[Congressional Record Volume 142, Number 88 (Friday, June 14, 1996)]
[Senate]
[Pages S6305-S6310]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. MOYNIHAN:
  S. 1879. 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; to the Committee on Finance.


 THE SECTION 501(c)(3) NON-PROFIT ORGANIZATIONS TAX-EXEMPT BOND REFOM 
                              ACT OF 1996

      By Mr. MOYNIHAN:
  S. 1880. A bill to amend the Internal Revenue Code of 1986 to correct 
the treatment of tax-exempt financing of professional sports 
facilities; to the Committee on Finance.


              THE STOP TAX-EXEMPT ARENA DEBT ISSUANCE ACT

  Mr. MOYNIHAN. Mr. President, I rise today to introduce two tax bills. 
The first, the section 501(c)(3) Nonprofit Organizations Tax-Exempt 
Bond Reform Act of 1996, has been introduced several times previously 
by this Senator, with several of my distinguished colleagues as 
cosponsors. It would undo what ought never have been done: the 
classification of bonds of private nonprofit higher education 
institutions and other nonprofit organizations as those of a private 
activity. I reintroduce this legislation today because of its critical 
importance, and because we have found a particularly appropriate 
offset: The Stop Tax-Exempt Arena Debt Issuance Act, which I introduce 
today for the first time.
  The Stop Tax-Exempt Arena Debt Issuance Act would close a gaping 
loophole. Recently, a spate of tax-exempt bonds have been issued to 
finance professional sports facilities, even though Congress acted to 
proscribe this practice in 1986. The bill would eliminate this tax-
subsidized financing of professional sports facilities.
  Taken together, these two bills correct a serious misallocation of 
our limited resources under present law: a tax subsidy that inures 
largely to the benefit of wealthy sports franchise owners would be 
replaced with increased funding for educational and research facilities 
at private colleges and universities.
  Let me briefly describe the two measures:


 the section 501(c)(3) nonprofit organizations tax-exempt bond reform 
                              act of 1996

  The first bill would remove the ``private activity'' label from the 
tax-exempt bonds of private, nonprofit higher education institutions 
and other organizations, and thereby eliminate the arbitrary $150 
million cap on the amount of tax-exempt bonds that such an institution 
may have outstanding.
  The Tax Reform Act of 1986 imposed the ``private activity'' label on 
bonds issued on behalf of nonprofit institutions, collectively known as 
section 501(c)(3) organizations, obscuring the longstanding recognition 
in the Internal Revenue Code of the public purposes served by these 
private institutions. Prior to that time, the tax law historically had 
treated private nonprofit colleges and universities essentially the 
same as governmental entities. Governmental units and section 501(c)(3) 
organizations were both classified as ``exempt persons,'' and were 
afforded the benefits of tax-exempt bonds on the same basis. This was 
an explicit recognition in the Tax Code of the public purposes served 
by private nonprofit institutions of higher learning.
  The 1986 act's elimination of the ``exempt person'' category and the 
classification of section 501(c)(3) organizations' bonds as ``private 
activity'' bonds was a serious error. It has relegated private higher 
education institutions to a diminished, restricted status. Most 
significant among the restrictions imposed in the 1986 act was the $150 
million limitation on the amount of bonds that any nonprofit 
institution--other than a hospital--may have outstanding. We were 
successful in 1986 in keeping other ``private activity'' bond 
strictures from being imposed on nonprofits--the minimum tax and 
statewide volume caps, for example.
  Now we must rectify our error, remove the ``private activity'' label, 
and restore equal access to tax-exempt financing. If we do not act 
soon, the vitality of our private institutions in higher education and 
research will be at risk. A distinguishing feature of American society 
is the singular degree to which we maintain an independent sector--
``private universit[ies] in the public service,'' to paraphrase the 
motto of New York University. This is no longer so in most of the 
democratic world; it never was so in the rest. It is a treasure and a 
phenomenon that has clearly produced excellence--indeed, the envy of 
the world. We must insure the strength of the independent sector by 
restoring parity of treatment for tax-exempt finance. Otherwise, in 20 
years, we will look up and find we have lost a unique feature of 
American democracy of inestimable value.
  The sciences are now capital intensive undertakings. The need for 
capital for university research facilities is

[[Page S6306]]

acute and critical. In 1990, the National Science Foundation estimated 
that for every $1 spent for maintenance of university research 
facilities, an additional $4.25 was deferred. As for new construction, 
the Foundation reports that for every $1 spent, another $3.11 in needed 
new construction was deferred in 1990.
  The practical effect of the $150 million cap is to deny tax-exempt 
financing to large, private, research-oriented educational institutions 
most in need of capital to carry out their research mission. This will 
have a predictable, inevitable impact over a generation: the 
distribution of major research among the leading institutions in this 
country will profoundly change. If I may use an example from 
California: with this kind of differential in capital costs, we could 
look up one day and find Stanford to be still an institution of the 
greatest quality as an undergraduate teaching facility--with a fine law 
school and excellent liberal arts degree program--but with all the big 
science projects at Berkeley, the State institution.

  This is not hyperbole. Already, 31-private colleges and universities 
are at or near the $150 million cap, and foreclosed from using tax-
exempt debt. A few years ago, as the $150 million cap was beginning to 
take effect, 19 of the universities that ranked in the top 50 in 
research undertaking were private institutions. Now, only 14 of those 
19 private institutions remain in the top 50, and all but 1 are 
foreclosed from tax-exempt financing as a result of the $150 million 
per institution limit.
  This legislation will restore the status of private nonprofit 
institutions of higher learning, making their access to tax-exempt 
financing equal to that of their public counterparts. The legislation 
also reestablishes recognition in the Tax Code of the essential public 
purposes served by private nonprofit institutions.
  Mr. President, the capital needs of private universities merit the 
very serious attention of this body. The cost of these changes is 
modest, given their importance. The staff of the Joint Committee on 
Taxation has estimated the revenue loss previously at $308 million over 
5 years. The Senate has twice passed legislation to reverse the $150 
million bond cap mistake--in the Family Tax Fairness, Economic Growth, 
and Health Care Access Act of 1992 (H.R. 4210) and the Revenue Act of 
1992 (H.R. 11)--only to have both bills vetoed by President Bush. We 
should correct this error before it is too late. If we do not, we will 
soon not recognize the higher education sector.


  The Stop Tax-exempt Arena Debt Issuance Act--A Bill to Correct the 
  Treatment of Tax-exempt Financing of Professional Sports Facilities

  Mr. President, the second bill is an especially appropriate offset 
for the first bill and is an important piece of legislation in its own 
right.
  This legislation will close a big loophole, a loophole that 
ultimately injures State and local governments and other issuers of tax 
exempt bonds, that provides an unintended Federal subsidy (in fact, 
contravenes congressional intent), and that contributes to the 
enrichment of persons who need no Federal assistance whatsoever.
  I refer to the large number of professional sports facilities 
subsidized in recent years through the issuance of tax-exempt bonds. It 
seems that nearly every day, another professional sports franchise 
owner demands a new stadium, one subsidized by Federal, State and local 
taxpayers.
  Why do owners want new stadiums? Our existing stock of stadiums is 
not functionally obsolete. Many stadiums are new, and our older ones 
generally can and will continue to serve, and serve well, for the 
exhibition of professional sports for years to come. In fact many 
older, historic stadiums are beloved by fans. The reason for new 
stadiums is economics--the team owners' bottom line. The owner can 
generate more revenues with a new stadium replete with luxury skyboxes 
and other amenities.
  Building new professional sports facilities is fine by me. Let the 
new stadiums be built. But, please, do not ask the American taxpayer to 
pay for them.
  Prior to 1984, professional sports stadiums could be completely 
financed with tax-exempt, ``private activity'' bonds (or industrial 
development bonds as they were formerly known). In the Deficit 
Reduction Act of 1984, Congress stipulated that tax-exempt bond 
proceeds could not be used to finance the construction of luxury 
skyboxes. And in the Tax Reform Act of 1986, we fundamentally 
restructured the tax-exempt bond provisions of the Internal Revenue 
Code. As part of that effort, we repealed the ``private activity'' bond 
category for stadium bonds, intending to eliminate tax-exempt financing 
of professional sports facilities altogether.

  Unfortunately, Congress did not address the issue of whether stadium 
bonds could be issued as governmental bonds because that possibility 
was too remote to have occurred to us. And in our silence, a loophole 
was born. Innovative bond counsel have devised aggressive schemes to 
finance stadiums with tax-exempt, governmental purpose bonds. So this 
legislation is corrective. It will put an end to a practice we thought 
we had stopped in 1986.
  The history of the changes made by the 1986 act reveals why the use 
of tax-exempt financing for professional sports facilities is a 
loophole that should be closed. In May 1985, President Reagan issued a 
report recommending that tax-exempt bonds be limited to traditional 
governmental purposes. In December 1985, the House largely adopted the 
Reagan administration's recommendations for tax-exempt bond reform. The 
Senate was of course not inclined to go as far as the House. The 1986 
act, as it emerged from conference, reflected a compromise between the 
House and Senate. We allowed States and local governments to continue 
to issue tax-exempt bonds for traditional governmental purposes, such 
as schools, roads, bridges. At the same time, we limited the issuance 
of tax-exempt bonds for private activities to a short list of projects 
with significant public benefits, even though carried out with private 
ownership. And we subjected private activity bonds to other significant 
limitations, chief among them being a unified, statewide volume 
limitation.
  Why did Congress make these changes? Why did the Reagan 
administration propose curtailing the use of tax-exempt bonds? We were 
all concerned with the large and increasing volume of tax-exempt bonds, 
including an increasing percentage of industrial development bonds that 
were being issued at that time to subsidize private business 
activities.
  The increasing proliferation of tax-exempt bonds led to a number of 
problems. First, it drove up interest costs. Larger interest costs 
drove up the cost of financing roads, bridges, and other items 
traditionally financed with tax-exempt bonds, and meant that State and 
local governments had to increase taxes or reduce services in order to 
pay for these improvements--or forego improvements.
  Second, the proliferation of tax-exempt bonds led to mounting revenue 
losses to the U.S. Treasury. The Congressional Research Service 
recently reported that from 1980 to 1985, the annual amount of foregone 
tax revenue from tax exempt bonds had risen 236 percent to $18.2 
billion.
  Third, the use of taxpayer-subsidized financing for a rapidly growing 
number of private business activities resulted in an inefficient 
allocation of capital. Investment decisions were being made on the 
basis of which projects qualified for tax-exempt financing, rather than 
on the economic viability of the underlying project.
  Fourth, taxpayers were able to shield a growing amount of their 
investment income from income tax by purchasing tax-exempt bonds. We 
had become very concerned with a number of tax sheltering activities 
during the 1980's and the undermining effect such activities had on our 
tax system.
  So in 1986, we fundamentally restructured the tax exempt bond rules. 
And one of the things we did was prohibit the issuance of tax-exempt 
bonds to finance sports stadiums. Or so we thought.
  Once again, under a loophole in the law, professional sports team 
owners are financing newer and more luxurious stadiums with tax-exempt 
stadium bonds. Cities are promising new stadiums, with dozens of luxury 
skyboxes, to entice professional sports teams to relocate. Should the 
taxpayers in the team's current home town be forced to pay for the 
team's new stadium in a new city? The answer is unmistakably no.

[[Page S6307]]

  Mr. President, this is extraordinary. Particularly when compared to 
the limitations we place on private activity bonds, and these stadium 
bonds assuredly are private activity bonds in fact if not in name. Most 
States cannot issue more than $150 million of private activity bonds 
per year. However, no limit is imposed on the amount of bond financing 
that can be used to finance a professional sports facility. Where is 
the private activity bond prohibition against building luxury skyboxes 
with tax-exempt bond proceeds? Where is the private activity bond 
provision that subjects the interest on stadium bonds to the 
alternative minimum tax? Where are all of the other limitations on 
private activity bonds that we have judged are necessary? They 
apparently do not apply to these new stadium bonds.
  And the situation is also unfair when compared to the restrictions we 
impose on the ability of our private, nonprofit educational 
institutions to issue tax-exempt debt. New York University can only 
issue $150 million in tax-exempt debt to finance its facilities in 
Manhattan. Stanford, Boston College, University of Miami, Northwestern 
University, Emory, Georgetown, University of Pennsylvania--these are a 
few of the institutions that can no longer issue tax-exempt debt to 
finance their laboratories, classrooms, and other facilities that are 
essential to our private institutions of higher education.
  The Congressional Research Service issued a critical report late last 
month on the new stadium bonds, and concluded that the federal tax 
subsidy inherent in tax-exempt bond financing is not justified:

       Proponents argue that these stadium's economic benefits 
     justify the subsidies. Economic analysis suggests this is not 
     the case. One study found that a new stadium had no 
     discernible impact on economic development in 27 of 30 
     metropolitan areas, and had a negative impact in the other 
     three areas. The reason for this can be illustrated with the 
     Baltimore football stadium proposal. Economic benefits were 
     overstated by 236%, primarily because the reduced spending on 
     other activities that enables people to attend stadium events 
     was not netted against stadium spending. And no account was 
     taken of losses incurred by foregoing more productive 
     investments. The state's $177 million stadium investment is 
     estimated to create 1,394 jobs at a cost of $127,000 per job. 
     The cost per job generated by the state's Sunny Day Fund 
     economic development program is estimated to be $6,250. The 
     economic case against federal subsidy of stadiums is 
     stronger. Almost all stadium spending is spending that would 
     have been made on other activities within the United States, 
     which means benefits to the Nation as a whole are near zero.

  The report continues by citing several problems caused by the change 
in treatment of tax-exempt bonds for stadiums made by the Tax Reform 
Act of 1986:

       It continues stadium financing as an open-ended matching 
     grant for which the magnitude of the federal subsidy in any 
     given year is determined without the input of federal 
     officials and federal taxpayers; it virtually requires state-
     local governments to offer more favorable lease terms to its 
     professional tenants; and it requires state-local governments 
     to finance their subsidy with general revenue sources rather 
     than benefit-type payments such as stadium-related user 
     charges and rents.

  Finally, what makes the new spate of stadium bonds all the more 
egregious is the price that we paid to end this practice in the first 
place. The realities of the legislative process in 1986 required that 
we provide extraordinarily generous transition relief to those persons 
planning to build such facilities at that time. We wrote special rules 
that allowed the tax-exempt financing of ``virtually every stadium in 
the planning or gleam-in-the-eye stages,'' as described in the 
aforementioned Congressional Research Service report. First, we allowed 
all proposed sports stadiums with binding commitments to issue tax-
exempt bonds, as they had planned. In addition, additional transitional 
relief was provided to allow the issuance of up to $2.7 billion in tax-
exempt bonds for the construction and repair of 25 specifically 
described sports facilities that were too preliminary in their 
development to satisfy the transition rules.
  Mr. President, the legislation I am introducing will do what we 
intended to do, and thought we did, in 1986. This legislation makes 
clear that professional sports facilities may not be financed with tax-
exempt bonds.
  There are a few technical issues on which I would like to solicit 
comments. First, the proposed effective date would be today. Perhaps it 
should be made effective on October 22, 1986, the day President Reagan 
signed the Tax Reform Act of 1986 into law and we prohibited the 
issuance of stadium bonds in the first place. After all, this bill is, 
in a sense, a ``technical correction.'' Nevertheless, I would like to 
consider the need for equitable relief for stadiums already in the 
planning stages.
  Second, a number of sports facilities that are not built for a 
professional sports franchise will be used for the occasional 
charitable or isolated sporting event. Thus, charitable or de minimis 
use exceptions to this legislation may be appropriate.
  Mr. President, these two bills, taken together, would correct a 
serious misallocation of our limited resources. Should we subsidize 
professional sports franchises and underwrite bidding wars among cities 
seeking (or fighting to keep) professional sports franchises, or should 
we act to prevent a significant decline in the ability of our 
nonprofit, private research universities to attract capital for 
classrooms and research facilities? To my mind, this is not a difficult 
choice.
  Mr. President, I ask unanimous consent that the two bills be printed 
in the Record, along with explanatory statements.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1879

       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

[[Page S6308]]

     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

[[Page S6309]]

     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.
                                                                    ____


Section 501(c)(3) Nonprofit Organization Tax-Exempt Bond Reform Act of 
                                  1996


                              Present Law

       Interest on State and local governmental bonds generally is 
     excluded from income if the bonds are issued to finance 
     direct activities of these governments (sec. 103). Interest 
     on bonds issued by these governments to finance activities of 
     other persons, e.g., private activity bonds, is taxable 
     unless a specific exception is included in the Code. One such 
     exception is for private activity bonds issued to finance 
     activities of private, charitable organizations described in 
     Code section 501(c)(3) (``section 501(c)(3) organizations'') 
     when the activities do not constitute an unrelated trade or 
     business (sec. 141(e)(1)(G)).

   Classification of section 501(c)(3) organization bonds as private 
                             activity bonds

       Before enactment of the Tax Reform Act of 1986, States and 
     local governments and section 501(c)(3) organizations were 
     defined as ``exempt persons,'' under the Code bond 
     provisions. As exempt persons, section 501(c)(3) 
     organizations were not treated as ``private'' persons, and 
     their bonds were not ``industrial development bonds'' or 
     ``private loan bonds'' (the predecessor categories to current 
     private activity bonds). Under present law, a bond is a 
     private activity bond if its proceeds are used in a manner 
     violating either (a) a private business test or (b) a private 
     loan test. The private business test is a conjunctive two-
     pronged test. First, the test limits private business use of 
     governmental bonds to no more than 10 percent of the 
     proceeds.\1\ Second, no more than 10 percent of the debt 
     service on the bonds may be secured by or derived from 
     private business users of the proceeds. The private loan test 
     limits to the lesser of 5 percent or $5 million the amount of 
     governmental bond proceeds that may be used to finance loans 
     to persons other than governmental units.
---------------------------------------------------------------------------
     \1\ No more than 5 percent of bond proceeds may be used in a 
     private business use that is unrelated to the governmental 
     purpose of the bond issue. The 10-percent debt service test, 
     described below, likewise is reduced to 5 percent in the case 
     of such ``disproportionate'' private business use.
---------------------------------------------------------------------------

      Special restrictions on tax-exemption for section 501(c)(3) 
                           organization bonds

       Present law treats section 501(c)(3) organizations as 
     private persons; thus, bonds for their use may only be issued 
     as private activity ``qualified 501(c)(3) bonds,'' subject to 
     the restrictions of Code section 145. The most significant of 
     these restrictions limits the amount of outstanding bonds 
     from which a section 501(c)(3) organization may benefit to 
     $150 million. In applying this ``$150 million limit,'' all 
     section 501(c)(3) organizations under common management or 
     control are treated as a single organization. The limit does 
     not apply to bonds for hospital facilities, defined to 
     include only acute care, primarily inpatient, organizations. 
     A second restriction limits to no more than five percent the 
     amount of the net proceeds of a bond issue that may be used 
     to finance any activities (including all costs of issuing the 
     bonds) other than the exempt purposes of the section 
     501(c)(3) organization.
       Legislation enacted in 1988 imposed low-income tenant 
     occupancy restrictions on existing residential rental 
     property that is acquired by section 501(c)(3) organizations 
     in tax-exempt-bond-financed transactions. These restrictions 
     require that a minimum number of the housing units comprising 
     the property be continuously occupied by tenants having 
     family incomes of 50 percent (60 percent in certain cases) of 
     area median income for periods of up to 15 years. These same 
     low-income tenant occupancy requirements apply to for-profit 
     developers receiving tax-exempt private activity bond 
     financing.

                           Other restrictions

       Several restrictions are imposed on private activity bonds 
     generally that do not apply to bonds used to finance State 
     and local government activities. Many of these restrictions 
     also apply to qualified 501(c)(3) bonds. No more than two 
     percent of the proceeds of a bond issue may be used to 
     finance the costs of issuing the bonds, and these monies are 
     not counted in determining whether the bonds satisfy the 
     requirement that at least 95 percent of the net proceeds of 
     each bond issue be used for the exempt activities qualifying 
     the bonds for tax-exemption.
       The weighted average maturity of a bond issue may not 
     exceed 120 percent of the average economic life of the 
     property financed with the proceeds. A public hearing must be 
     held and an elected public official must approve the bonds 
     before they are issued (or the bonds must be approved by 
     voter referendum).
       If property financed with private activity bonds is 
     converted to a use not qualifying for tax-exempt financing, 
     certain loan interest penalties are imposed.
       Both governmental and private activity bonds are subject to 
     numerous other Code restrictions, including the following:
       1. The amount of arbitrage profits that may be earned on 
     tax-exempt bonds is strictly limited, and most such profits 
     must be rebated to the Federal Government;
       2. Banks may not deduct interest they pay to the extent of 
     their investments in most tax-exempt bonds; and
       3. Interest on private activity bonds, other than qualified 
     501(c)(3) bonds, is a preference item in calculating the 
     alternative minimum tax.


                           Reasons for Change

       A distinguishing feature of American society is the 
     singular degree to which the United States maintains a 
     private, non-profit sector of private higher education, 
     health care, and other charitable institutions in the public 
     service. It is important to assist these private institutions 
     in their advancement of the public good. The restrictions of 
     present law place these section 501(c)(3) organizations at a 
     financial disadvantage relative to substantially identical 
     governmental institutions, and are particularly 
     inappropriate. For example, private, non-profit research 
     universities are subject to the $150 million limitation on 
     outstanding bonds, whereas State-sponsored universities 
     competing for the same research projects do not operate 
     under a comparable restriction. A public hospital 
     generally has unlimited access to tax-exempt bond 
     financing, while a private, non-profit hospital is subject 
     to a $150 million limitation on outstanding bonds to the 
     extent the bonds finance health care facilities that do 
     not qualify under the present-law definition of hospital. 
     These and other restrictions inhibit the ability of 
     America's private, non-profit institutions to modernize 
     their health care facilities and to build state-of-the-art 
     research facilities for the advancement of science, 
     medicine, and other educational endeavors.
       Inhibiting the access of private, non-profit research 
     institutions to sources of capital financing, in relation to 
     their public counterparts, distorts the distribution of major 
     research among the leading institutions, and over time will 
     lead to the decline of research undertakings by private, non-
     profit universities. The tax-exempt bond rules should reduce 
     these distortions by treating more equally State and local 
     governments and those private organizations which are engaged 
     in similar actions advancing the public good.


                        Explanation of Provision

       The bill amends the tax-exempt bond provisions of the Code 
     to conform generally the treatment of bonds for section 
     501(c)(3) organizations to that provided for bonds issued to 
     finance direct State or local government activities, 
     including construction of public hospitals and university 
     facilities. Certain restrictions, described below, that have 
     been imposed on qualified 501(c)(3) bonds (but not on 
     governmental bonds) since 1986, and that address specialized 
     policy concerns, are retained.

 Repeal of private activity bond classification for bonds for section 
                        501(c)(3) organizations

       The concept of an ``exempt person'' that existed under the 
     Code bond provisions before 1986, is reenacted. An exempt 
     person is defined as (a) a State or local governmental unit 
     or (b) a section 501(c)(3) organization, when carrying out 
     its exempt activities under Code section 501(a). Thus, bonds 
     for section 501(c)(3) organizations are generally no longer 
     classified as private activity bonds. Financing for unrelated 
     business activities of such organizations continue to be 
     treated as a private activity for which tax-exempt financing 
     is not authorized.
       As exempt persons, section 501(c)(3) organizations are 
     subject to the same limits as States and local governments on 
     using their bond proceeds to finance private business 
     activities or to make private loans. Thus, generally no more 
     than 10 percent of the bond proceeds \2\ can be used in a 
     business use of a person other than an exempt person if the 
     Code private payment test is satisfied, and no more than 5 
     percent ($5 million if less) can be used to make loans to 
     such ``nonexempt'' persons.
---------------------------------------------------------------------------
     \2\ This limit would be reduced to 5 percent in the case of 
     disproportionate private use as under the present-law 
     governmental bond disproportionate private use limit.
---------------------------------------------------------------------------

  Repeal of most additional special restrictions on section 501(c)(3) 
                           organization bonds

       Present Code section 145, which establishes additional 
     restrictions on qualified 501(c)(3) bonds, is repealed, along 
     with the restriction on bond-financed costs of issuance for 
     section 501(c)(3) organization bonds (sec. 147(h)). This 
     eliminates the $150 million limit on non-hospital bonds for 
     section 501(c)(3) organizations.

  Retention of certain specialized requirements for section 501(c)(3) 
                           organization bonds

       The bill retains certain specialized restrictions on bonds 
     for section 501(c)(3) organizations. First, the bill retains 
     the requirement that existing residential rental property 
     acquired by a section 501(c)(3) organization in a tax-exempt-
     bond-financed transaction satisfy the same low-income tenant 
     requirements as similar housing financing for for-

[[Page S6310]]

     profit developers. Second, the bill retains the present-law 
     maturity limitations applicable to bonds for section 
     501(c)(3) organizations, and the public approval requirements 
     applicable generally to private activity bonds. Third, the 
     bill continues to apply the penalties on changes in use of 
     tax-exempt-bond-financed section 501(c)(3) organization 
     property to a use not qualified for such financing.
       Finally, the bill makes no amendments, other than technical 
     conforming amendments, to the tax-exempt arbitrage 
     restrictions, the alternative minimum tax tax-exempt bond 
     preference, or the provisions generally disallowing interest 
     paid by banks on monies used to acquire or carry tax-exempt 
     bonds.


                             Effective Date

       The provision is generally effective with respect to bonds 
     issued and to capital expenditures made after the date of 
     enactment. The provision does not apply to bonds issued prior 
     to January 1, 1997 for the purposes of applying the rebate 
     requirements under Section 148(f)(4)(D).
                                                                    ____


                                S. 1880

       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 ``Stop Tax-Exempt Arena Debt 
     Issuance Act''.

     SEC. 2. TREATMENT OF TAX-EXEMPT FINANCING OF PROFESSIONAL 
                   SPORTS FACILITIES.

       (a) In General.--Section 141 of the Internal Revenue Code 
     of 1986 (defining private activity bond and qualified bond) 
     is amended by redesignating subsection (e) as subsection (f) 
     and by inserting after subsection (d) the following new 
     subsection:
       ``(e) Certain Issues Used for Professional Sports 
     Facilities Treated as Private Activity Bonds.--
       ``(1) In general.--For purposes of this title, the term 
     `private activity bond' includes any bond issued as part of 
     an issue if the amount of the proceeds of the issue which are 
     to be used (directly or indirectly) to provide professional 
     sports facilities exceeds the lesser of--
       ``(A) 5 percent of such proceeds, or
       ``(B) $5,000,000.
       ``(2) Bond not treated as a qualified bond.--For purposes 
     of this title, any bond described in paragraph (1) shall not 
     be a qualified bond.
       ``(3) Professional sports facilities.--For purposes of this 
     subsection--
       ``(A) In general.--The term `professional sports 
     facilities' means real property or related improvements used 
     for professional sports exhibitions, games, or training, 
     regardless if the admission of the public or press is allowed 
     or paid.
       ``(B) Use for professional sports.--Any use of facilities 
     which generates a direct or indirect monetary benefit (other 
     than reimbursement for out-of-pocket expenses) for a person 
     who uses such facilities for professional sports exhibitions, 
     games, or training shall be treated as a use described in 
     subparagraph (A).
       ``(4) Anti-abuse regulations.--The Secretary shall 
     prescribe such regulations as may be appropriate to carry out 
     the purposes of this subsection, including such regulations 
     as may be appropriate to prevent avoidance of such purposes 
     through related persons, use of related facilities or 
     multiuse complexes, or otherwise.''
       (b) Effective Date.--The amendments made by this section 
     shall apply to bonds issued on or after June 14, 1996.
                                                                    ____


              The Stop Tax-exempt Arena Debt Issuance Act


                              Present Law

       Interest on State and local governmental bonds generally is 
     excluded from income if the bonds are issued to finance 
     direct activities of these governments (sec. 103). Interest 
     on bonds issued by these governments to finance activities of 
     other persons, e.g., private activity bonds, is taxable 
     unless the bonds satisfy certain requirements. Private 
     activity bonds must be within certain statewide volume 
     limitations, must not violate the arbitrage and other 
     applicable restrictions, and must finance activities within 
     one of the categories specified in the Code. The Tax Reform 
     Act of 1986 repealed the private activity bond category for 
     sports facilities; therefore no private activity bonds may be 
     issued for this purpose.
       Bonds issued by State and local governments are considered 
     to be government use bonds, unless the bonds are classified 
     as private activity bonds. Bonds are deemed to be private 
     activity bonds if both the (i) private business use test and 
     (ii) private security or payment test are met. The private 
     business use test is met if more than 10 percent of the bond 
     proceeds, including facilities financed with the bond 
     proceeds, is used in a non-governmental trade or business. 
     The private security or payment test is met if more than 10 
     percent of the bond repayments is secured by privately used 
     property, or is derived from the payments of private business 
     users. Additionally, bonds are deemed to be private activity 
     bonds if more than 5 percent of the bond proceeds or $5 
     million are used to finance loans to persons other than 
     governmental units.


                           Reasons for Change

       The use of tax-exempt financing for professional sports 
     facilities provides an indirect and inefficient federal tax 
     subsidy. Congress intended to eliminate this subsidy for 
     professional sports facilities in the Tax Reform Act of 1986, 
     by repealing the private activity bond category for sports 
     facilities. The use of government bonds to finance the 
     identical underlying private business use is an unintended 
     and improper use of a federal subsidy, and an abuse of the 
     government bond rules. In addition, the use of tax-exempt 
     bonds to finance professional sports facilities is 
     particularly inappropriate where the facilities to be built 
     are used to entice professional sports franchises to 
     relocate.


                        Explanation of Provision

       The bill would provide that bonds issued to finance 
     professional sports facilities are private activity bonds, 
     and that such bonds are not qualified bonds. Therefore, 
     professional sports facilities will not qualify for tax-
     exempt bond financing.
       A professional sports facility is defined to include real 
     property and related improvements which are used for 
     professional sports exhibitions, games, or training, whether 
     or not admission of the public or press is allowed or paid. 
     In addition, a facility that is used for purpose other than 
     professional sports will nevertheless be treated as being 
     used for professional sports if the facility generates a 
     direct or indirect monetary benefit (other than reimbursement 
     for out-of-pocket expenses) for a person who uses the 
     facility for professional sports. These benefits are intended 
     to include an interest in revenues from parking fees, food 
     and beverage sales, advertising and sports facility naming 
     rights, television rights, ticket sales, private suites and 
     club seats, and concessions.
       The Secretary of the Treasury is authorized to issue anti-
     abuse regulations to prevent transactions intended to 
     improperly divert the indirect Federal subsidy for 
     traditional governmental uses inherent in tax-exempt bonds 
     for the benefit of professional sports facilities or 
     professional sports teams. It is intended that no tax-exempt 
     bond proceeds may finance a ball park used for professional 
     sports exhibitions, even if the ball park is made a part of a 
     larger multi-use complex used 365 days a year for other 
     purposes. In addition, it is intended that reciprocal usage 
     of sports facilities by professional sports franchises that 
     divide their usage among several facilities in order to avoid 
     the 5 percent use test be aggregated for purposes of this 
     provision.
       No inference is intended regarding the rules under present 
     law regarding the issuance or holding of, or interest paid or 
     accrued on, any bonds issued prior to the effective date of 
     this bill to finance sports facilities.


                             Effective Date

       The provision is effective with respect to bonds issued on 
     or after June 14, 1996.

                          ____________________