SEC. 2. BACKGROUND

.01 Section 103(a) provides that, except as provided in § 103(b), gross income does not include interest on any state or local bond. Section 103(b)(1) provides that § 103(a) shall not apply to any private activity bond that is not a ‘‘qualified bond’’ within the meaning of § 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 § 146, and (3) meets the applicable requirements under § 147.

.02 Section 143(a)(1) provides that the term ‘‘qualified mortgage bond’’ means a bond that is issued as part of a ‘‘qualified mortgage issue’’. Section 143(a)(2)(A) provides that the term ‘‘qualified mortgage issue’’ means an issue of one or more bonds by a state or political subdivision thereof, 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) of § 143; (iii) the issue does not meet the private business tests of paragraphs (1) and (2) of § 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 § 143 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 § 143(j)(1)(A) to include residences in a qualified census tract. A ‘‘qualified census tract’’, according to § 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) 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.

.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 available 3 months prior to the date of issuance and shall not be affected by official changes to the data during or after that 3-month period. .06 Qualified census tracts for the states and the District of Columbia, based on the 1990 census, were most

recently published in Rev. Proc. 93–38, 1993–2 C.B. 483. .07 Section 143(k)(2)(A) provides that the term ‘‘statistical area’’ means (i) a metropolitan statistical area (MSA), and (ii) any county (or the portion thereof) that is not within an MSA.

.08 An MSA is an area that contains a city of at least 50,000 population, or an urbanized area of at least 50,000 with a total metropolitan population of at least 100,000. See Office of Management and Budget Release No. OMB– 93–05, dated December 28, 1992. .09 A state or local government may elect to exchange all or part of its qualified mortgage bond authority for authority to issue mortgage credit certificates. In general, the recipient of a mortgage credit certificate may claim a federal income tax credit equal to the product of the certificate credit rate and the interest paid or accrued during the tax year on the remaining principal of the certified indebtedness amount. Section 25(c)(2)(A)(iii)(V) provides that the indebtedness certified by mortgage credit certificates must meet the requirements of § 143(h) concerning the portion of loans to be placed in targeted areas.

.10 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.