Code of 1954) the interest on which is excludable from gross income under section 103 (a) (1) of such Code if, by reason of the application of paragraph (4) or (6) of section 103 (c) [Now 103(b)] of such Code (determined as if paragraphs (4) (A), (5), and (7) were not included in section 103 (c) [103(b)], paragraph (1) of such section 103 (c) [Now 103 (b)] does not apply to such security;".

The pertinent provisions of section 103 of the Internal Revenue Code of 1954 read as follows:

"SEC. 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;

"(b) 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

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"(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.

"(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 or gas,

"(F) air or water pollution control facilities, or

"(G) facilities for the furnishing of water, if available on

"(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 facilities, 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) or 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 county (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

"(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 the proceeds of outstanding issues to which subparagraph (A) applied), as if the aggregate amount of such capital expenditures constituted the face amount of 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 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 $1,000,000), 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 be made under subparagraph (D) only if all the prior issues being redeemed are issues to which subparagraph (A) applies. In applying subparagraph (D) (ii) with respect to such

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.".

F. Section 3(a) (2) of the Securities Act also exempts from the registration requirements of that Act

"any interest or participation in a single or collective trust fund maintained by a bank or in a separate account maintained by an insurance company which interest or participation is issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954, or (B) an annuity plan which meets the requirements for the deduction of the employer's contribution under section 404(a)(2) of such Code, other than any plan described in clause (A) or (B) of this paragraph (i) the contributions under which are held in a single trust fund maintained by a bank or in a separate account maintained by an insurance company for a single employer and under which an amount in excess of the employer's contribution is allocated to the purchase of securities (other than interests or participations in the trust or separate account itself) issued by the employer or by any company directly or indirectly controlling, controlled by or under common control with the employer or (ii) which covers employees some or all of whom are employees within the meaning of section 401 (c) (1) of such Code.".

The relevant sections of the Internal Revenue Code of 1954 read as follows:

"SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS

PLANS.

"(a) REQUIREMENTS FOR QUALIFICATION.-A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section

"(1) if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404 (a) (3) (B) (relating to deduction for contributions to profit-sharing and stock bonus plans), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan;

"(2) if under the trust instrument it is impossible, at any time. prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his

"(3) if the plan of which such trust is a part satisfies the requirements of section 410 (relating to minimum participation standards); and

"(4) if the contributions or benefits provided under the plan do not discriminate in favor of employees who are—

"(A) officers,

"(B) shareholders, or

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"(C) highly compensated.

For purposes of this paragraph, there shall be excluded from consideration employees described in section 410 (b) (2) (A) and (C). "(5) A classification shall not be considered discriminatory within the meaning of paragraph (4) or section 410 (b) (without regard to paragraph (1)(A) thereof) merely because it excludes employees the whole of whose remuneration constitutes "wages" under section 3121 (a) (1) (relating to the Federal Insurance Contributions Act) or merely because it is limited to salaries or clerical employees. Neither shall a plan be considered discriminatory within the meaning of such provisions merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees, or merely because the contributions or benefits based on that part of an employee's remuneration which is excluded from "wages" by section 3121(a)(1) differ from the contributions or benefits based on employee's remuneration not so excluded, or differ because of any retirement benefits created under the State or Federal law. For purposes of this paragraph and paragraph (10), the total compensation of an individual who is an employee within the meaning of subsection (c) (1) means such individual's earned income (as defined in subsection (c) (2)), and the basic or regular rate of compensation of such an individual shall be determined, under regulations prescribed by the Secretary or his delegate, with respect to that portion of his earned income which bears the same ratio to his earned income as the basic or regular compensation of the employees under the plan bears to the total compensation of such employees. For purposes of determining whether two or more plans of an employer satisfy the requirements of paragraph (4) when considered as a single plan, if the amount of contributions on behalf of the employees allowed as a deduction under section 404 for the taxable year with respect to such plans, taken together, bears a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees, the plans shall not be considered discriminatory merely because the rights of employees to, or derived from, the employer contributions under the separate plans do not become non forfeitable at the same rate. For the purposes of determining whether two or more plans of an employer satisfy the requirements of paragraph (4) when considered as a single plan, if the employees' rights to benefits under the separate plans do not become non forfeitable at the same rate, but the levels of benefits provided by the separate plans