TREATMENT OF HEDGE BONDS.

SEC. 7651. TREATMENT OF HEDGE BONDS. (a) In General.—Section 149 (relating to bonds must be registered to be tax-exempt; other requirements) is amended by adding at the end thereof the following new subsection: “(g) Treatment of Hedge Bonds.— “(1) In general.— Section 103(a) shall not apply to any hedge bond unless, with respect to the issue of which such bond is a part— “(A) the requirement of paragraph (2) is met, and “(B) the requirement of subsection (f)(3) is met. “(2) Reasonable expectations as to when proceeds will be spent.— An issue meets the requirement of this paragraph if the issuer reasonably expects that— “(A) 10 percent of the spendable proceeds of the issue will be spent for the governmental purposes of the issue within the 1-year period beginning on the date the bonds are issued, “(B) 30 percent of the spendable proceeds of the issue will be spent for such purposes within the 2-year period beginning on such date, “(C) 60 percent of the spendable proceeds of the issue will be spent for such purposes within the 3-year period beginning on such date, and “(D) 85 percent of the spendable proceeds of the issue will be spent for such purposes within the 5-year period beginning on such date. “(3) Hedge bond.— “(A) In general.—For purposes of this subsection, the term ‘hedge bond’ means any bond issued as part of an issue unless— “(i) the issuer reasonably expects that 85 percent of the spendable proceeds of the issue will be used to carry out the governmental purposes of the issue within the 3-year period beginning on the date the bonds are issued, and “(ii) not more than 50 percent of the proceeds of the issue are invested in nonpurpose investments (as defined in section 148(f)(6)(A)) having a substantially guaranteed yield for 4 years or more. “(B) Exception for investment in tax-exempt bonds not subject to minimum tax.— 103 STAT. 2384 “(i) In general.—Such term shall not include any bond issued as part of an issue 95 percent of the net proceeds of which are invested in bonds— “(I) the interest on which is not includible in gross income under section 103, and “(II) which are not specified private activity bonds (as defined in section 57(a)(5)(C)). “(ii) Amounts in bona fide debt service fund.—Amounts in a bona fide debt service fund shall be treated as invested in bonds described in clause (i). “(iii) Investment earnings held pending reinvestment.—Investment earnings held for not more than 30 days pending reinvestment shall be treated as invested in bonds described in clause (i). “(C) Exception for refunding bonds.— “(i) In general.—A refunding bond shall be treated as meeting the requirements of this subsection only if the original bond met such requirements. “(ii) General rule for refunding of pre-effective date bonds.—A refunding bond shall be treated as meeting the requirements of this subsection if— “(I) this subsection does not apply to the original bond, “(II) the average maturity date of the issue of which the refunding bond is a part is not later than the average maturity date of the bonds to be refunded by such issue, and “(III) the amount of the refunding bond does not exceed the outstanding amount of the refunded bond. “(iii) Refunding of pre-effective date bonds entitled to 5-year temporary period.—A refunding bond shall be treated as meeting the requirements of this subsection if— “(I) this subsection does not apply to the original bond, “(II) the issuer reasonably expected that 85 percent of the spendable proceeds of the issue of which the original bond is a part would be used to carry out the governmental purposes of the issue within the 5-year period beginning on the date the original bonds were issued but did not reasonably expect that 85 percent of such proceeds would be so spent within the 3-year period beginning on such date, and “(III) at least 85 percent of the spendable proceeds of the original issue (and all other prior original issues issued to finance the governmental purposes of such issue) were spent before the date the refunding bonds are issued. “(4) Special rules.— For purposes of this subsection— “(A) Construction period in excess of 5 years.—The Secretary may, at the request of any issuer, provide that the requirement of paragraph (2) shall be treated as met with respect to the portion of the spendable proceeds of an issue which is to be used for any construction project having a construction period in excess of 5 years if it is 103 STAT. 2385reasonably expected that such proceeds will be spent over a reasonable construction schedule specified in such request. “(B) Rules for determining expectations.—The rules of subsection (Í)(2)(B) shall apply. (5) Regulations.—The Secretary may prescribe regulations to prevent the avoidance of the rules of this subsection, including through the aggregation of projects within a single issue.” (b) Effective Date.— (1) In general.—Except as otherwise provided in this subsection, the amendment made by subsection (a) shall apply to bonds issued after September 14, 1989. (2) Bonds sold before September 15, 1989.—The amendment made by subsection (a) shall not apply to any bond sold before September 15, 1989, and issued before October 15, 1989. (3) Bonds with respect to which preliminary offering materials mailed.—The amendment made by subsection (a) shall not apply to any issue issued after the date of the enactment of this Act if the preliminary offering materials with respect to such issue were mailed (or otherwise delivered) to members of the underwriting syndicate before September 15, 1989. (4) Certain other bonds.—In the case of a bond issued before January 1, 1991, with respect to which official action was taken (or a series of official actions were taken), or other comparable preliminary approval was given, before November 18, 1989, demonstrating an intent to issue such bonds in a maximum specified amount for such issue or with a maximum specified amount of net proceeds of such issue, the issuer may elect to apply section 149(g)(2) of the Internal Revenue Code of 1986 (as added by this section) by substituting “15 percent” for “10 percent” in subparagraph (A) and “50 percent” for “60 percent” in subparagraph (C). (5) Bonds issued to finance self-insurance funds.—The amendment made by subsection (a) shall not apply to any bonds issued before July 1, 1990, to finance a self-insurance fund if official action was taken (or a series of official actions were taken), or other comparable preliminary approval was given, before September 15, 1989, demonstrating an intent to issue such bonds in a maximum specified amount for such issue or with a maximum specified amount of net proceeds of such issue.