)(1)(B) shall apply. (v) Portions of issues used for construction If— (I) all of the construction expenditures to be financed by an issue are to be fi- nanced from a portion thereof, and (II) the issuer elects to treat such por- tion as a construction issue for purposes of this subparagraph, then, for purposes of this subparagraph and subparagraph (B), such portion shall be treated as a separate issue. (vi) Available construction proceeds For purposes of this subparagraph— (I) In general The term ‘‘available construction pro- ceeds’’ means the amount equal to the issue price (within the meaning of sec- tions 1273 and 1274) of the construction issue, increased by earnings on the issue price, earnings on amounts in any rea- sonably required reserve or replacement fund not funded from the issue, and earn- ings on all of the foregoing earnings, and reduced by the amount of the issue price in any reasonably required reserve or re- placement fund and the issuance costs fi- nanced by the issue. (II) Earnings on reserve included only for certain periods The term ‘‘available construction pro- ceeds’’ shall not include amounts earned on any reasonably required reserve or re- placement fund after the earlier of the close of the 2-year period described in clause (ii) or the date the construction is substantially completed. (III) Payments on acquired purpose obli- gations excluded The term ‘‘available construction pro- ceeds’’ shall not include payments on any obligation acquired to carry out the governmental purposes of the issue and shall not include earnings on such pay- ments. (IV) Election to rebate on earnings on re- serve At the election of the issuer, the term ‘‘available construction proceeds’’ shall not include earnings on any reasonably required reserve or replacement fund. (vii) Election to pay penalty in lieu of re- bate (I) In general At the election of the issuer, paragraph (2) shall not apply to available construc- Page 701 TITLE 26—INTERNAL REVENUE CODE § 148 tion proceeds which do not meet the spending requirements of clause (ii) if the issuer pays a penalty, with respect to each 6-month period after the date the bonds were issued, equal to 11⁄2 percent of the amount of the available construction proceeds of the issue which, as of the close of such 6-month period, is not spent as required by clause (ii). (II) Termination The penalty imposed by this clause shall cease to apply only as provided in clause (viii) or after the latest maturity date of any bond in the issue (including any refunding bond with respect there- to). (viii) Election to terminate 11⁄2 percent penalty At the election of the issuer (made not later than 90 days after the earlier of the end of the initial temporary period or the date the construction is substantially completed), the penalty under clause (vii) shall not apply to any 6-month period after the initial temporary period under sub- section (c) if the requirements of sub- clauses (I), (II), and (III) are met. (I) 3 percent penalty The requirement of this subclause is met if the issuer pays a penalty equal to 3 percent of the amount of available con- struction proceeds of the issue which is not spent for the governmental purposes of the issue as of the close of such initial temporary period multiplied by the num- ber of years (including fractions thereof) in the initial temporary period. (II) Yield restriction at close of tem- porary period The requirement of this subclause is met if the amount of the available con- struction proceeds of the issue which is not spent for the governmental purposes of the issue as of the close of such initial temporary period is invested at a yield not exceeding the yield on the issue or which is invested in any tax-exempt bond which is not investment property. (III) Redemption of bonds at earliest call date The requirement of this subclause is met if the amount of the available con- struction proceeds of the issue which is not spent for the governmental purposes of the issue as of the earliest date on which bonds may be redeemed is used to redeem bonds on such date. (ix) Election to terminate 11⁄2 percent pen- alty before end of temporary period If— (I) the construction to be financed by a construction issue is substantially com- pleted before the end of the initial tem- porary period, (II) the issuer identifies an amount of available construction proceeds which will not be spent for the governmental purposes of the issue, (III) the issuer has made the election under clause (viii), and (IV) the issuer makes an election under this clause before the close of the initial temporary period and not later than 90 days after the date the construction is substantially completed, then clauses (vii) and (viii) shall be applied to the available construction proceeds so identified as if the initial temporary pe- riod ended as of the date the election is made. (x) Failure to pay penalties In the case of a failure (which is not due to willful neglect) to pay any penalty re- quired to be paid under clause (vii) or (viii) in the amount or at the time prescribed therefor, the Secretary may treat such failure as not occurring if, in addition to paying such penalty, the issuer pays a pen- alty equal to the sum of— (I) 50 percent of the amount which was not paid in accordance with clauses (vii) and (viii), plus (II) interest (at the underpayment rate established under section 6621) on the portion of the amount which was not paid on the date required for the period beginning on such date. The Secretary may waive all or any por- tion of the penalty under this clause. Bonds which are part of an issue with re- spect to which there is a failure to pay the amount required under this clause (and any refunding bond with respect thereto) shall be treated as not being, and as never having been, tax-exempt bonds. (xi) Election for pooled financing bonds At the election of the issuer of an issue the proceeds of which are to be used to make or finance loans (other than nonpur- pose investments) to 2 or more persons, the periods described in clauses (ii) and (iii) shall begin on— (I) the date the loan is made, in the case of loans made within the 1-year pe- riod after the date the bonds are issued, and (II) the date following such 1-year pe- riod, in the case of loans made after such 1-year period. If such an election applies to an issue, the requirements of paragraph (2) shall apply to amounts earned before the beginning of the periods determined under the pre- ceding sentence. (xii) Payments of principal not to affect re- quirements For purposes of this subparagraph, pay- ments of principal on the bonds which are part of the construction issue shall not be treated as an expenditure of the available construction proceeds of the issue. (xiii) Refunding bonds (I) In general Except as provided in this clause, clause (vii)(II), and the last sentence of Page 702 TITLE 26—INTERNAL REVENUE CODE § 148 clause (x), this subparagraph shall not apply to any refunding bond and no pro- ceeds of a refunded bond shall be treated for purposes of this subparagraph as pro- ceeds of a refunding bond. (II) Determination of construction por- tion of issue For purposes of clause (v), any portion of an issue which is used to refund any issue (or portion thereof) shall be treated as a separate issue. (III) Coordination with rebate require- ment on refunding bonds The requirements of paragraph (2) shall be treated as met with respect to earnings for any period if a penalty is paid under clause (vii) or (viii) with re- spect to such earnings for such period. (xiv) Elections Any election under this subparagraph (other than clauses (viii) and (ix)) shall be made on or before the date the bonds are issued; and, once made, shall be irrev- ocable. (xv) Time for payment of penalties Any penalty under this subparagraph shall be paid to the United States not later than 90 days after the period to which the penalty relates. (xvi) Treatment of bona fide debt service funds If the spending requirements of clause (ii) are met with respect to the available construction proceeds of a construction issue, then paragraph (2) shall not apply to earnings on a bona fide debt service fund for such issue. (D) Exception for governmental units issuing $5,000,000 or less of bonds (i) In general An issue shall, for purposes of this sub- section, be treated as meeting the require- ments of paragraphs (2) and (3) if— (I) the issue is issued by a govern- mental unit with general taxing powers, (II) no bond which is part of such issue is a private activity bond, (III) 95 percent or more of the net pro- ceeds of such issue are to be used for local governmental activities of the issuer (or of a governmental unit the ju- risdiction of which is entirely within the jurisdiction of the issuer), and (IV) the aggregate face amount of all tax-exempt bonds (other than private ac- tivity bonds) issued by such unit during the calendar year in which such issue is issued is not reasonably expected to ex- ceed $5,000,000. (ii) Aggregation of issuers For purposes of subclause (IV) of clause (i)— (I) an issuer and all entities which issue bonds on behalf of such issuer shall be treated as 1 issuer, (II) all bonds issued by a subordinate entity shall, for purposes of applying such subclause to each other entity to which such entity is subordinate, be treated as issued by such other entity, and (III) an entity formed (or, to the extent provided by the Secretary, availed of) to avoid the purposes of such subclause (IV) and all other entities benefiting thereby shall be treated as 1 issuer. (iii) Certain refunding bonds not taken into account in determining small issuer status There shall not be taken into account under subclause (IV) of clause (i) any bond issued to refund (other than to advance re- fund) any bond to the extent the amount of the refunding bond does not exceed the outstanding amount of the refunded bond. (iv) Certain issues issued by subordinate governmental units, etc., exempt from rebate requirement An issue issued by a subordinate entity of a governmental unit with general tax- ing powers shall be treated as described in clause (i)(I) if the aggregate face amount of such issue does not exceed the lesser of— (I) $5,000,000, or (II) the amount which, when added to the aggregate face amount of other issues issued by such entity, does not ex- ceed the portion of the $5,000,000 limita- tion under clause (i)(IV) which such gov- ernmental unit allocates to such entity. For purposes of the preceding sentence, an entity which issues bonds on behalf of a governmental unit with general taxing powers shall be treated as a subordinate entity of such unit. An allocation shall be taken into account under subclause (II) only if it is irrevocable and made before the issuance date of such issue and only to the extent that the limitation so allocated bears a reasonable relationship to the ben- efits received by such governmental unit from issues issued by such entity. (v) Determination of whether refunding bonds eligible for exception from re- bate requirement If any portion of an issue is issued to re- fund other bonds, such portion shall be treated as a separate issue which does not meet the requirements of paragraphs (2) and (3) by reason of this subparagraph un- less— (I) the aggregate face amount of such issue does not exceed $5,000,000, (II) each refunded bond was issued as part of an issue which was treated as meeting the requirements of paragraphs (2) and (3) by reason of this subpara- graph, (III) the average maturity date of the refunding bonds issued as part of such issue is not later than the average matu- rity date of the bonds to be refunded by such issue, and (IV) no refunding bond has a maturity date which is later than the date which Page 703 TITLE 26—INTERNAL REVENUE CODE § 148 is 30 years after the date the original bond was issued. Subclause (III) shall not apply if the aver- age maturity of the issue of which the original bond was a part (and of the issue of which the bonds to be refunded are a part) is 3 years or less. For purposes of this clause, average maturity shall be deter- mined in accordance with section 147(b)(2)(A). (vi) Refundings of bonds issued under law prior to Tax Reform Act of 1986 If section 141(a) did not apply to any re- funded bond, the issue of which such re- funded bond was a part shall be treated as meeting the requirements of subclause (II) of clause (v) if— (I) such issue was issued by a govern- mental unit with general taxing powers, (II) no bond issued as part of such issue was an industrial development bond (as defined in section 103(b)(2), but without regard to subparagraph (B) of section 103(b)(3)) or a private loan bond (as de- fined in section 103(o)(2)(A), but without regard to any exception from such defi- nition other than section 103(o)(2)(C)), and (III) the aggregate face amount of all tax-exempt bonds (other than bonds de- scribed in subclause (II)) issued by such unit during the calendar year in which such issue was issued did not exceed $5,000,000. References in subclause (II) to section 103 shall be to such section as in effect on the day before the date of the enactment of the Tax Reform Act of 1986. Rules similar to the rules of clauses (ii) and (iii) shall apply for purposes of subclause (III). For purposes of subclause (II) of clause (i), bonds described in subclause (II) of this clause to which section 141(a) does not apply shall not be treated as private activ- ity bonds. (vii) Increase in exception for bonds fi- nancing public school capital expendi- tures Each of the $5,000,000 amounts in the pre- ceding provisions of this subparagraph shall be increased by the lesser of $10,000,000 or so much of the aggregate face amount of the bonds as are attributable to financing the construction (within the meaning of subparagraph (C)(iv)) of public school facilities. (5) Exemption from gross income of sum re- bated Gross income shall not include the sum de- scribed in paragraph (2). Notwithstanding any other provision of this title, no deduction shall be allowed for any amount paid to the United States under paragraph (2). (6) Definitions For purposes of this subsection and sub- sections (c) and (d)— (A) Nonpurpose investment The term ‘‘nonpurpose investment’’ means any investment property which— (i) is acquired with the gross proceeds of an issue, and (ii) is not acquired in order to carry out the governmental purpose of the issue. (B) Gross proceeds Except as otherwise provided by the Sec- retary, the gross proceeds of an issue in- clude— (i) amounts received (including repay- ments of principal) as a result of investing the original proceeds of the issue, and (ii) amounts to be used to pay debt serv- ice on the issue. (7) Penalty in lieu of loss of tax exemption In the case of an issue which would (but for this paragraph) fail to meet the requirements of paragraph (2) or (3), the Secretary may treat such issue as not failing to meet such re- quirements if— (A) no bond which is part of such issue is a private activity bond (other than a quali- fied 501(c)(3) bond), (B) the failure to meet such requirements is not due to willful neglect, and (C) the issuer pays to the United States a penalty in an amount equal to the sum of— (i) 50 percent of the amount which was not paid in accordance with paragraphs (2) and (3), plus (ii) interest (at the underpayment rate established under section 6621) on the por- tion of the amount which was not paid on the date required under paragraph (3) for the period beginning on such date. The Secretary may waive all or any portion of the penalty under this paragraph. (g) Student loan incentive payments Except to the extent otherwise provided in regulations, payments made by the Secretary of Education pursuant to section 438 of the Higher Education Act of 1965 are not to be taken into account, for purposes of subsection (a)(1), in de- termining yields on student loan notes. (h) Determinations of yield For purposes of this section, the yield on an issue shall be determined on the basis of the issue price (within the meaning of sections 1273 and 1274). (i) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section. (Added Pub. L. 99–514, title XIII, § 1301(b), Oct. 22, 1986, 100 Stat. 2641; amended Pub. L. 100–647, title I, § 1013(a)(14)–(16)(A), (17)(A), (B), (18), (19), (43)(A), (B), title IV, § 4005(d)(2), title V, § 5053(b), title VI, §§ 6177(a), (b), 6181(a), (b), 6183(a), Nov. 10, 1988, 102 Stat. 3539, 3540, 3542, 3545, 3646, 3678, 3726, 3727, 3729; Pub. L. 101–239, title VII, §§ 7652(a)–(d), 7814(c)(2), 7816(r), (t), Dec. 19, 1989, 103 Stat. 2385–2387, 2413, 2423; Pub. L. 101–508, title XI, § 11701(j)(1)–(6), Nov. 5, 1990, 104 Stat. 1388–508 to 1388–513; Pub. L. 105–34, title II, § 223(a), title XIV, §§ 1441–1444, Aug. 5, 1997, 111 Stat. 818, 1053, 1054; Pub. L. 107–16, title IV, § 421(a), June 7, 2001, 115 Stat. 64; Pub. L. 109–58, title XIII, § 1327(a), Aug. 8, 2005, 119 Stat. 1017; Page 704 TITLE 26—INTERNAL REVENUE CODE § 148 Pub. L. 109–222, title V, § 508(c), May 17, 2006, 120 Stat. 362; Pub. L. 115–97, title I, § 13532(b)(2), Dec. 22, 2017, 131 Stat. 2154.) INFLATION ADJUSTED ITEMS FOR CERTAIN YEARS For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under section 1 of this title. Editorial Notes REFERENCES IN TEXT The date of the enactment of the Tax Reform Act of 1986, referred to in subsec. (f)(4)(C)(vi), is the date of en- actment of Pub. L. 99–514, which was approved Oct. 22, 1986. Section 438 of the Higher Education Act of 1965, re- ferred to in subsec. (g), is classified to section 1087–1 of Title 20, Education. AMENDMENTS 2017—Subsec. (f)(4)(C)(xiv) to (xvii). Pub. L. 115–97 re- designated cls. (xv) to (xvii) as (xiv) to (xvi), respec- tively, and struck out former cl. (xiv). Prior to amend- ment, text of cl. (xiv) read as follows: ‘‘For purposes of this subpargraph, the end of the initial temporary pe- riod shall be determined without regard to section 149(d)(3)(A)(iv).’’ 2006—Subsec. (f)(4)(D)(ii)(II) to (IV). Pub. L. 109–222 redesignated subcls. (III) and (IV) as (II) and (III), re- spectively, and struck out former subcl. (II) which read as follows: ‘‘all bonds issued by a governmental unit to make loans to other governmental units with general taxing powers not subordinate to such unit shall, for purposes of applying such subclause to such unit, be treated as not issued by such unit.’’ 2005—Subsec. (b)(4). Pub. L. 109–58 added par. (4). 2001—Subsec. (f)(4)(D)(vii). Pub. L. 107–16 substituted ‘‘the lesser of $10,000,000’’ for ‘‘the lesser of $5,000,000’’. 1997—Subsec. (c)(2)(B) to (E). Pub. L. 105–34, § 1444(a), redesignated subpars. (C) to (E) as (B) to (D), respec- tively, and struck out heading and text of former sub- par. (B). Text read as follows: ‘‘In the case of the pro- ceeds of an issue to be used to make or finance loans under a program described in section 144(b)(1)(A), sub- paragraph (A) shall be applied by substituting ‘18 months’ for ‘6 months’. The preceding sentence shall not apply to any bond issued after December 31, 1988.’’ Subsec. (d)(3). Pub. L. 105–34, § 1443, struck out par. (3) which related to limitations on investment in nonpur- pose investments. Subsec. (f)(4)(B)(ii)(I). Pub. L. 105–34, § 1441, sub- stituted ‘‘5 percent of the proceeds of the issue’’ for ‘‘the lesser of 5 percent of the proceeds of the issue or $100,000’’. Subsec. (f)(4)(C)(xvii). Pub. L. 105–34, § 1442, added cl. (xvii). Subsec. (f)(4)(D)(vii). Pub. L. 105–34, § 223(a), added cl. (vii). Subsec. (f)(4)(E). Pub. L. 105–34, § 1444(b), struck out subpar. (E) which related to exception for certain quali- fied student loan bonds. 1990—Subsec. (c)(2)(D). Pub. L. 101–508, § 11701(j)(5), substituted ‘‘subsection (f)(4)(C)(iv)’’ for ‘‘subsection (f)(4)(B)(iv)(IV)’’ in introductory provisions and ‘‘sub- section (f)(4)(C)(v)’’ for ‘‘subsection (f)(4)(B)(iv)(VIII)’’ in cl. (i). Subsec. (c)(2)(D), (E). Pub. L. 101–508, § 11701(j)(6), made technical amendment to Pub. L. 101–239, § 7652(c). See 1989 Amendment note below. Subsec. (f)(4)(B)(i). Pub. L. 101–508, § 11701(j)(2), sub- stituted in last sentence ‘‘replacement fund, and gross proceeds which arise after such 6 months and which were not reasonably anticipated as of the date of issuance, shall not be considered gross proceeds for pur- poses of subclause (I) only’’ for ‘‘replacement fund shall not be considered gross proceeds for purposes of this subparagraph only’’ in concluding provisions. Subsec. (f)(4)(B)(i)(II). Pub. L. 101–508, § 11701(j)(1), amended subcl. (II) generally. Prior to amendment, subcl. (II) read as follows: ‘‘the requirements of para- graph (2) are met after such 6 months with respect to earnings on amounts in any reasonably required re- serve or replacement fund.’’ Subsec. (f)(4)(B)(iv). Pub. L. 101–508, § 11701(j)(4), amended cl. (iv) generally, substituting present provi- sions for provisions which provided for a special rule to be applied during a 2-year period for certain construc- tion bonds from issues in which at least 75 percent of the net proceeds of the issue were to be used for con- struction expenditures with respect to property which was owned by a governmental unit or a 501(c)(3) organi- zation. Subsec. (f)(4)(C) to (E). Pub. L. 101–508, § 11701(j)(3)(A), (B), added subpar. (C) and redesignated former subpars. (C) and (D) as (D) and (E), respectively. 1989—Subsec. (c)(2)(D), (E). Pub. L. 101–239, § 7652(c), as amended by Pub. L. 101–508, § 11701(j)(6), added subpar. (D) and redesignated former subpar. (D) as (E). Subsec. (d)(3)(E)(ii). Pub. L. 101–239, § 7814(c)(2), struck out ‘‘a qualified mortgage bond or’’ after ‘‘in the case of’’. Subsec. (f)(4)(B)(i). Pub. L. 101–239, § 7652(a), amended cl. (i) generally. Prior to amendment, cl. (i) read as fol- lows: ‘‘An issue shall, for purposes of this subsection, be treated as meeting the requirements of paragraph (2) if the gross proceeds of such issue are expended for the governmental purpose for which the issue was issued by no later than the day which is 6 months after the date of issuance of such issue. Gross proceeds which are held in a bona fide debt service fund shall not be considered gross proceeds for purposes of this subparagraph only.’’ Subsec. (f)(4)(B)(ii)(I). Pub. L. 101–239, § 7652(d), in- serted ‘‘each place it appears’’ after ‘‘ ‘6 months’ ’’. Subsec. (f)(4)(B)(iii)(III). Pub. L. 101–239, § 7816(r), sub- stituted ‘‘such date of issuance or the date’’ for ‘‘such date of issuance. or the date’’. Subsec. (f)(4)(B)(iv). Pub. L. 101–239, § 7652(b), added cl. (iv). Subsec. (f)(4)(C)(ii)(II). Pub. L. 101–239, § 7816(t), sub- stituted ‘‘to make loans to’’ for ‘‘on behalf of’’. 1988—Subsec. (b)(2). Pub. L. 100–647, § 1013(a)(43)(B), struck out at end ‘‘Such term shall not include any tax-exempt bond.’’ Subsec. (b)(2)(E). Pub. L. 100–647, § 5053(b), added sub- par. (E). Subsec. (b)(3). Pub. L. 100–647, § 1013(a)(43)(A), added par. (3). Subsec. (d)(2). Pub. L. 100–647, § 1013(a)(14), substituted ‘‘any reserve or replacement fund’’ for ‘‘any fund de- scribed in paragraph (1)’’. Subsec. (f)(1). Pub. L. 100–647, § 4005(d)(2), struck out ‘‘qualified mortgage bond or’’ after ‘‘apply to any’’. Subsec. (f)(3). Pub. L. 100–647, § 6177(b), inserted at end ‘‘In the case of a tax and revenue anticipation bond, the last installment shall not be required to be made before the date 8 months after the date of issuance of the issue of which the bond is a part.’’ Pub. L. 100–647, § 1013(a)(15), inserted ‘‘A series of issues which are redeemed during a 6-month period (or such longer period as the Secretary may prescribe) shall be treated (at the election of the issuer) as 1 issue for purposes of the preceding sentence if no bond which is part of any issue in such series has a maturity of more than 270 days or is a private activity bond.’’ Subsec. (f)(4)(A). Pub. L. 100–647, § 6181(a), (b), struck out ‘‘unless the issuer otherwise elects,’’ before ‘‘any amount earned’’ in cl. (ii) and inserted at end of subpar. (A) ‘‘In the case of an issue no bond of which is a pri- vate activity bond, clause (ii) shall be applied without regard to the dollar limitation therein if the average maturity of the issue (determined in accordance with section 147(b)(2)(A)) is at least 5 years and the rates of interest on bonds which are part of the issue do not vary during the term of the issue.’’ Subsec. (f)(4)(B)(iii)(I). Pub. L. 100–647, § 1013(a)(16)(A), substituted ‘‘proceeds’’ for ‘‘aggregate face amount’’. Subsec. (f)(4)(B)(iii)(III). Pub. L. 100–647, § 6177(a), sub- stituted ‘‘the earlier of the date 6 months after such Page 705 TITLE 26—INTERNAL REVENUE CODE § 148 date of issuance.’’ for ‘‘the earliest of the maturity date of the issue, the date 6 months after such date of issuance,’’. Subsec. (f)(4)(C). Pub. L. 100–647, § 1013(a)(17)(A), in heading substituted ‘‘governmental units issuing $5,000,000 or less of bonds’’ for ‘‘small governmental units’’, designated existing provision as cl. (i), inserted heading ‘‘In general’’, redesignated existing cls. (i) to (iv) as subcls. (I) to (IV) and realigned their margins, struck out last sentence providing that cl. (iv) not take into account any bond which is not outstanding at the time of a later issue or which is redeemed, other than in an advance refunding, from the net proceeds of the later issue, and added cls. (ii) to (vi). Subsec. (f)(4)(C)(i)(IV). Pub. L. 100–647, § 1013(a)(17)(B), struck out ‘‘(and all subordinate entities thereof)’’ after ‘‘such unit’’. Subsec. (f)(4)(C)(ii). Pub. L. 100–647, § 6183(a), added subcl. (II) and redesignated former subcls. (II) and (III) as (III) and (IV), respectively. Subsec. (f)(4)(D)(i). Pub. L. 100–647, § 1013(a)(18), in- serted ‘‘for a program’’ before ‘‘described in section 144(b)(1)(A)’’ in introductory text, substituted ‘‘such program’’ for ‘‘such a program’’ in subcl. (I), and in- serted at end ‘‘Amounts designated as interest on stu- dent loans shall not be taken into account in deter- mining whether the issuer is reimbursed for such costs. Except as otherwise hereafter provided in regulations prescribed by the Secretary, costs described in sub- clause (I) paid from amounts earned as described in the first sentence of this clause may also be taken into ac- count in determining the yield on the student loans under a program described in section 144(b)(1)(A).’’ Subsec. (f)(7)(B). Pub. L. 100–647, § 1013(a)(19), sub- stituted ‘‘not due’’ for ‘‘due to reasonable cause and not’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Pub. L. 115–97, title I, § 13532(c), Dec. 22, 2017, 131 Stat. 2154, provided that: ‘‘The amendments made by this section [amending this section and section 149 of this title] shall apply to advance refunding bonds issued after December 31, 2017.’’ EFFECTIVE DATE OF 2006 AMENDMENT Pub. L. 109–222, title V, § 508(e), May 17, 2006, 120 Stat. 362, provided that: ‘‘The amendments made by this sec- tion [amending this section and sections 54 and 149 of this title] shall apply to bonds issued after the date of the enactment of this Act [May 17, 2006].’’ EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–58 applicable to obliga- tions issued after Aug. 8, 2005, see section 1327(d) of Pub. L. 109–58, set out as a note under section 141 of this title. EFFECTIVE DATE OF 2001 AMENDMENT Pub. L. 107–16, title IV, § 421(b), June 7, 2001, 115 Stat. 65, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to obligations issued in calendar years beginning after December 31, 2001.’’ EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title II, § 223(b), Aug. 5, 1997, 111 Stat. 818, provided that: ‘‘The amendments made by this sec- tion [amending this section] shall apply to bonds issued after December 31, 1997.’’ Pub. L. 105–34, title XIV, § 1445, Aug. 5, 1997, 111 Stat. 1054, provided that: ‘‘The amendments made by this subtitle [subtitle B (§§ 1441–1445) of title XIV of Pub. L. 105–34, amending this section] shall apply to bonds issued after the date of the enactment of this Act [Aug. 5, 1997].’’ EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101–508 effective, except as otherwise provided, as if included in the provision of the Revenue Reconciliation Act of 1989, Pub. L. 101–239, title VII, to which such amendment relates, see section 11701(n) of Pub. L. 101–508, set out as a note under sec- tion 42 of this title. Pub. L. 101–508, title XI, § 11701(j)(8), Nov. 5, 1990, 104 Stat. 1388–513, provided that: ‘‘Section 148(f)(4)(C)(xiii)(II) of such Code (as added by this sub- section) shall apply only to refunding bonds issued after August 3, 1990.’’ EFFECTIVE DATE OF 1989 AMENDMENT Pub. L. 101–239, title VII, § 7652(e), Dec. 19, 1989, 103 Stat. 2387, provided that: ‘‘The amendments made by this section [amending this section] shall apply to bonds issued after the date of the enactment of this Act [Dec. 19, 1989].’’ Amendment by sections 7814(c)(2) and 7816(r), (t) of Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Mis- cellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title I, § 1013(a)(16)(B), Nov. 10, 1988, 102 Stat. 3540, provided that: ‘‘The amendment made by subparagraph (A) [amending this section] shall apply to bonds issued after June 30, 1987.’’ Pub. L. 100–647, title I, § 1013(a)(17)(C), Nov. 10, 1988, 102 Stat. 3542, provided that: ‘‘(i) Except as provided in clause (ii), the amendments made by this paragraph [amending this section] shall apply to bonds issued after June 30, 1987. ‘‘(ii) At the election of an issuer (made at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe), the amendments made by this paragraph shall apply to such issuer as if included in the amendments made by section 1301(a) of the Tax Reform Act of 1986 [amending section 103 of this title].’’ Pub. L. 100–647, title I, § 1013(a)(43)(C), Nov. 10, 1988, 102 Stat. 3545, provided that: ‘‘The amendments made by this paragraph [amending this section] shall apply to obligations issued after March 31, 1988.’’ Amendment by section 1013(a)(14), (15), (18), (19) 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 re- lates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Amendment by section 4005(d)(2) of Pub. L. 100–647 ap- plicable to bonds issued, and nonissued bond amounts elected, after Dec. 31, 1988, see section 4005(h)(1) of Pub. L. 100–647, set out as a note under section 143 of this title. Amendment by section 5053(b) of Pub. L. 100–647 ap- plicable, with certain exceptions, to obligations issued after Oct. 21, 1988, see section 5053(c) of Pub. L. 100–647, set out as a note under section 145 of this title. Pub. L. 100–647, title VI, § 6177(c), Nov. 10, 1988, 102 Stat. 3727, provided that: ‘‘The amendments made by this section [amending this section] shall apply to bonds issued after the date of the enactment of this Act [Nov. 10, 1988].’’ Pub. L. 100–647, title VI, § 6181(c), Nov. 10, 1988, 102 Stat. 3729, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section] shall apply to bonds issued after the date of the enactment of this Act [Nov. 10, 1988]. ‘‘(2) ELECTION FOR OUTSTANDING BONDS.—Any issue of bonds other than private activity bonds outstanding as of the date of the enactment of this Act shall be al- lowed a 1-time election to apply the amendments made by subsection (b) [amending this section] to amounts deposited after such date in bona fide debt service funds of such bonds. ‘‘(3) DEFINITION OF PRIVATE ACTIVITY BOND.—For pur- poses of this section and the last sentence of section 148(f)(4)(A) of the 1986 Code (as added by subsection (b)), Page 706 TITLE 26—INTERNAL REVENUE CODE § 149 the term ‘private activity bond’ shall include any qualified 501(c)(3) bond (as defined under section 145 of the 1986 Code).’’ Pub. L. 100–647, title VI, § 6183(b), Nov. 10, 1988, 102 Stat. 3730, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to bonds issued after December 31, 1988.’’ EFFECTIVE DATE Subpart applicable to bonds issued after Aug. 15, 1986, except as otherwise provided, see sections 1311 to 1318 of Pub. L. 99–514, set out as an Effective Date; Transi- tional Rules note under section 141 of this title. EXTENSION OF PERIOD TO ELECT TO TERMINATE PER- CENT PENALTY FOR BONDS ISSUED BEFORE NOVEMBER 5, 1990 Pub. L. 101–508, title XI, § 11701(j)(7), Nov. 5, 1990, 104 Stat. 1388–513, provided that: ‘‘In the case of a bond issued before the date of the enactment of this Act [Nov. 5, 1990], the period for making the election under section 148(f)(4)(C)(viii) of the Internal Revenue Code of 1986 (as added by this subsection) shall not expire be- fore the date which is 180 days after such date of enact- ment.’’ AMENDMENT TO ARBITRAGE REGULATIONS Pub. L. 99–514, title XIII, § 1301(c), Oct. 22, 1986, 100 Stat. 2654, provided that: ‘‘The provision in the Federal income tax regulations relating to the arbitrage re- quirements which permits a higher yield on acquired obligations if the issuer elects to waive the benefits of the temporary period provisions shall not apply to bonds issued after August 31, 1986.’’ § 149. Bonds must be registered to be tax exempt; other requirements (a) Bonds must be registered to be tax exempt (1) General rule Nothing in section 103(a) or in any other pro- vision of law shall be construed to provide an exemption from Federal income tax for inter- est on any registration-required bond unless such bond is in registered form. (2) Registration-required bond For purposes of paragraph (1), the term ‘‘reg- istration-required bond’’ means any bond other than a bond which— (A) is not of a type offered to the public, or (B) has a maturity (at issue) of not more than 1 year. (3) Special rules (A) Book entries permitted For purposes of paragraph (1), a book entry bond shall be treated as in registered form if the right to the principal of, and stated in- terest on, such bond may be transferred only through a book entry consistent with regu- lations prescribed by the Secretary. (B) Nominees The Secretary shall prescribe such regula- tions as may be necessary to carry out the purpose of paragraph (1) where there is a nominee or chain of nominees. (b) Federally guaranteed bond is not tax exempt (1) In general Section 103(a) shall not apply to any State or local bond if such bond is federally guaran- teed. (2) Federally guaranteed defined For purposes of paragraph (1), a bond is fed- erally guaranteed if— (A) the payment of principal or interest with respect to such bond is guaranteed (in whole or in part) by the United States (or any agency or instrumentality thereof), (B) such bond is issued as part of an issue and 5 percent or more of the proceeds of such issue is to be— (i) used in making loans the payment of principal or interest with respect to which are to be guaranteed (in whole or in part) by the United States (or any agency or in- strumentality thereof), or (ii) invested (directly or indirectly) in federally insured deposits or accounts, or (C) the payment of principal or interest on such bond is otherwise indirectly guaranteed (in whole or in part) by the United States (or an agency or instrumentality thereof). (3) Exceptions (A) Certain insurance programs A bond shall not be treated as federally guaranteed by reason of— (i) any guarantee by the Federal Housing Administration, the Department of Vet- erans Affairs, the Federal National Mort- gage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association, (ii) any guarantee of student loans and any guarantee by the Student Loan Mar- keting Association to finance student loans, (iii) any guarantee by the Bonneville Power Authority pursuant to the North- west Power Act (16 U.S.C. 839d) as in effect on the date of the enactment of the Tax Reform Act of 1984, or (iv) subject to subparagraph (E), any guarantee by a Federal home loan bank made in connection with the original issuance of a bond during the period begin- ning on the date of the enactment of this clause and ending on December 31, 2010 (or a renewal or extension of a guarantee so made). (B) Debt service, etc. Paragraph (1) shall not apply to— (i) proceeds of the issue invested for an initial temporary period until such pro- ceeds are needed for the purpose for which such issue was issued, (ii) investments of a bona fide debt serv- ice fund, (iii) investments of a reserve which meet the requirements of section 148(d), (iv) investments in bonds issued by the United States Treasury, or (v) other investments permitted under regulations. (C) Exception for housing programs (i) In general Except as provided in clause (ii), para- graph (1) shall not apply to— (I) a private activity bond for a quali- fied residential rental project or a hous- ing program obligation under section 11(b) of the United States Housing Act of 1937,