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Mr. Smith. No, because the conference report has been agreed to.

Mr. KLEPPE. Mr. Chairman, there is very definitely communication going on to correct it.

Mr. SMITH. Well, I said fully correct it.
Mr. KLEPPE. Oh, OK.
Mr. Smith. But, anyway, we accept your apology.

Mr. KLEPPE. Anyway, I wanted you to know that we are sorry about it and we did blow it.

Mr. SMITH. We accept your apology.
Mr. KLEPPE. Thank you very much.
Mr. SMITH. The subcommittee will stand adjourned.

[Whereupon, at 11:30 a.m., the subcommittee adjourned to reconvene subject to the call of the Chair.]

APPENDIX A-INTERNAL REVENUE CODE, 26 U.S.C. § 103

INTERNAL REVENUE CODE-26 U.S.C. § 103
$ 103. Interest on certain governmental obligations

(A) GENERAL RULE

Gross income does not include interest on

(1) the obligations of a State, a Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia ;

(2) the obligations ofthe United States; or

(3) the obligations of a corporation organized under Act of Congress, if such corporation is an instrumentality of the United States and if under the respective Acts authorizing the issue of the obligations the interest is wholly exempt from the taxes imposed by this subtitle.

(B) EXCEPTION

Subsection (a) (2) shall not apply to interest on obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit, to the extent they represent deposits made before March 1, 1941), unless under the respective Acts authorizing the issuance thereof such interest is wholly exempt from the taxes imposed by this subtitle.

(0) INDUSTRIAL DEVELOPMENT BONDS

(1) Subsection (a) (1) not to apply

Except as otherwise provided in this subsection, any industrial development bond shall be treated as an obligation not described in subsection (a)(1). (2) Industrial development bond

For purposes of this subsection, the term "industrial development bond" means any obligation

(A) which is issued as part of an issue all or a major portion of the proceeds of which are to be used directly or indirectly in any trade or business carried on by any person who is not an exempt person (within the meaning of paragraph (3)), and

(B) the payment of the principal or interest, on which (under the terms of such obligation or any underlying arrangement) is, in whole or in major part

(i) secured by any interest in property used or to be used in a trade or business or in payments in respect of such property, or

(ii) to be derived from payments in respect of property, or borrowed money, used or to be used in a trade or business. (3) Exempt person For purposes of paragraph (2) (A), the term "exempt person" means

(A) a governmental unit, or

(B) an organization described in section 501(c)(3) and exempt from tax under section 501 (a) (but only with respect to a trade or business carried on by such organization which is not an unrelated trade or business, deter

mined by applying section 513(a) to such organization). (4) Certain exempt activities

Paragraph (1) shall not apply to any obligation which is issued as part of an issue substantially all of the proceeds of which are to be used to provide

(A) residential real property for family units,
(B) sports facilities,
(C) convention or trade show facilities,

(D) airports, docks, wharves, mass commuting facilities, parking facilities, or storage or training facilities directly related to any of the foregoing.

(E) sewage or solid waste disposal facilities or facilities for the local furnishing of electric energy, gas, or water, or

(F) air or water pollution control facilities. (5) Industrial parks

Paragraph (1) shall not apply to any obligation issued as part of an issue substantially all of the proceeds of which are to be used for the acquisition or development of land as the site for an industrial park. For purposes of the preceding sentence, the term "development of land" includes the provision of water, sewage, drainage, or similar facilities, or of transportation, power, or communication faciliites, which are incidental to use of the site as an industrial park, but, except with respect to such facilities, does not include the provision of structures or buildings. (6) Exemption for certain small issues

(A) In general.-Paragraph (1) shall not apply to any obligation issued as part of an issue the aggregate authorized face amount of which is $1,000,000 or less and substantially all of the proceeds of which are to be used (i) for the acquisition, construction, reconstruction, or improvement of land or property of a character subject to the allowance for depreciation, or (ii) to redeem part or all of a prior issue which was issued for purposes described in clause (i) of this clause. (B) Certain prior issues taken into account.-If

(i) the proceeds of two or more issues of obligations (whether or not the issuer of each such issue is the same) are or will be used primarily with respect to facilities located in the same incorporated municipality or located in the same country (but not in any incorporated municipality),

(ii) the principal user of such facilities is or will be the same person or two or more related persons, and

(iii) but for this subparagraph, subparagraph (A) would apply to each

such issue, then, for purposes of subparagraph (A), in determining the aggregate face amount of any later issue there shall be taken into account the face amount of obligations issued under all prior such issues and outstanding at the time of such later issue (not including as outstanding any obligation which is to be redeemed from the proceeds of the later issue).

(C) Related persons.-For purposes of this paragraph and paragraph (7), a person is a related person to another person if

(i) the relationship between such persons would result in a disallowance of losses under section 267 or 707 (b), or

(ii) such persons are members of the same controlled group of corporations (as defined in section 1563 (a), except that “more than 50 percent" shall be

substituted for “at least 80 percent" each place it appears therein). (D) $5,000,000 limit in certain cases.—At the election of the issuer, made at such time and in such manner as the Secretary or his delegate shall by regulations prescribe, with respect to any issue this paragraph shall be applied

(i) by substituting "$5,000,000" for “$1,000,000” in subparagraph (A), and

(ii) in determining the aggregate face amount of such issue, by taking into account not only the amount described in subparagraph (B), but also the aggregate amount of capital expenditures with respect to facilities described in subparagraph (E) paid or incurred during the 6-year period beginning 3 years before the date of such issue and ending 3 years after such date (and financed otherwise than out of proceeds of outstanding issues to which subparagraph (A) applied), as if the aggregate amount of such capital expenditures constituted the face amount a prior outstanding issue described

in subparagraph (B). (E) Facilities taken into account.--For purposes of subparagraph (D) (ii), the facilities described in this subparagraph are facilities

(i) located in the same incorporated municipality or located in the same county (but not in any incorporated municipality), and

(ii) the principal user of which is or will be the same person or two or

more related persons. For purposes of clause (i), the determination of whether or not facilities are located in the same governmental unit shall be made as of the date of issue of the issue in question.

(F) Certain capital expenditures not taken into account.--For purposes of subparagraph (D) (ii), any capital expenditure

(i) to replace property destroyed or damaged by fire, storm, or other casualty, to the extent of the fair market value of the property replaced,

(ii) required by a change made after the date of issue of the issue in question in a Federal or State law or local ordinance of general application or required by a change made after such date in rules and regulations of general application issued under such a law or ordinance, or

(iii) required by circumstances which could not be reasonably foreseen on such date of issue or arising out of a mistake of law or fact (but the aggregate amount of expenditures not taken into account under this clause

with respect to any issue shall not exceed $250,000), shall not be taken into account.

(G) Limitation on loss of tax exemption.-In applying subparagraph (D) (ii) with respect to capital expenditures made after the date of any issue, no obligation issued as a part of such issue shall be treated as an obligation not described in subsection (a) (1) by reason of any such expenditure for any period before the date on which such expenditure is paid or incurred.

(H) Certain refinancing issues.—In the case of any issue described in subparagraph (A)(ii), an election may eb made under subparagraph (D) only if all of the prior issues being redeemed are issues to which subparagraph (A) applies. In applying subparagraph (D) (ii) with respect to such a refinancing issue, capital expenditures shall be taken into account only for purposes of determining whether the prior issues being redeemed qualified (and would have continued to qualify) under subparagraph (A). (7) Exception

Paragraphs (4), (5), and (6) shall not apply with respect to any obligation for any period during which it is held by a person who is a substantial user of the facilities or a related person.

(D) ARBITRAGE BONDS

(1) Subsection (a) (1) not to apply

Except as provided in this subsection, any arbitrage bond shall be treated as an obligation not described in subsection (a)(1). (2) Arbitrage bond.

For purposes of this subsection, the term “arbitrage bond' means any obligation which is issued as part of an issue all or a major portion of the proceeds of which are reasonably expected to be used directly or indirectly

(A) to acquire securities (within the meaning of section 165 (g) (2) (A) or (B)) or obligations (other than obligations described in subsection (a) (1) which may be reasonably expected at the time of issuance of such issue, to produce a yield over the term of the issue which is materially higher (taking into account any discount or premium) than the yield on obligations of such issue, or

(B) To replace funds which were used directly or indirectly to acquire securities or obligations described in subparagraph (A). (3) Exceptions Paragraph (1) shall not apply to any obligation

(A) which is issued as part of an issue substantially all of the proceeds of which are reasonably expected to be used to provide permanent financing for real property used or to be used for residential purposes for the personnel of an educational institution (within the meaning of section 151 (e) (4)) which grants baccalaureate or higher degrees, or to replace funds which were so used, and

(B) the yield on which over the term of the issue is not reasonably expectedly, at the time of issuance of such issue, to be substantially lower than the yield on obligations acquired or to be acquired in providing such

financing. This paragraph shall not apply with respect to any obligation for any period during which it is held by a person who is a substantial user of property financed by the proceeds of the issue of which such obligation is a part, or by a member of the family (within the meaning of section 318(a) (1)) of any such person.

(4) Special rules

For purposes of paragraph (1), an obligation shall not be treated as an arbitrage bond solely by reason of the fact that

(A) the proceeds of the issue of which such obligation is a part may be invested for a temporary period in securities or other obligations until such proceeds are needed for the purpose for which such issue was issued, or

(B) an amount of the proceeds of the issue of which such obligation is a part may be invested in securities or other obligations which are part of

a reasonably required reserve or replacement fund. The amount referred to in subparagraph (B) shall not exceed 15 percent of the proceeds of the issue of which such obligation is a part unless the issuer establishes that a higher amount is necessary. (5) Regulations

The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this subsection.

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