Internal Revenue Code:Sec. 1397E. Credit to holders of qualified zone academy bonds

From TaxAlmanac

Location in Internal Revenue Code

     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter U - Designation and Treatment of Empowerment Zones,
              Enterprise Communities, and Rural Development Investment Areas
          PART IV - INCENTIVES FOR EDUCATION ZONES
        

Statute

    Sec. 1397E. Credit to holders of qualified zone academy bonds
 
    (a) Allowance of credit
      In the case of an eligible taxpayer who holds a qualified zone
    academy bond on the credit allowance date of such bond which occurs
    during the taxable year, there shall be allowed as a credit against
    the tax imposed by this chapter for such taxable year the amount
    determined under subsection (b).
    (b) Amount of credit
      (1) In general
        The amount of the credit determined under this subsection with
      respect to any qualified zone academy bond is the amount equal to
      the product of -
          (A) the credit rate determined by the Secretary under
        paragraph (2) for the month in which such bond was issued,
        multiplied by
          (B) the face amount of the bond held by the taxpayer on the
        credit allowance date.
      (2) Determination
        During each calendar month, the Secretary shall determine a
      credit rate which shall apply to bonds issued during the
      following calendar month.  The credit rate for any month is the
      percentage which the Secretary estimates will permit the issuance
      of qualified zone academy bonds without discount and without
      interest cost to the issuer.
    (c) Limitation based on amount of tax
      The credit allowed under subsection (a) for any taxable year
    shall not exceed the excess of -
        (1) the sum of the regular tax liability (as defined in section
      26(b)) plus the tax imposed by section 55, over
        (2) the sum of the credits allowable under part IV of
      subchapter A (other than subpart C thereof, relating to
      refundable credits, and subpart H thereof).
    (d) Qualified zone academy bond
      For purposes of this section -
      (1) In general
        The term ''qualified zone academy bond'' means any bond issued
      as part of an issue if -
          (A) 95 percent or more of the proceeds of such issue are to
        be used for a qualified purpose with respect to a qualified
        zone academy established by an eligible local education agency,
          (B) the bond is issued by a State or local government within
        the jurisdiction of which such academy is located,
          (C) the issuer -
            (i) designates such bond for purposes of this section,
            (ii) certifies that it has written assurances that the
          private business contribution requirement of paragraph (2)
          will be met with respect to such academy, and
            (iii) certifies that it has the written approval of the
          eligible local education agency for such bond issuance,
          (D) the term of each bond which is part of such issue does
        not exceed the maximum term permitted under paragraph (3), and
          (E) the issue meets the requirements of subsections (f), (g), 
        and (h).
      (2) Private business contribution requirement
        (A) In general
          For purposes of paragraph (1), the private business
        contribution requirement of this paragraph is met with respect
        to any issue if the eligible local education agency that
        established the qualified zone academy has written commitments
        from private entities to make qualified contributions having a
        present value (as of the date of issuance of the issue) of not
        less than 10 percent of the proceeds of the issue.
        (B) Qualified contributions
          For purposes of subparagraph (A), the term ''qualified
        contribution'' means any contribution (of a type and quality
        acceptable to the eligible local education agency) of -
            (i) equipment for use in the qualified zone academy
          (including state-of-the-art technology and vocational
          equipment),
            (ii) technical assistance in developing curriculum or in
          training teachers in order to promote appropriate market
          driven technology in the classroom,
            (iii) services of employees as volunteer mentors,
            (iv) internships, field trips, or other educational
          opportunities outside the academy for students, or
            (v) any other property or service specified by the eligible
          local education agency.
      (3) Term requirement
        During each calendar month, the Secretary shall determine the
      maximum term permitted under this paragraph for bonds issued
      during the following calendar month.  Such maximum term shall be
      the term which the Secretary estimates will result in the present
      value of the obligation to repay the principal on the bond being
      equal to 50 percent of the face amount of the bond.  Such present
      value shall be determined using as a discount rate the average
      annual interest rate of tax-exempt obligations having a term of
      10 years or more which are issued during the month.  If the term
      as so determined is not a multiple of a whole year, such term
      shall be rounded to the next highest whole year.
      (4) Qualified zone academy
        (A) In general
          The term ''qualified zone academy'' means any public school
        (or academic program within a public school) which is
        established by and operated under the supervision of an
        eligible local education agency to provide education or
        training below the postsecondary level if -
            (i) such public school or program (as the case may be) is
          designed in cooperation with business to enhance the academic
          curriculum, increase graduation and employment rates, and
          better prepare students for the rigors of college and the
          increasingly complex workforce,
            (ii) students in such public school or program (as the case
          may be) will be subject to the same academic standards and
          assessments as other students educated by the eligible local
          education agency,
            (iii) the comprehensive education plan of such public
          school or program is approved by the eligible local education
          agency, and
            (iv)(I) such public school is located in an empowerment
          zone or enterprise community (including any such zone or
          community designated after the date of the enactment of this
          section), or
            (II) there is a reasonable expectation (as of the date of
          issuance of the bonds) that at least 35 percent of the
          students attending such school or participating in such
          program (as the case may be) will be eligible for free or
          reduced-cost lunches under the school lunch program
          established under the Richard B. Russell National School
          Lunch Act.
        (B) Eligible local education agency
          The term ''eligible local education agency'' means any local
        educational agency as defined in section 9101 of the Elementary
        and Secondary Education Act of 1965.
      (5) Qualified purpose
        The term ''qualified purpose'' means, with respect to any
      qualified zone academy -
          (A) rehabilitating or repairing the public school facility in
        which the academy is established,
          (B) providing equipment for use at such academy,
          (C) developing course materials for education to be provided
        at such academy, and
          (D) training teachers and other school personnel in such
        academy.
      (6) Eligible taxpayer
        The term ''eligible taxpayer'' means -
          (A) a bank (within the meaning of section 581),
          (B) an insurance company to which subchapter L applies, and
          (C) a corporation actively engaged in the business of lending
        money.
    (e) Limitation on amount of bonds designated
      (1) National limitation
        There is a national zone academy bond limitation for each
      calendar year.  Such limitation is $400,000,000 for 1998, 1999,
      2000, 2001, 2002, 2003, 2004, 2005, 2006, and 2007 and, except 
      as provided in paragraph (4), zero thereafter.    
      (2) Allocation of limitation
        The national zone academy bond limitation for a calendar year
      shall be allocated by the Secretary among the States on the basis
      of their respective populations of individuals below the poverty
      line (as defined by the Office of Management and Budget). The
      limitation amount allocated to a State under the preceding
      sentence shall be allocated by the State education agency to
      qualified zone academies within such State.
      (3) Designation subject to limitation amount
        The maximum aggregate face amount of bonds issued during any
      calendar year which may be designated under subsection (d)(1)
      with respect to any qualified zone academy shall not exceed the
      limitation amount allocated to such academy under paragraph (2)
      for such calendar year.
      (4) Carryover of unused limitation
        If for any calendar year -
          (A) the limitation amount for any State, exceeds
          (B) the amount of bonds issued during such year which are
        designated under subsection (d)(1) with respect to qualified
        zone academies within such State,
      the limitation amount for such State for the following calendar
      year shall be increased by the amount of such excess.  Any
      carryforward of a limitation amount may be carried only to the
      first 2 years (3 years for carryforwards from 1998 or 1999)
      following the unused limitation year.  For purposes of the
      preceding sentence, a limitation amount shall be treated as used
      on a first-in first-out basis.
    (f) Special Rules Relating to Expenditures.--
            (1) In general.--An issue shall be treated as meeting the 
        requirements of this subsection if, as of the date of issuance, 
        the issuer reasonably expects--
                    (A) at least 95 percent of the proceeds from the 
                sale of the issue are to be spent for 1 or more 
                qualified purposes with respect to qualified zone 
                academies within the 5-year period beginning on the date 
                of issuance of the qualified zone academy bond,
                    (B) a binding commitment with a third party to 
                spend at least 10 percent of the proceeds from the sale 
                of the issue will be incurred within the 6-month period 
                beginning on the date of issuance of the qualified zone 
                academy bond, and
                    (C) such purposes will be completed with due 
                diligence and the proceeds from the sale of the issue 
                will be spent with due diligence.
            (2) Extension of period.--Upon submission of a request 
        prior to the expiration of the period described in paragraph 
        (1)(A), the Secretary may extend such period if the issuer 
        establishes that the failure to satisfy the 5-year requirement 
        is due to reasonable cause and the related purposes will 
        continue to proceed with due diligence.
            (3) Failure to spend required amount of bond proceeds 
        within 5 years.--To the extent that less than 95 percent of the 
        proceeds of such issue are expended by the close of the 5-year 
        period beginning on the date of issuance (or if
        an extension has been obtained under paragraph (2), by the close 
        of the extended period), the issuer shall redeem all of the 
        nonqualified bonds within 90 days after the end of such period. 
        For purposes of this paragraph, the amount of the nonqualified 
        bonds required to be redeemed shall be determined in the same 
        manner as under section 142.
    (g) Special Rules Relating to Arbitrage.--An issue shall be 
      treated as meeting the requirements of this subsection if the issuer 
    satisfies the arbitrage requirements of section 148 with respect to 
    proceeds of the issue.
    (h) Reporting.--Issuers of qualified academy zone bonds shall 
      submit reports similar to the reports required under section 149(e).
    (i) Other definitions
      For purposes of this section -
      (1) Credit allowance date
        The term ''credit allowance date'' means, with respect to any
      issue, the last day of the 1-year period beginning on the date of
      issuance of such issue and the last day of each successive 1-year
      period thereafter.
      (2) Bond
        The term ''bond'' includes any obligation.
      (3) State
        The term ''State'' includes the District of Columbia and any
      possession of the United States.
    (j) Credit included in gross income
      Gross income includes the amount of the credit allowed to the
    taxpayer under this section (determined without regard to
    subsection (c)).

    [Energy Policy Act of 2005,PL109-058, amended Section (h), effective for bonds
     issued after December 31, 2005, as follows:] 
    (k) Credit Treated as Nonrefundable Bondholder Credit- 
      For purposes of this title, the credit allowed by this section shall
      be treated as a credit allowable under subpart H of part IV of 
      subchapter A of this chapter.

     [Prior to the Energy Policy Act of 2005, Sec. (h) read as follows:]
    (h) Credit treated as allowed under part IV of subchapter A
      For purposes of subtitle F, the credit allowed by this section
      shall be treated as a credit allowable under part IV of subchapter
      A of this chapter.

    (l) S Corporations.--In the case of a qualified zone academy bond 
        held by an S corporation which is an eligible taxpayer--
        (1) each shareholder shall take into account such 
        shareholder's pro rata share of the credit, and
        (2) no basis adjustments to the stock of the corporation 
        shall be made under section 1367 on account of this section.
 

Sources

    (Added Pub. L. 105-34, title II, Sec. 226(a), Aug. 5, 1997, 111
    Stat. 821; amended Pub. L. 105-206, title VI, Sec. 6004(g)(2)-(4),
    July 22, 1998, 112 Stat. 796; Pub. L. 106-78, title VII, Sec.
    752(b)(11), Oct. 22, 1999, 113 Stat. 1169; Pub. L. 106-170, title
    V, Sec. 509, Dec. 17, 1999, 113 Stat. 1924; Pub. L. 107-110, title
    X, Sec. 1076(t), Jan. 8, 2002, 115 Stat. 2092.)
 

References in Text

                             REFERENCES IN TEXT
      The date of the enactment of this section, referred to in subsec.
    (d)(4)(A)(iv)(I), is the date of enactment of Pub. L. 105-34, which
    was approved Aug. 5, 1997.
      The Richard B. Russell National School Lunch Act, referred to in
    subsec. (d)(4)(A)(iv)(II), is act June 4, 1946, ch. 281, 60 Stat.
    230, as amended, which is classified generally to chapter 13 (Sec.
    1751 et seq.) of Title 42, The Public Health and Welfare. For
    complete classification of this Act to the Code, see Short Title
    note set out under section 1751 of Title 42 and Tables.
      Section 9101 of the Elementary and Secondary Education Act of
    1965, referred to in subsec. (d)(4)(B), is classified to section
    7801 of Title 20, Education.
 

Miscellaneous

                                 AMENDMENTS

2006 - Tax Relief and Health Care Act of 2006 (P.L. 109-432)
SEC. 107. EXTENSION AND MODIFICATION OF QUALIFIED ZONE ACADEMY BONDS.
    (a) In General.--Paragraph (1) of section 1397E(e) is amended by 
striking ``and 2005'' and inserting ``2005, 2006, and 2007''.
    (b) Special Rules Relating to Expenditures, Arbitrage, and 
Reporting.--
            (1) In general.--Section 1397E is amended--
                    (A) in subsection (d)(1), by striking ``and'' at the 
                end of subparagraph (C)(iii), by striking the period at 
                the end of subparagraph (D) and inserting ``, and'', and 
                by adding at the end the following new subparagraph:
                    ``(E) the issue meets the requirements of 
                subsections (f), (g), and (h).'', and
                    (B) by redesignating subsections (f), (g), (h), and 
                (i) as subsections (i), (j), (k), and (l), respectively, 
                and by inserting after subsection (e) the following new 
                subsections:
    ``(f) Special Rules Relating to Expenditures.--
            ``(1) In general.--An issue shall be treated as meeting the 
        requirements of this subsection if, as of the date of issuance, 
        the issuer reasonably expects--
                    ``(A) at least 95 percent of the proceeds from the 
                sale of the issue are to be spent for 1 or more 
                qualified purposes with respect to qualified zone 
                academies within the 5-year period beginning on the date 
                of issuance of the qualified zone academy bond,
                    ``(B) a binding commitment with a third party to 
                spend at least 10 percent of the proceeds from the sale 
                of the issue will be incurred within the 6-month period 
                beginning on the date of issuance of the qualified zone 
                academy bond, and
                    ``(C) such purposes will be completed with due 
                diligence and the proceeds from the sale of the issue 
                will be spent with due diligence.
            ``(2) Extension of period.--Upon submission of a request 
        prior to the expiration of the period described in paragraph 
        (1)(A), the Secretary may extend such period if the issuer 
        establishes that the failure to satisfy the 5-year requirement 
        is due to reasonable cause and the related purposes will 
        continue to proceed with due diligence.
            ``(3) Failure to spend required amount of bond proceeds 
        within 5 years.--To the extent that less than 95 percent of the 
        proceeds of such issue are expended by the close of the 5-year 
        period beginning on the date of issuance (or if
        an extension has been obtained under paragraph (2), by the close 
        of the extended period), the issuer shall redeem all of the 
        nonqualified bonds within 90 days after the end of such period. 
        For purposes of this paragraph, the amount of the nonqualified 
        bonds required to be redeemed shall be determined in the same 
        manner as under section 142.
    ``(g) Special Rules Relating to Arbitrage.--An issue shall be 
treated as meeting the requirements of this subsection if the issuer 
satisfies the arbitrage requirements of section 148 with respect to 
proceeds of the issue.
    ``(h) Reporting.--Issuers of qualified academy zone bonds shall 
submit reports similar to the reports required under section 149(e).''.
            (2) Conforming amendments.--Sections 54(l)(3)(B) and 
        1400N(l)(7)(B)(ii) <<NOTE: 26 USC 54, 1400N.>> are each amended 
        by striking ``section 1397E(i)'' and inserting ``section 
        1397E(l)''.
    
     2005 - Energy Policy Act of 2005,PL109-058, made these admendments:
     Section 1397E(c)(2) is amended by inserting `, and subpart H thereof'
     after `refundable credits';  Subsection (h) of section 1397E is
     amended to read as follows: "(h) Credit Treated as Nonrefundable 
     Bondholder Credit- For purposes of this title, the credit allowed by 
     this section shall be treated as a credit allowable under subpart H
     of part IV of subchapter A of this chapter."  Effective Date- The
     amendments made by this section shall apply to bonds issued after 
     December 31, 2005. 

      2004 - Subsec.406(c),Pub.L.108-311, amended Sec.1397E
     by adding a new subsection (i).
      2004 - Subsec.304(a), Pub.L.108-311, amended Sec.1397E(e)(1)
     by striking "and 2003" and inserting "2003, 2004, and 2005".
     Effective Date.--The amendment made by this section shall 
     apply to obligations issued after December 31, 2003.
      2002 - Subsec. 608(a), Pub. L. 107-147, amended Sec. 1397E(e)
    (1)by substituting 2000, 2001, 2002, and 2003 for 2000 and 2001.
    This Amendment shall apply to obligations issued after the date of 
    the enactment of this Act.
      2002 - Subsec. (d)(4)(B). Pub. L. 107-110 substituted ''9101''
    for ''14101''.
      1999 - Subsec. (d)(4)(A)(iv)(II). Pub. L. 106-78 substituted
    ''Richard B. Russell National School Lunch Act'' for ''National
    School Lunch Act''.
      Subsec. (e)(1). Pub. L. 106-170, Sec. 509(a), substituted '',
    1999, 2000, and 2001'' for ''and 1999''.
      Subsec. (e)(4). Pub. L. 106-170, Sec. 509(b), inserted at end
    ''Any carryforward of a limitation amount may be carried only to
    the first 2 years (3 years for carryforwards from 1998 or 1999)
    following the unused limitation year.  For purposes of the
    preceding sentence, a limitation amount shall be treated as used on
    a first-in first-out basis.''
      1998 - Subsec. (d)(4)(B). Pub. L. 105-206, Sec. 6004(g)(2),
    substituted ''local educational agency as defined'' for ''local
    education agency as defined''.
      Subsec. (g). Pub. L. 105-206, Sec. 6004(g)(4), inserted
    ''(determined without regard to subsection (c))'' after
    ''section''.
      Subsec. (h). Pub. L. 105-206, Sec. 6004(g)(3), added subsec. (h).

                      EFFECTIVE DATE OF 2006 AMENDMENT
2006 - Tax Relief and Health Care Act of 2006 (P.L. 109-432)
SEC. 107. EXTENSION AND MODIFICATION OF QUALIFIED ZONE ACADEMY BONDS.
    (c) <<NOTE: 26 USC 1397E note.>> Effective Dates.--
            (1) Extension.--The amendment made by subsection (a) shall 
        apply to obligations issued after December 31, 2005.
            (2) Special rules.--The amendments made by subsection (b) 
        shall apply to obligations issued after the date of the 
        enactment of this Act pursuant to allocations of the national 
        zone academy bond limitation for calendar years after 2005.

                      EFFECTIVE DATE OF 2002 AMENDMENT
      Amendment by Pub. L. 107-110 effective Jan. 8, 2002, except with
    respect to certain noncompetitive programs and competitive
    programs, see section 5 of Pub. L. 107-110, set out as an Effective
    Date note under section 6301 of Title 20, Education.
                      EFFECTIVE DATE OF 1998 AMENDMENT
      Amendment by Pub. L. 105-206 effective, except as otherwise
    provided, as if included in the provisions of the Taxpayer Relief
    Act of 1997, Pub. L. 105-34, to which such amendment relates, see
    section 6024 of Pub. L. 105-206, set out as a note under section 1
    of this title.
                               EFFECTIVE DATE
      Section 226(c) of Pub. L. 105-34 provided that: ''The amendments
    made by this section (enacting this section and renumbering section
    1397D as section 1397F of this title) shall apply to obligations
    issued after December 31, 1997.''