26 U.S.C. § 150 — Definitions and special rules

(a) General rule. For this part of the tax law, several terms have specific meanings. "Bond" includes any kind of obligation, not just a formal bond. "Governmental unit" does not include the United States federal government or its agencies. "Net proceeds" means an issue's proceeds, minus money held in a reasonably required reserve or replacement fund. "501(c)(3) organization" means an organization described in tax code section 501(c)(3) that's tax-exempt under section 501(a). Property is treated as owned by a governmental unit if it's held on that unit's behalf. And "tax-exempt," for a bond, means the interest on it is left out of taxable income. (b) Change in use of facilities financed with tax-exempt private activity bonds. This subsection takes away the interest deduction when a financed property stops being used the way the law required. If a home financed by a tax-exempt mortgage bond or veterans' mortgage bond stops being at least one borrower's main home for a full year or more, no interest deduction is allowed for that period — starting when the home stopped being a main residence and ending when it becomes one again. That penalty doesn't apply if the Secretary decides enforcing it would cause undue hardship, and the borrower lost main-residence status through circumstances beyond their control. If a rental housing project was financed with a bond meant to be tax exempt for residential rental property, but the project fails to meet the low-income housing requirements in section 142(d), no interest deduction is allowed starting from the beginning of the tax year the project fails those rules, until it meets them again. If the original bond was refunded, this same rule applies to the newer refunding bond, using the older version of the housing rule. If part of a facility financed by a bond meant to be a tax-exempt charity bond gets used in a business by anyone other than a 501(c)(3) charity or a government — but a 501(c)(3) charity still owns that part — the owner is treated as running an unrelated business on that part, and must report at least the fair rental value of that part as income. No interest deduction is allowed for that period of improper use either. If a facility financed by certain other tax-exempt bonds — exempt facility bonds other than the residential rental type, or qualified small issue bonds — is used for a purpose that wouldn't have qualified for tax-exempt financing when the bond was issued, no interest deduction is allowed while that improper use continues. If a facility was financed by a bond meant to be tax-exempt on the condition that a government or a 501(c)(3) charity owns it, but that ownership requirement stops being true, no interest deduction is allowed while it isn't owned that way. And if a bond meant to be a qualified small issue bond stops qualifying because spending goes over the legal limit, no interest deduction is allowed while it doesn't qualify. (c) Exception and special rules for purposes of subsection (b). Any use of the facility that the bond's tax-exempt purpose never required doesn't count against the owner under subsection (b). If the amounts paid for using the facility aren't technically "interest," subsection (b) still applies to them as if they were — but only up to the amount of interest that actually accrued on the bond for that period. If someone uses only part of a facility, only the interest tied to financing that part counts for them. If only part of a facility stops being used properly, only the interest tied to financing that part is affected. And the Secretary must write regulations needed to carry out subsection (b) and this subsection. (d) Qualified scholarship funding bond. A qualified scholarship funding bond is treated the same as a state or local government bond. It's a bond issued by a nonprofit corporation that exists only to buy up student loan notes made under the Higher Education Act of 1965, and that is either set up at a state or local government's request, or is required — by its own charter and bylaws, or by state law — to put leftover income, after expenses, debt payments, and reserves, back into buying more student loans, or to pay it to the United States. An issuer can choose to stop being this kind of nonprofit without losing its bonds' tax-exempt status, as long as it follows a strict process. It must transfer all its student loan notes and pledged assets to a new, taxable corporation within a reasonable time. That new corporation must take over paying off the old bonds. It must also take over the old issuer's responsibilities and rights under its agreements with the Department of Education. Right after the transfer, the old issuer — and any other issuer that made this same election involving that new corporation — must hold all the "senior stock" in it. And the new corporation must not be tax-exempt. The old issuer must then, within a reasonable time, actually become a 501(c)(3) tax-exempt charity, stop meeting the old definition of a scholarship funding corporation, and have at least 80 percent independent directors — meaning directors who aren't paid for any other work connected to the new corporation, or for serving as one of its officers. "Senior stock" is a special class of stock. It shares fully and equally in the company's value with other common stock, but gets paid first if the company is liquidated. It has a fixed right, when liquidated or redeemed, to whichever is higher: the stock's fair market value, or the value of everything the old issuer transferred, minus debts the new corporation took on. Its holder can force the new corporation to redeem it within 10 years of issuance. And while it's outstanding, no other stock can outrank it in liquidation, redemption, or dividend rights. For two specific private foundation taxes — the tax on failing to distribute income, and the tax on holding too much stock in a business — the new corporation is treated as functionally related to the old issuer, until the earlier of: the last tax year in which more than half the new corporation's income or assets still come from these old student loans, or ten years after the election was made. This election can only be undone with the Secretary's permission. (e) Bonds of certain volunteer fire departments. A bond issued by a qualifying volunteer fire department is treated as a bond of a state's political subdivision if the department is a "qualified volunteer fire department" for an area within that subdivision, and at least 95 percent of the bond's net proceeds pay for building, buying, rebuilding, or improving a firehouse — including the land under it — or a firetruck the department uses. A "qualified volunteer fire department" is an organization set up to provide firefighting or emergency medical service in an area that has no other firefighting service, and that the local government has required, in writing, to provide that service. In deciding whether an area already has "other" firefighting service, service from another qualified volunteer department doesn't count against this test, as long as both departments have continuously served that area since January 1, 1981. A bond that meets these rules is treated as a private activity bond only for two narrow purposes elsewhere in the tax code — not for every rule that normally applies to private activity bonds.