26 U.S.C. § 141 — Private activity bond; qualified bond

(a) Private activity bond. A bond issued as part of a bond issue is a "private activity bond" if it meets either: (1) both the private business use test and the private security or payment test described in subsection (b), or (2) the private loan financing test described in subsection (c). (b) Private business tests. (1) Private business use test: generally, an issue meets this test if more than 10 percent of its proceeds are used for any private business use. (2) Private security or payment test: generally, an issue meets this test if more than 10 percent of the principal or interest owed on it is, directly or indirectly, secured by an interest in property used for private business (or by payments tied to that property), or is to be paid from money linked to private business use. (3) 5 percent test for private business use unrelated or disproportionate to the issue's government use: an issue is treated as meeting tests (1) and (2) if it would meet them using a 5 percent threshold instead of 10 percent, counting only proceeds used for private business unrelated to the issue's government use, the "disproportionate" related private-use proceeds, and payments, property, or borrowed money tied to either. "Disproportionate related business use proceeds" means the total, across each related private business use, of the amount by which proceeds used for that private use exceed the proceeds used for the government use it's related to. (4) Lower limit for certain output facilities (electric or gas facilities, but not water facilities): if 5 percent or more of an issue's proceeds go to such a facility, the issue is treated as meeting tests (1) and (2) if its "nonqualified amount" exceeds $15,000,000 minus the nonqualified amounts of prior tax-exempt issues (5 percent or more of which went to the same or a related facility). Bonds no longer outstanding at the time of the later issue, or being redeemed (other than through an advance refunding) from that later issue, don't count toward the prior total. (5) Coordination with the state volume cap when the nonqualified amount exceeds $15,000,000: if the nonqualified amount exceeds $15,000,000 but stays under the amount that would otherwise make the bond a private activity bond, the bond is still treated as a private activity bond — unless the issuer allocates enough of its volume cap under section 146 to cover the excess over $15,000,000. (6) "Private business use" means use, directly or indirectly, in a trade or business carried on by anyone other than a government unit; use by the general public doesn't count. Any activity carried on by someone who isn't a natural person (like a corporation) is treated as a trade or business. The sale of carbon dioxide captured by a qualified carbon dioxide capture facility owned by a government unit is not private business use. (7) "Government use" means any use that isn't private business use. (8) "Nonqualified amount" means, for an issue, the smaller of: the proceeds used for private business use, or the proceeds tied to the payments, property, or borrowed money described in paragraph (2). (9) Exception for qualified 501(c)(3) bonds: this subsection and subsection (c) don't count the portion of proceeds that would be a qualified 501(c)(3) bond if issued separately, if the issuer elects to treat it that way. (c) Private loan financing test. (1) An issue meets this test if the proceeds used, directly or indirectly, to make or finance loans (other than the excepted loans below) to non-government borrowers exceed the smaller of 5 percent of the proceeds or $5,000,000. (2) Excepted loans are ones that: let the borrower pay a general governmental tax or assessment for a specific essential government function; are a "nonpurpose investment" as defined in section 148(f)(6)(A); or are a qualified natural gas supply contract as defined in section 148(b)(4). (d) Certain issues used to buy nongovernmental output property are treated as private activity bonds. (1) An issue is a private activity bond if the proceeds used, directly or indirectly, for a government unit to buy "nongovernmental output property" exceed the smaller of 5 percent of the proceeds or $5,000,000. (2) "Nongovernmental output property" generally means property that, before the government bought it, was used (or held for use) by someone other than a government unit in connection with an output facility (like electricity or gas, but not a water facility) — use before October 14, 1987 doesn't count. (3) Exception for property serving certain areas: property isn't "nongovernmental output property" if 95 percent or more of the output from the connected facility will be consumed in either the government unit's "qualified service area" or its "qualified annexed area." A "qualified service area" is any area the government unit has continuously provided the same type of output to for the 10 years before buying the property (ignoring time before October 14, 1987). A "qualified annexed area" is an area that is next to, and formally annexed for general government purposes into, a qualified service area, where output from the new property is made available to everyone in the annexed area, and the annexed area is no more than 10 percent the size of the qualified service area — unless the added output capacity from the annexation is itself no more than 10 percent of the capacity already serving that qualified service area, in which case the size limit doesn't apply. For comparing sizes and capacities, use figures as of the end of the calendar year before the acquisition or annexation, and once annexed, an area counts as part of the service area for judging later annexations. (4) Exception for property later converted to a non-output use: property isn't "nongovernmental output property" if it will be converted to a use unconnected with an output facility — except this exception doesn't cover property that's part of a nuclear power facility's output function. (5) Special rules: for a bond that's a private activity bond solely because of this subsection, the land- and existing-property-acquisition limits in section 147(c) and (d) don't apply, and section 142(a)(8) is applied as if it didn't say "local." (6) For nongovernmental output property bought by a joint action agency whose members are government units, this subsection applies at each member's level, treating each member as buying its proportionate share. (7) "Nongovernmental output property" doesn't include a contract to prepay for electricity or natural gas, if that contract isn't "investment property" under section 148(b)(2). (e) Qualified bond. A private activity bond is a "qualified bond" if: (1) it is one of these types — an exempt facility bond, a qualified mortgage bond, a qualified veterans' mortgage bond, a qualified small issue bond, a qualified student loan bond, a qualified redevelopment bond, or a qualified 501(c)(3) bond; (2) it's issued as part of an issue that meets the volume-cap requirements of section 146; and (3) it meets the applicable requirements of every subsection of section 147.