Tax-Exempt Bond Reform Act of 1986

Tax-Exempt Bond Reform Act of 1986 - Amends the Internal Revenue Code to replace the term "industrial development bonds" with the new term "quasi-governmental bonds." Defines "quasi-governmental bond" as any obligation: (1) which is issued as part of an issue more than 25 percent of the net proceeds of which are to be used directly or indirectly in any trade or business carried on by any person other than a governmental unit; and (2) the payment of the principal or interest on which is, to the extent of more than 25 percent, secured by an interest in property used or to be used in a trade or business or in payments with respect of property, or to be derived from payments in respect of property, or borrowed money, used or to be used in trade or business. Sets forth rules concerning the use of proceeds in ways which will not be considered to be used in a trade or business carried on by other than a governmental unit.

Provides that an issue of obligations will not be treated as quasi-governmental bonds if 95 percent or more of the proceeds are to be used to provide projects for residential rental or limited-equity cooperative property if certain conditions are satisfied.

Provides that certain issues will not be treated as quasi-governmental bonds if 95 percent or more of the net proceeds of the issue are used for certain specified activities. Provides that when 95 percent or more of the net proceeds of an industrial park or small issue are used for such purposes, then the bonds are tax-exempt.

Repeals the termination date for the small issue industrial development bond exemption. Sets forth the definition of "principal user" for purposes of certain facilities.

Provides that obligations where 95 percent of the proceeds are to be used by nonprofit organizations in activities which do not constitute unrelated trade or businesses shall not be treated as quasi-governmental bonds. Provides that qualified mortgage bonds, qualified veterans' mortgage bonds, qualified student loan bonds, and qualified tax-increment bonds will not be treated as quasi-governmental bonds.

Modifies the requirements with respect to tax-exempt bonds used for low-income housing involving residential or limited-equity cooperative property.

Makes other modifications with respect to quasi-governmental bonds.

Modifies the definition of "arbitrage bond" for purposes of determining the tax-exemption for such bonds. Repeals the exception for obligations used for educational institutions.

Makes modifications in certain special rules relating to arbitrage bonds.

Provides that certain irrigation dams shall be treated as air or water pollution control facilities if certain conditions are met for purposes of quasi-governmental bonds.

Makes modifications with respect to qualified scholarship funding bonds, federally guaranteed obligations, and qualified steam generating or alcohol producing facilities.

Provides that an obligation is federally guaranteed if more than five percent of the net proceeds of such issue is used to make loans guaranteed by the Federal Government or invested in federally insured deposits.

Requires public approval for quasi-governmental bonds.

Requires certain informational reporting to the Secretary of the Treasury with respect to quasi-governmental bonds.

Substitutes the term "quasi-governmental" for the term "private activity". Increases the dollar amount of the State ceiling on quasi-governmental bonds to $225 multiplied by the State's population or $260,000,000. Provides special rules for allocating the volume cap with respect to States with constitutional home rule cities.

Modifies the refunding rules with respect to student loan bonds, qualified mortgage bonds, and qualified veterans' mortgage bonds.

Substitutes the term "private loan bonds" for the term "consumer loan bonds." Requires that more than five percent of the net proceeds of the issue must be used for certain purposes in order to be classified as private loan bonds.

Makes various modifications in the definition and requirements for qualified student loan bonds and tax-increment bonds.

Provides that the tax-exempt status of an obligation issued for the purpose of the advance refunding of a tax-exempt obligation or quasi-governmental bonds will not be allowed unless certain conditions are satisfied.

Provides rules for the change in use or ownership of facilities financed by certain tax-exempt obligations.

Defines "net proceeds" to mean the proceeds of an issue reduced by insurance costs and a reasonably required reserve and replacement fund.

Makes certain changes in the provisions concerning the mortgage credit certificate program.

Directs the Secretary of the Treasury to amend the regulations relating to the arbitrage requirements to eliminate the provision which permits a higher yield on purpose obligations if the issuer elects to waive the benefits of the temporary period provisions.

Provides a penalty for failure to file certain reports on compliance with the qualified residential project rules.

Makes certain technical and conforming amendments to the Internal Revenue Code and to the securities laws.

Provides that, generally, the effective date for these provisions will apply to obligations issued after the date of enactment of this Act. Sets forth other effective dates for specific provisions.

Provides that tax-exempt financing of low income housing, or of water, sewer, and solid waste facilities will not effect the depreciation of such property.

Prohibits the deduction of interest expenses of financial institutions allocable to tax-exempt securities. Sets forth the formula for making such allocation.

Provides that a certain percentage of tax-exempt interest received by an insurance company shall be subtracted from the amount of losses incurred by the company in calculating taxable income.

Provides that an individual is not required to report on tax returns either the tax-exempt interest received or the receipt of State and local tax payments.