SECTION 3. BACKGROUND

.01 Section 103(a) of the Code provides that, except as provided in section 103(b), gross income does not include interest on any state or local bond. Section 103(b)(1) provides that section 103(a) shall not apply to any private activity bond that is not a “qualified bond” within the meaning of section 141. Section 141(e) provides that the term “qualified bond” includes any private activity bond if that bond: (1) is a qualified mortgage bond; (2) meets the volume cap requirements under section 146; and (3) meets the applicable requirements under section 147.

.02 Section 143(a)(1) of the Code provides that the term “qualified mortgage bond” means a bond which is issued as part of a “qualified mortgage issue”. Section 143(a)(2)(A) provides that the term “qualified mortgage issue” means an issue by

a state or political subdivision thereof of one or more bonds but only if: (i) all proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner occupied residences; (ii) the issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7); (iii) the issue does not meet the private business tests of paragraphs (1) and (2) of section 141(b); and (iv) with respect to amounts received more than 10 years after the date of issuance, repayments of $250,000 or more of principal on financing provided by the issue are used not later than the close of the first semi-annual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds that are part of the issue.

.03 An issue of bonds meets the requirements of subsection (h) of section 143 of the Code only if at least 20 percent of the proceeds of the issue is made available for owner financing of “targeted area residences” for at least 1 year after the date on which owner financing is first made available with respect to targeted area residences. Subsection (h)(2) provides, however, that the amount made available need not exceed 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences located in targeted areas within the jurisdiction of the issuing authority.

.04 Targeted area residences are defined in section 143(j)(1)(A) to include residences in a qualified census tract. A “qualified census tract”, according to section 143(j)(2)(A), is a census tract in which 70 percent or more of the families have income that is 80 percent or less of the statewide median family income. Section 143(j)(2)(B) of the Code provides that the determination that a census tract is a “qualified census tract” must be based on the most recent decennial census for which data are available. The last list of qualified census tracts, published in Rev. Proc. 2003–15, 2003–4 I.R.B. 321, was based on the 2000 Census.

.05 Section 6a.103A–2(b)(4)(ii) of the Temporary Income Tax Regulations provides that, with respect to any particular bond issue, the determination that a census tract is a “qualified census tract” may be based upon the decennial census data

2003-29 I.R.B. 89 July 21, 2003

.09 The list of qualified census tracts is developed by HUD for publication by the service. HUD's determination is based upon decennial census data received by HUD from the Bureau of the Census.