Police and fire department bonds

(a)

In general

Part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to credits against tax) is amended by adding at the end the following new subpart:

Qualified tax credit bonds

Sec. 54A. Credit to holders of qualified tax credit bonds.

Sec. 54B. Police and fire department bonds.

54A.

Credit to holders of qualified tax credit bonds

(a)

Allowance of credit

If a taxpayer holds a qualified tax credit bond on one or more credit allowance dates of the bond during any taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of the credits determined under subsection (b) with respect to such dates. (b)

Amount of credit

(1)

In general

The amount of the credit determined under this subsection with respect to any credit allowance date for a qualified tax credit bond is 25 percent of the annual credit determined with respect to such bond. (2)

Annual credit

The annual credit determined with respect to any qualified tax credit bond is the product of— (A)the applicable credit rate, multiplied by (B)the outstanding face amount of the bond. (3)

Applicable credit rate

For purposes of paragraph (2), the applicable credit rate is the rate which the Secretary estimates will permit the issuance of qualified tax credit bonds with a specified maturity or redemption date without discount and without interest cost to the qualified issuer. The applicable credit rate with respect to any qualified tax credit bond shall be determined as of the first day on which there is a binding, written contract for the sale or exchange of the bond. (4)

Special rule for issuance and redemption

In the case of a bond which is issued during the 3-month period ending on a credit allowance date, the amount of the credit determined under this subsection with respect to such credit allowance date shall be a ratable portion of the credit otherwise determined based on the portion of the 3-month period during which the bond is outstanding. A similar rule shall apply when the bond is redeemed or matures. (c)

Limitation based on amount of tax

(1)

In general

The credit allowed under subsection (a) for any taxable year shall not exceed the excess of— (A)the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over (B)the sum of the credits allowable under this part (other than subpart C and this subpart). (2)

Carryover of unused credit

If the credit allowable under subsection (a) exceeds the limitation imposed by paragraph (1) for such taxable year, such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year (determined before the application of paragraph (1) for such succeeding taxable year). (d)

Qualified tax credit bond

For purposes of this section— (1)

Qualified tax credit bond

The term qualified tax credit bond means a police and fire department bond which is part of an issue that meets the requirements of paragraphs (2), (3), (4), and (5). (2)

Special rules relating to expenditures

(A)

In general

An issue shall be treated as meeting the requirements of this paragraph if, as of the date of issuance, the issuer reasonably expects— (i)100 percent or more of the available project proceeds to be spent for 1 or more qualified purposes within the 3-year period beginning on such date of issuance, and (ii)a binding commitment with a third party to spend at least 10 percent of such available project proceeds will be incurred within the 6-month period beginning on such date of issuance. (B)

Failure to spend required amount of bond proceeds within 3 years

(i)

In general

To the extent that less than 100 percent of the available project proceeds of the issue are expended by the close of the expenditure period for 1 or more qualified purposes, the issuer shall redeem all of the nonqualified bonds within 90 days after the end of such period. For purposes of this paragraph, the amount of the nonqualified bonds required to be redeemed shall be determined in the same manner as under section 142. (ii)

Expenditure period

For purposes of this subpart, the term expenditure period means, with respect to any issue, the 3-year period beginning on the date of issuance. Such term shall include any extension of such period under clause (iii). (iii)

Extension of period

Upon submission of a request prior to the expiration of the expenditure period (determined without regard to any extension under this clause), the Secretary may extend such period if the issuer establishes that the failure to expend the proceeds within the original expenditure period is due to reasonable cause and the expenditures for qualified purposes will continue to proceed with due diligence. (C)

Qualified purpose

For purposes of this paragraph, the term qualified purpose means a purpose specified in section 54B(a)(1). (D)

Reimbursement

For purposes of this subtitle, available project proceeds of an issue shall be treated as spent for a qualified purpose if such proceeds are used to reimburse the issuer for amounts paid for a qualified purpose after the date that the Secretary makes an allocation of bond limitation with respect to such issue, but only if— (i)prior to the payment of the original expenditure, the issuer declared its intent to reimburse such expenditure with the proceeds of a qualified tax credit bond, (ii)not later than 60 days after payment of the original expenditure, the issuer adopts an official intent to reimburse the original expenditure with such proceeds, and (iii)the reimbursement is made not later than 18 months after the date the original expenditure is paid. (3)

Reporting

An issue shall be treated as meeting the requirements of this paragraph if the issuer of qualified tax credit bonds submits reports similar to the reports required under section 149(e). (4)

Special rules relating to arbitrage

(A)

In general

An issue shall be treated as meeting the requirements of this paragraph if the issuer satisfies the requirements of section 148 with respect to the proceeds of the issue. (B)

Special rule for investments during expenditure period

An issue shall not be treated as failing to meet the requirements of subparagraph (A) by reason of any investment of available project proceeds during the expenditure period. (C)

Special rule for reserve funds

An issue shall not be treated as failing to meet the requirements of subparagraph (A) by reason of any fund which is expected to be used to repay such issue if— (i)such fund is funded at a rate not more rapid than equal annual installments, (ii)such fund is funded in a manner reasonably expected to result in an amount not greater than an amount necessary to repay the issue, and (iii)the yield on such fund is not greater than the discount rate determined under paragraph (5)(B) with respect to the issue. (5)

Maturity limitation

(A)

In general

An issue shall not be treated as meeting the requirements of this paragraph if the maturity of any bond which is part of such issue exceeds the maximum term determined by the Secretary under subparagraph (B). (B)

Maximum term

During each calendar month, the Secretary shall determine the maximum term permitted under this paragraph for bonds issued during the following calendar month. Such maximum term shall be the term which the Secretary estimates will result in the present value of the obligation to repay the principal on the bond being equal to 50 percent of the face amount of such bond. Such present value shall be determined using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more which are issued during the month. If the term as so determined is not a multiple of a whole year, such term shall be rounded to the next highest whole year. (e)

Other definitions

For purposes of this subchapter— (1)

Credit allowance date

The term credit allowance date means— (A)March 15, (B)June 15, (C)September 15, and (D)December 15.

Such term includes the last day on which the bond is outstanding.

(2)

Bond

The term bond includes any obligation. (3)

State

The term State includes the District of Columbia and any possession of the United States. (4)

Available project proceeds

The term available project proceeds means— (A)the excess of— (i)the proceeds from the sale of an issue, over (ii)the issuance costs financed by the issue (to the extent that such costs do not exceed 2 percent of such proceeds), and (B)the proceeds from any investment of the excess described in subparagraph (A). (f)

Credit treated as interest

For purposes of this subtitle, the credit determined under subsection (a) shall be treated as interest which is includible in gross income. (g)

S Corporations and partnerships

In the case of a tax credit bond held by an S corporation or partnership, the allocation of the credit allowed by this section to the shareholders of such corporation or partners of such partnership shall be treated as a distribution. (h)

Bonds held by regulated investment companies and real estate investment trusts

If any qualified tax credit bond is held by a regulated investment company or a real estate investment trust, the credit determined under subsection (a) shall be allowed to shareholders of such company or beneficiaries of such trust (and any gross income included under subsection (f) with respect to such credit shall be treated as distributed to such shareholders or beneficiaries) under procedures prescribed by the Secretary. (i)

Credits may be stripped

Under regulations prescribed by the Secretary— (1)

In general

There may be a separation (including at issuance) of the ownership of a qualified tax credit bond and the entitlement to the credit under this section with respect to such bond. In case of any such separation, the credit under this section shall be allowed to the person who on the credit allowance date holds the instrument evidencing the entitlement to the credit and not to the holder of the bond. (2)

Certain rules to apply

In the case of a separation described in paragraph (1), the rules of section 1286 shall apply to the qualified tax credit bond as if it were a stripped bond and to the credit under this section as if it were a stripped coupon. (j)

Termination

This section shall not apply to bonds issued after December 31, 2014.

54B.

Police and fire department bonds

(a)

In general

For purposes of this subpart, the term police and fire department bond means any bond issued as part of an issue if— (1)100 percent of the available project proceeds of such issue are to be used for capital expenditures incurred by a State or local government for one or more police or fire departments of the State or local government (as the case may be), (2)the bond is issued by a State or local government, and (3)the issuer designates such bond for purposes of this section. (b)

Limitation on amount of bonds designated

The maximum aggregate face amount of bonds which may be designated under subsection (a) by any issuer shall not exceed the limitation amount allocated to such issuer under subsection (d). (c)

National limitation on amount of bonds designated

There is a national police and fire department bond limitation of $3,000,000,000. (d)

Allocations

(1)

In general

The limitation applicable under subsection (c) shall be allocated by the Secretary among the States in proportion to the population of the States. (2)

Allocations to largest local governments

(A)

In general

In the case of any State in which there is a large local government, each such local government shall be allocated a portion of such State’s allocation which bears the same ratio to the State’s allocation (determined without regard to this subparagraph) as the population of such large local government bears to the population of such State. (B)

Allocation of unused limitation to state

The amount allocated under this subsection to a large local government may be reallocated by such local government to the State in which such local government is located. (C)

Large local government

For purposes of this section, the term large local government means any municipality or county if such municipality or county has a population of 500,000 or more. (e)

Population

(1)

In general

The population of any State or local government shall be determined for purposes of this section as provided in section 146(j) for the calendar year which includes the date of the enactment of this section. (2)

Special rule for counties

In determining the population of any county for purposes of this section, any population of such county which is taken into account in determining the population of any municipality which is a large local government shall not be taken into account in determining the population of such county.

(b)

Reporting

Subsection (d) of section 6049 of such Code (relating to returns regarding payments of interest) is amended by adding at the end the following new paragraph:

(9)

Reporting of credit on qualified tax credit bonds

(A)

In general

For purposes of subsection (a), the term interest includes amounts includible in gross income under section 54A and such amounts shall be treated as paid on the credit allowance date (as defined in section 54A(e)(1)). (B)

Reporting to corporations, etc

Except as otherwise provided in regulations, in the case of any interest described in subparagraph (A) of this paragraph, subsection (b)(4) of this section shall be applied without regard to subparagraphs (A), (H), (I), (J), (K), and (L)(i). (C)

Regulatory authority

The Secretary may prescribe such regulations as are necessary or appropriate to carry out the purposes of this paragraph, including regulations which require more frequent or more detailed reporting.

(c)

Conforming amendments

(1)Sections 54(c)(2) and 1400N(l)(3)(B) of such Code are each amended by striking subpart C and inserting subparts C and I. (2)Section 1397E(c)(2) of such Code is amended by striking subpart H and inserting subparts H and I. (3)Section 6401(b)(1) of such Code is amended by striking and H and inserting H, and I. (4)The table of subparts for part IV of subchapter A of chapter 1 of such Code is amended by inserting after the item relating to subpart H the following new item:

Subpart I. Qualified tax credit bonds.

(d)

Effective date

The amendments made by this section shall apply to obligations issued after December 31, 2008.