§149 Bonds Must Be Registered to Be Tax Exempt; Other Requirements

Summary

A bond must be in registered form to have tax‑free interest from the federal income tax. Bonds that are not offered to the public or that mature in one year or less are not covered by that rule. Book‑entry bonds count as registered if they can be transferred only by book entry under rules the Secretary sets, and the Secretary will make rules for nominee holders. A State or local bond is not tax‑exempt if it is federally guaranteed. A bond is federally guaranteed if the United States (or a U.S. agency) promises payment, if 5 percent or more of the issue’s proceeds are used for loans guaranteed by the United States or invested in federally insured deposits/accounts, or if the U.S. otherwise indirectly guarantees payment. Certain guarantees do not count, including some by the FHA, VA, FNMA, FHLMC, GNMA, student loan guarantees, the Bonneville Power Authority as of the 1984 law date, and some Federal Home Loan Bank guarantees subject to safety rules and time limits (ending December 31, 2010 for some). Other exceptions apply for short‑term investment of proceeds, bona fide debt service funds, qualified reserves, Treasury securities, some housing programs (unless invested in federally insured deposits), ordinary loans to banks, and where the U.S. just pays rent or user fees for a spaceport. The law treats some entities that can borrow from the U.S. as federal instrumentalities under Treasury rules, and it defines “federally insured deposit or account” by naming FDIC, FSLIC, NCUA, or similar federal insurers. Interest on a bond must be exempt under the tax code itself to be tax‑free, though bonds already tax‑exempt on January 6, 1983 keep that status (with extra rules for bonds issued after 1983 and special categories tied to certain laws and dates, including bonds issued before June 19, 1984). A bond issued to advance refund another bond is not tax‑exempt if it is issued more than 90 days before the refunded bond is redeemed. Issuers must file an information statement with the Secretary no later than the 15th day of the second calendar month after the quarter in which the bond was issued (or later if the Secretary allows). That statement must give issuer name and address, issue date, net proceeds, interest rate, term and face amounts, issuance costs and reserves, how the issue was approved, names and tax IDs of initial principal users and related parents where required, a description of financed property, a certification about private activity bond limits when needed, and other items the Secretary requires. Pooled financing bonds (issues over $5,000,000 used to finance loans to two or more borrowers) must meet tests: the issuer must reasonably expect that at least 30 percent of net proceeds will be used for loans within 1 year and 95 percent within 3 years; at least 95 percent of expected legal and underwriting costs must be paid within 180 days and not be contingent; written loan commitments for at least 30 percent of net proceeds must exist before issuance (with limited exceptions); and if the use tests are not met, the issuer must use excess proceeds to redeem bonds within 90 days. Hedge bonds must meet spending tests for when proceeds are used (10 percent in 1 year, 30 percent in 2 years, 60 percent in 3 years, and 85 percent in 5 years) and the same cost rules as pooled financing; a bond is a hedge unless the issuer expects 85 percent of spendable proceeds to be used within 3 years and not more than 50 percent is put into nonpurpose investments with a substantially guaranteed yield for 4 years or more. The Secretary may make regulations to carry out and prevent avoidance of these rules.