Section 135. Income from United States savings bonds used to pay higher education tuition and fees
(a) General rule. In the case of an individual who pays qualified higher education expenses during the taxable year, no amount shall be includible in gross income by reason of the redemption during such year of any qualified United States savings bond.
(b) Limitations.
(1) Limitation where redemption proceeds exceed higher education expenses.
(A) In general. If-
(i) the aggregate proceeds of qualified United States savings bonds redeemed by the taxpayer during the taxable year exceed
(ii) the qualified higher education expenses paid by the taxpayer during such taxable year,
the amount excludable from gross income under subsection (a) shall not exceed the applicable fraction of the amount excludable from gross income under subsection (a) without regard to this subsection.
(B) Applicable fraction. For purposes of subparagraph (A), the term "applicable fraction" means the fraction the numerator of which is the amount described in subparagraph (A)(ii) and the denominator of which is the amount described in subparagraph (A)(i).
(2) Limitation based on modified adjusted gross income.
(A) In general. If the modified adjusted gross income of the taxpayer for the taxable year exceeds $40,000 ($60,000 in the case of a joint return), the amount which would (but for this paragraph) be excludable from gross income under subsection (a) shall be reduced (but not below zero) by the amount which bears the same ratio to the amount which would be so excludable as such excess bears to $15,000 ($30,000 in the case of a joint return).
(B) Inflation adjustment. In the case of any taxable year beginning in a calendar year after 1990, the $40,000 and $60,000 amounts contained in subparagraph (A) shall be increased by an amount equal to-
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment under section 1(f)(3) for the calendar year in which the taxable year begins.
(C) Rounding. If any amount as adjusted under subparagraph (B) is not a multiple of $50., such amount shall be rounded to the nearest multiple of $50. (or if such amount is a multiple of $25, such amount shall be rounded to the next highest multiple of $50).
(c) Definitions. For purposes of this section-
(1) Qualified United States savings bond. The term "qualified United States savings bond" means any United States savings bond issued-
(A) after December 31, 1989,
(B) to an individual who has attained age 24 before the date of issuance, and
(C) at discount under section 3105 of title 31, United States Code.
(2) Qualified higher education expenses.
(A) In general. The term "qualified higher education expenses" means tuition and fees required for the enrollment or attendance of-
(i) the taxpayer,
(ii) the taxpayer's spouse, or
(iii) any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151,
at an eligible educational institution.
(B) Exception for education involving sports, etc. Such term shall not include expenses with respect to any course or other education involving sports, games, or hobbies other than as part of a degree program.
(3) Eligible educational institution. The term "eligible educational institution" means-
(A) an institution described in section 1201(a) or subparagraph (C) or (D) of section 481(a)(1) of the Higher Education Act of 1965 (as in effect on October 21, 1988), and
(B) an area vocational education school (as defined in subparagraph (C) or (D) of section 521(3) of the Carl D. Perkins Vocational Education Act) which is in any State (as defined in section 521(27) of such Act), as such sections are in effect on October 21, 1988.
(4) Modified adjusted gross income. The term "modified adjusted gross income" means the adjusted gross income of the taxpayer for the taxable year determined-
(A) without regard to this section and sections 911, 931, and 933, and
(B) after the application of sections 86, 469, and 219.
(d) Special rules.
(1) Adjustment for certain scholarships and veterans benefits. The amount of qualified higher education expenses otherwise taken into account under subsection (a) with respect to the education of an individual shall be reduced (before the application of subsection (b)) by the sum of the amounts received with respect to such individual for the taxable year as-
(A) a qualified scholarship which under section 117 is not includable in gross income,
(B) an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or
(C) a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for educational expenses, or attributable to attendance at an eligible educational institution, which is exempt from income taxation by any law of the United States.
(2) No exclusion for married individuals filing separate returns. If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and his spouse file a joint return for the taxable year.
(3) Regulations. The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations requiring record keeping and information reporting.
Section 136. Cross references to other acts
(a) For exemption of
(1) Allowances and expenditures of meet losses sustained by persons serving the United States abroad, due to appreciation of foreign currencies, see section 5943 of Title 5, United States Code.
(2) Amounts credited to the Maritime Administration under section 9(b)(6) of the Merchant Ship sales Act of 1946, see section 9(c)(1) of that Act (50 USC App. 1742).
(3) Benefits under laws administered by the Veteran's Administration, see section 3101 of title 38, United States Code.
(4) Earnings of slip contractors deposited in special reserve funds, see section 607(d) of the Merchant Marine Act, 1936 (46 USC 1177).
(5) Income derived from Federal Reserve banks, including capital stock and surplus, see section 7 of the Federal Reserve Act (12 USC 531).
(6) Special pensions of persons on Army and Navy medal of honor roll, see 38 USC 562(a)-(c).
(b) For extension of military income-tax-exemption benefits to commissioned officers of Public Health Service in certain circumstances, see section 212 of the Public Health Service Act (42 USC 213).
Section 141. Private activity bond; qualified bond
(a) Private activity bond. For purposes of this title, the term "private activity bond" means any bond issued as part of an issue-
(1) which meets-
(A) the private business use test of paragraph (1) of subsection (b), and
(B) the private security or payment test of paragraph (2) of subsection (b), or
(2) which meets the private loan financing test of subsection (c).
(b) Private business tests.
(1) Private business use test. Except as otherwise provided in the subsection, an issue meets the test of this paragraph if more than 10 percent of the proceeds of the issue are to be used for any private business use.
(2) Private security or payment test. Except as otherwise provided in this subsection, an issue meets the test of this paragraph if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly-
(A) secured by any interest in-
(i) property used or to be used for a private business use, or
(ii) payments in respect of such property, or
(B) to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use.
(3) 5 percent test for private business use not related or disproportionate to government use financed by the issue.
(A) In general. An issue shall be treated as meeting the tests of paragraphs (1) and (2) if such tests would b
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