EXCEPTIONS FROM ARBITRAGE REBATE REQUIREMENT.

SEC. 7652. EXCEPTIONS FROM ARBITRAGE REBATE REQUIREMENT. (a) In general.—Clause (i) of section 148(f)(4)(B) (relating to temporary investments) is amended to read as follows: “(i) In general.—An issue shall, for purposes of this subsection, be treated as meeting the requirements of paragraph (2) if— “(I) the gross proceeds of such issue are expended for the governmental purposes for which the issue was issued no later than the day which is 6 months after the date of issuance of the issue, and “(II) the requirements of paragraph (2) are met after such 6 months with respect to earnings on amounts in any reasonably required reserve or replacement fund. Gross proceeds which are held in a bona fide debt service fund or a reasonably required reserve or 103 STAT. 2386replacement fund shall not be considered gross proceeds for purposes of this subparagraph only.” (b) Construction Bonds.—Subparagraph (B) of section 148(f)(4) (relating to temporary investments) is amended by adding at the end thereof the following new clause: “(iv) 2-year period for certain construction bonds.— “(I) In general.—In the case of an issue described in subclause (IV), clause (i) shall be applied by substituting ‘2 years’ for ‘6 months’ each place it appears. “(II) Proceeds must be spent within certain periods.—Subclause (I) shall not apply to any issue if less than 10 percent of the net proceeds of the issue are spent for the governmental purposes of the issue within the 6-month period beginning on the date the bonds are issued, less than 45 percent of such proceeds are spent for such purposes within the 1-year period beginning on such date, less than 75 percent of such proceeds are spent for such purposes within the 18-month period beginning on such date, or less than 100 percent of such proceeds are spent for such purposes within the 2-year period beginning on such date. For purposes of the preceding sentence, the term ’net proceeds’ includes investment proceeds earned before the close of the period involved on the investment of the sale proceeds of the issue. “(III) Exception for reasonable retainage.—For purposes of subclause (II), 100 percent of the net proceeds of an issue shall be treated as spent for the governmental purposes of the issue within the 2-year period beginning on the date the bonds are issued if such requirement is met within the 3-year period beginning on such date and such requirement would have been met within such 2-year period but for a reasonable retainage (not exceeding 5 percent of the net proceeds of the issue). “(IV) Issues to which subclause (I) applies.—An issue is described in this subclause if at least 75 percent of the net proceeds of the issue are to be used for construction expenditures with respect to property which is owned by a governmental unit or a 501(c)(3) organization. For purposes of the preceding sentence, the term ‘construction’ includes reconstruction and rehabilitation, and section 142(b)(1) shall apply. An issue is not described in this subclause if any bond which is part of such issue is a bond other than a qualified 501(c)(3) bond, a bond which is not a private activity bond, or a private activity bond to finance property to be owned by a governmental unit or a 501(c)(3) organization. “(V) Election to pay penalty in lieu of rebate.—In the case of an issue described in subclause (IV) which fails to meet the require-103 STAT. 2387ments of subclause (H), if the issuer elected the application of this subclause, the requirements of paragraph (2) shall be treated as met if the issuer pays the penalty under paragraph (7) or pays a penalty with respect to the close of each 6 month period after the date the bonds are issued equal to 1½ percent of the amount of the net proceeds of the issue which, as of the close of such period, are not spent as required by subclause (II). The penalty under this subclause shall cease to apply only after the bonds (including any refunding bonds with respect thereto) are no longer outstanding. “(VI) Election to rebate on earnings on reserve.—If the issuer so elects, the term ‘net proceeds’ for purposes of subclause (II) shall not include earnings on any reasonably required reserve or replacement fund and the requirements of paragraph (2) shall apply to such earnings. “(VII) Pooled financing bonds.—At the election of the issuer of an issue the proceeds of which are to be used to make or finance loans (other than nonpurpose investments) to 2 or more persons, the periods described in clause (i) and this clause shall gin on the date the loan is made in the case of loans made within the 1-year period after the date the bonds were issued. In the case of loans made after such 1-year period, the periods described in clause (i) and this clause shall begin at the close of such 1-year period. “(VIII) Portions of issue may be treated separately.—If only a portion of an issue is to be used for construction expenditures referred to in subclause (TV), such portion and the other portion of such issue may, at the election of the issuer, be treated as separate issues for purposes of this clause and clause (i). “(IX) Elections.—Any election under this clause shall be made on or before the date the bonds are issued; and, once made, shall be irrevocable.” (c) Pooled Financing Bonds.—Subparagraph (A) of section 148(c)(2) is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph: “(D) Bonds used to provide construction financing.—In the case of an issue described in subparagraph (A) any portion of which is used to make or finance loans for construction expenditures (within the meaning of subsection (f)(4)(B)(iv)(IV))— “(i) rules similar to the rules of subsection (f)(4)(B)(iv)(VIII) shall apply, and “(ii) subparagraph (A) shall be applied with respect to such portion by substituting ‘2 years’ for ‘6 months’.” (d) Conforming Amendment.—Subclause (I) of section 148(f)(4)(B)(ii) is amended by inserting “each place it appears” after “‘6 months’”. (e) Effective Date.—The amendments made by this section shall apply to bonds issued after the date of the enactment of this Act.