[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 1879 Introduced in Senate (IS)]







104th CONGRESS
  2d Session
                                S. 1879

  To amend the Internal Revenue Code of 1986 to provide for 501(c)(3) 
  bonds a tax treatment similar to governmental bonds, and for other 
                               purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             June 14, 1996

 Mr. Moynihan introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to provide for 501(c)(3) 
  bonds a tax treatment similar to governmental bonds, and for other 
                               purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Section 501(c)(3) Nonprofit 
Organizations Tax-Exempt Bond Reform Act of 1996''.

SEC. 2. TAX TREATMENT OF 501(c)(3) BONDS SIMILAR TO GOVERNMENTAL BONDS.

    (a) In General.--Subsection (a) of section 150 of the Internal 
Revenue Code of 1986 (relating to definitions and special rules) is 
amended by striking paragraphs (2) and (4), by redesignating paragraphs 
(5) and (6) as paragraphs (4) and (5), respectively, and by inserting 
after paragraph (1) the following new paragraph:
            ``(2) Exempt person.--
                    ``(A) In general.--The term `exempt person' means--
                            ``(i) a governmental unit, or
                            ``(ii) a 501(c)(3) organization, but only 
                        with respect to its activities which do not 
                        constitute unrelated trades or businesses as 
                        determined by applying section 513(a).
                    ``(B) Governmental unit not to include federal 
                government.--The term `governmental unit' does not 
                include the United States or any agency or 
                instrumentality thereof.
                    ``(C) 501(c)(3) organization.--The term `501(c)(3) 
                organization' means any organization described in 
                section 501(c)(3) and exempt from tax under section 
                501(a).''
    (b) Repeal of Qualified 501(c)(3) Bond Designation.--Section 145 of 
the Internal Revenue Code of 1986 (relating to qualified 501(c)(3) 
bonds) is repealed.
    (c) Conforming Amendments.--
            (1) Paragraph (3) of section 141(b) of the Internal Revenue 
        Code of 1986 is amended--
                    (A) by striking ``government use'' in subparagraph 
                (A)(ii)(I) and subparagraph (B)(ii) and inserting 
                ``exempt person use'',
                    (B) by striking ``a government use'' in 
                subparagraph (B) and inserting ``an exempt person 
                use'',
                    (C) by striking ``related business use'' in 
                subparagraph (A)(ii)(II) and subparagraph (B) and 
                inserting ``related private business use'',
                    (D) by striking ``related business use'' in the 
                heading of subparagraph (B) and inserting ``related 
                private business use'', and
                    (E) by striking ``government use'' in the heading 
                thereof and inserting ``exempt person use''.
            (2) Subparagraph (A) of section 141(b)(6) of such Code is 
        amended by striking ``a governmental unit'' and inserting ``an 
        exempt person''.
            (3) Paragraph (7) of section 141(b) of such Code is 
        amended--
                    (A) by striking ``government use'' and inserting 
                ``exempt person use'', and
                    (B) by striking ``Government use'' in the heading 
                thereof and inserting ``Exempt person use''.
            (4) Section 141(b) of such Code is amended by striking 
        paragraph (9).
            (5) Paragraph (1) of section 141(c) of such Code is amended 
        by striking ``governmental units'' and inserting ``exempt 
        persons''.
            (6) Section 141 of such Code is amended by redesignating 
        subsection (e) as subsection (f) and by inserting after 
        subsection (d) the following new subsection:
    ``(e) Certain Issues Used To Provide Residential Rental Housing for 
Family Units.--
            ``(1) In general.--Except as provided in paragraph (2), for 
        purposes of this title, the term `private activity bond' 
        includes any bond issued as part of an issue if any portion of 
        the net proceeds of the issue are to be used (directly or 
        indirectly) by an exempt person described in section 
        150(a)(2)(A)(ii) to provide residential rental property for 
        family units. This paragraph shall not apply if the bond would 
        not be a private activity bond if the section 501(c)(3) 
        organization were not an exempt person.
            ``(2) Exception for bonds used to provide qualified 
        residential rental projects.--Paragraph (1) shall not apply to 
        any bond issued as part of an issue if the portion of such 
        issue which is to be used as described in paragraph (1) is to 
        be used to provide--
                    ``(A) a residential rental property for family 
                units if the first use of such property is pursuant to 
                such issue,
                    ``(B) qualified residential rental projects (as 
                defined in section 142(d)), or
                    ``(C) property which is to be substantially 
                rehabilitated in a rehabilitation beginning within the 
                2-year period ending 1 year after the date of the 
                acquisition of such property.
            ``(3) Substantial rehabilitation.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), rules similar to the rules of section 
                47(c)(1)(C) shall apply in determining for purposes of 
                paragraph (2)(C) whether property is substantially 
                rehabilitated.
                    ``(B) Exception.--For purposes of subparagraph (A), 
                clause (ii) of section 47(c)(1)(C) shall not apply, but 
                the Secretary may extend the 24-month period in section 
                47(c)(1)(C)(i) where appropriate due to circumstances 
                not within the control of the owner.
            ``(4) Certain property treated as new property.--Solely for 
        purposes of determining under paragraph (2)(A) whether the 1st 
        use of property is pursuant to tax-exempt financing--
                    ``(A) In general.--If--
                            ``(i) the 1st use of property is pursuant 
                        to taxable financing,
                            ``(ii) there was a reasonable expectation 
                        (at the time such taxable financing was 
                        provided) that such financing would be replaced 
                        by tax-exempt financing, and
                            ``(iii) the taxable financing is in fact so 
                        replaced within a reasonable period after the 
                        taxable financing was provided,
                then the 1st use of such property shall be treated as 
                being pursuant to the tax-exempt financing.
                    ``(B) Special rule where no operating state or 
                local program for tax-exempt financing.--If, at the 
                time of the 1st use of property, there was no operating 
                State or local program for tax-exempt financing of the 
                property, the 1st use of the property shall be treated 
                as pursuant to the 1st tax-exempt financing of the 
                property.
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Tax-exempt financing.--The term `tax-
                        exempt financing' means financing provided by 
                        tax-exempt bonds.
                            ``(ii) Taxable financing.--The term 
                        `taxable financing' means financing which is 
                        not tax-exempt financing.''
            (7) Section 141(f) of such Code, as redesignated by 
        paragraph (6), is amended--
                    (A) by adding ``or'' at the end of subparagraph 
                (E),
                    (B) by striking ``, or'' at the end of subparagraph 
                (F), and inserting in lieu thereof a period, and
                    (C) by striking subparagraph (G).
            (8) The last sentence of section 144(b)(1) of such Code is 
        amended by striking ``(determined'' and all that follows to the 
        period.
            (9) Clause (ii) of section 144(c)(2)(C) of such Code is 
        amended by striking ``a governmental unit'' and inserting ``an 
        exempt person''.
            (10) Section 146(g) of such Code is amended--
                    (A) by striking paragraph (2), and
                    (B) by redesignating the remaining paragraphs after 
                paragraph (1) as paragraphs (2) and (3), respectively.
            (11) The heading of section 146(k)(3) of such Code is 
        amended by striking ``governmental'' and inserting ``exempt 
        person''.
            (12) The heading of section 146(m) of such Code is amended 
        by striking ``Government'' and inserting ``Exempt Person''.
            (13) Subsection (h) of section 147 of such Code is amended 
        to read as follows:
    ``(h) Certain Rules Not To Apply to Mortgage Revenue Bonds and 
Qualified Student Loan Bonds.--Subsections (a), (b), (c), and (d) shall 
not apply to any qualified mortgage bond, qualified veterans' mortgage 
bond, or qualified student loan bond.''
            (14) Section 147 of such Code is amended by striking 
        paragraph (4) of subsection (b) and redesignating paragraph (5) 
        of such subsection as paragraph (4).
            (15) Subparagraph (F) of section 148(d)(3) of such Code is 
        amended--
                    (A) by striking ``or which is a qualified 501(c)(3) 
                bond'', and
                    (B) by striking ``governmental use bonds and 
                qualified 501(c)(3)'' in the heading thereof and 
                inserting ``exempt person''.
            (16) Subclause (II) of section 148(f)(4)(B)(ii) of such 
        Code is amended by striking ``(other than a qualified 501(c)(3) 
        bond)''.
            (17) Clause (iv) of section 148(f)(4)(C) of such Code is 
        amended--
                    (A) by striking ``a governmental unit or a 
                501(c)(3) organization'' each place it appears and 
                inserting ``an exempt person'',
                    (B) by striking ``qualified 501(c)(3) bonds,'', and
                    (C) by striking the comma after ``private activity 
                bonds'' the first place it appears.
            (18) Subparagraph (A) of section 148(f)(7) of such Code is 
        amended by striking ``(other than a qualified 501(c)(3) 
        bond)''.
            (19) Paragraph (2) of section 149(d) of such Code is 
        amended--
                    (A) by striking ``(other than a qualified 501(c)(3) 
                bond)'', and
                    (B) by striking ``Certain private'' in the heading 
                thereof and inserting ``Private''.
            (20) Section 149(e)(2) of such Code is amended--
                    (A) by striking ``which is not a private activity 
                bond'' in the second sentence and inserting ``which is 
                a bond issued for an exempt person described in section 
                150(a)(2)(A)(i)'', and
                    (B) by adding at the end the following new 
                sentence: ``Subparagraph (D) shall not apply to any 
                bond which is not a private activity bond but which 
                would be such a bond if the 501(c)(3) organization 
                using the proceeds thereof were not an exempt person.''
            (21) The heading of subsection (b) of section 150 of such 
        Code is amended by striking ``Tax-Exempt Private Activity 
        Bonds'' and inserting ``Certain Tax-Exempt Bonds''.
            (22) Paragraph (3) of section 150(b) of such Code is 
        amended--
                    (A) by inserting ``owned by a 501(c)(3) 
                organization'' after ``any facility'' in subparagraph 
                (A),
                    (B) by striking ``any private activity bond which, 
                when issued, purported to be a tax-exempt qualified 
                501(c)(3) bond'' in subparagraph (A) and inserting 
                ``any bond which, when issued, purported to be a tax-
                exempt bond, and which would be a private activity bond 
                if the 501(c)(3) organization using the proceeds 
                thereof were not an exempt person'', and
                    (C) by striking the heading thereof and inserting 
                ``Bonds for exempt persons other than governmental 
                units.--''.
            (23) Paragraph (5) of section 150(b) of such Code is 
        amended--
                    (A) by striking ``private activity'' in 
                subparagraph (A),
                    (B) by inserting ``and which would be a private 
                activity bond if the 501(c)(3) organization using the 
                proceeds thereof were not an exempt person'' after 
                ``tax-exempt bond'' in subparagraph (A),
                    (C) by striking subparagraph (B) and inserting the 
                following new subparagraph:
                    ``(B) such facility is required to be owned by an 
                exempt person, and'', and
                    (D) by striking ``governmental units or 501(c)(3) 
                organizations'' in the heading thereof and inserting 
                ``exempt persons''.
            (24) Section 150 of such Code is amended by adding at the 
        end the following new subsection:
    ``(f) Certain Rules To Apply to Bonds for Exempt Persons Other Than 
Governmental Units.--
            ``(1) In general.--Nothing in section 103(a) or any other 
        provision of law shall be construed to provide an exemption 
        from Federal income tax for interest on any bond which would be 
        a private activity bond if the 501(c)(3) organization using the 
        proceeds thereof were not an exempt person unless such bond 
        satisfies the requirements of subsections (b) and (f) of 
        section 147.
            ``(2) Special rule for pooled financing of 501(c)(3) 
        organization.--
                    ``(A) In general.--At the election of the issuer, a 
                bond described in paragraph (1) shall be treated as 
                meeting the requirements of section 147(b) if such bond 
                meets the requirements of subparagraph (B).
                    ``(B) Requirements.--A bond meets the requirements 
                of this subparagraph if--
                            ``(i) 95 percent or more of the net 
                        proceeds of the issue of which such bond is a 
                        part are to be used to make or finance loans to 
                        2 or more 501(c)(3) organizations or 
                        governmental units for acquisition of property 
                        to be used by such organizations,
                            ``(ii) each loan described in clause (i) 
                        satisfies the requirements of section 147(b) 
                        (determined by treating each loan as a separate 
                        issue),
                            ``(iii) before such bond is issued, a 
                        demand survey was conducted which shows a 
                        demand for financing greater than an amount 
                        equal to 120 percent of the lendable proceeds 
                        of such issue, and
                            ``(iv) 95 percent or more of the net 
                        proceeds of such issue are to be loaned to 
                        501(c)(3) organizations or governmental units 
                        within 1 year of issuance and, to the extent 
                        there are any unspent proceeds after such 1-
                        year period, bonds issued as part of such issue 
                        are to be redeemed as soon as possible 
                        thereafter (and in no event later than 18 
                        months after issuance).
                A bond shall not meet the requirements of this 
                subparagraph if the maturity date of any bond issued as 
                part of such issue is more than 30 years after the date 
                on which the bond was issued (or, in the case of a 
                refunding or series of refundings, the date on which 
                the original bond was issued).''
            (25) Section 1302 of the Tax Reform Act of 1986 is 
        repealed.
            (26) Subparagraph (C) of section 57(a)(5) of such Code is 
        amended by striking clause (ii) and redesignating clauses (iii) 
        and (iv) as clauses (ii) and (iii), respectively.
            (27) Paragraph (3) of section 103(b) of such Code is 
        amended by inserting ``and section 150(f)'' after ``section 
        149''.
            (28) Paragraph (3) of section 265(b) of such Code is 
        amended--
                    (A) by striking clause (ii) of subparagraph (B) and 
                inserting the following:
                            ``(ii) Certain bonds not treated as private 
                        activity bonds.--For purposes of clause 
                        (i)(II), there shall not be treated as a 
                        private activity bond any obligation issued to 
                        refund (or which is part of a series of 
                        obligations issued to refund) an obligation 
                        issued before August 8, 1986, which was not an 
                        industrial development bond (as defined in 
                        section 103(b)(2) as in effect on the day 
                        before the date of the enactment of the Tax 
                        Reform Act of 1986) or a private loan bond (as 
                        defined in section 103(o)(2)(A), as so in 
                        effect, but without regard to any exemption 
                        from such definition other than section 
                        103(o)(2)(A)).''; and
                    (B) by striking ``(other than a qualified 501(c)(3) 
                bond, as defined in section 145)'' in subparagraph 
                (C)(ii)(I).
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to bonds (including 
        refunding bonds) issued and capital expenditures made on or 
        after the date of the enactment of this Act.
            (2) Exception.--The amendments made by this section shall 
        not apply to bonds issued before January 1, 1997, for purposes 
        of applying section 148(f)(4)(D) of the Internal Revenue Code 
        of 1986.
                                 <all>