(iii) Certain refunding bonds not taken into account is determining small issuer status. There shall not be taken into account under subclause (IV) of clause (i) any bond issued to refund (other than to advance refund) any bond to the extent the amount of the refunding bond does not exceed the outstanding amount of the refunded bond.
(iv) Certain issues issued by subordinate governmental units, etc., exempt from rebate requirement. An issue issued by a subordinate entity of a governmental unit with general taxing powers shall be treated as described in clause (i)(I) if the aggregate face amount of such issue does not exceed the lesser of-
(I) $5,000,000, or
(II) the amount which, when added to the aggregate face amount of other issues issued by such entity, does not exceed the portion of the $5,000,000 limitation under clause (i)(IV) which such governmental unit allocates to such entity.
For purposes of the preceding sentence, an entity which issues bonds on behalf of a governmental unit with general taxing powers shall be treated as a subordinate entity of such unit. An allocation shall be taken into account under subclause (II) only if it is irrevocable and made before the issuance date of such issue and only to the extent that the limitation so allocated bears a reasonable relationship to the benefits received by such governmental unit from issues issued by such entity.
(v) Determination of whether refunding bonds eligible for exception from rebate requirement. If any portion of an issue is issued to refund other bonds, such portion shall be treated as a separate issue which does not meet the requirements of paragraphs (2) and (3) by reason of this subparagraph unless-
(I) the aggregate face amount of such issue does not exceed $5,000,000,
(II) each refunded bond was issued as part of an issue which was treated as meeting the requirements of paragraphs (2) and (3) by reason of this subparagraph,
(III) the average maturity date of the refunding bonds issued as part of such issue is not later than the average maturity date of the bonds to be refunded by such issue, and
(IV) no refunding bond has a maturity date which is later than the date which is 30 years after the date the original bond was issued.
Subclause (III) shall not apply if the average maturity of the issue of which the original bond was a part (and of the issue of which the bonds to be refunded as a part) is 3 years of less. For purposes of this clause, average maturity shall be determined in accordance with section 147(b)(2)(A).
(vi) Refundings of bonds issued under law prior to Tax Reform Act of 1986. If section 141(a) did not apply to any refunded bond, the issue of which such refunded bond was a part shall be treated as meeting the requirements of subclause (II) of clause (v) if-
(I) such issue was issued by a governmental unit with general taxing powers,
(II) no bond issued as part of such issue was an industrial development bond (as defined in section 103(b)(2), but without regard to subparagraph (B) of section 103(b)(3) or a private loan bond (as defined in section 103(o)(2)(A)), but without regard to any exception from such definition other than section 103(o)(2)(C), and
(III) the aggregate face amount of all tax-exempt bonds (other than bonds described in subclause (II)) issued by such unit during the calendar year in which such issue was issued did not exceed $5,000,000.
References in subclause (II) to section 103 shall be to such section as in effect on the day before the date of the enactment of the Tax Reform Act of 1986. Rules similar to the rules of clauses (ii) and (iii) shall apply for purposes of subclause (III). For purposes of subclause (II) of clause (i), bonds described in subclause (II) of this clause to which section 141(a) does not apply shall not be treated as private activity bonds.
(E) Exception for certain qualified student loan bonds.
(i) In general. In determining the aggregate amount earned on nonpurpose investments acquired with gross proceeds of an issue of bonds for a program described in section 144(b)(1)(A), the amount earned from investment of net proceeds of such issue during the initial temporary period under subsection (c) shall not be taken into account to the extent that the amount so earned is used to pay the reasonable-
(I) administrative costs of such program attributable to such issue and the costs of carrying such issue, and
(II) costs of issuing such issue,
but only to the extent such costs were financed with proceeds of such issue and for which the issuer was not reimbursed. Amounts designated as interest on student loans shall not be taken into account in determining whether the issuer is reimbursed for such costs. Except as otherwise hereafter provided in regulations prescribed by the Secretary, cost described in subclause (I) paid from amounts earned as described in the first sentence of this clause may also be taken into account in determining the yield on the student loans under a program described in section 144(b)(1)(A).
(ii) Only arbitrage on amounts loaned during temporary period taken into account for administrative costs, etc. The amount earned from investment of net proceeds of an issue during the initial temporary period under subsection (c) shall be taken into account under clause (i)(I) only to the extent attributable to proceeds which were used to make or finance (not later than the close of such period) student loans under a program described in section 144(b)(1)(A).
(iii) Election. This subparagraph shall not apply to any issue if the issuer elects not to have the subparagraph apply to such issue.
(iv) Termination. This subparagraph shall not apply to any bond issued after December 31, 1988.
(5) Exemption from gross income of sum rebated. Gross income shall not include the sum described in paragraph (2). Notwithstanding any other provision of this title, no deduction shall be allowed for any amount paid to the United States under paragraph (2).
(6) Definitions. For purposes of this subsection and subsections (c) and (d)-
(A) Nonpurpose investment. The term "nonpurpose investment" means any investment property which-
(i) is acquired with the gross proceeds of an issue, and
(ii) is not acquired in order to carry out the governmental purpose of the issue.
(B) Gross proceeds. Except as otherwise provided by the Secretary, the gross proceeds of an issue include-
(i) amounts received (including repayments of principal) as a result of investing the original proceeds of the issue, and
(ii) amounts to be used to pay debt service on the issue.
(7) Penalty in lieu of loss of tax exemption. In the case of an issue which would (but for this paragraph) fail to meet the requirements of paragraph (2) or (3), the Secretary may treat such issue as not failing to meet such requirements if-
(A) no bond which is part of such issue is a private activity bond (other than a qualified 501(c)(3) bond),
(B) the failure to meet with such requirements is not due to willful neglect, and
(C) the issuer pays to the United States a penalty in an amount equal to the sum of-
(i) 50 percent to the amount which was not paid in accordance with paragraphs (2) and (3), plus
(ii) interest (at the underpayment rate established under section 6621) on the portion of the amount which was not paid on the date required under paragraph (3) for the period beginning on such date.
The Secretary may waive all or any portion of the penalty under this paragraph.
(g) Student loan incentive payments. Except to the extent otherwise provided in regulations, payments made by the Secretary of Education pursuant to section 438 of the Higher Education Act of 1965 are not to be taken into account, for purposes of subsection (a)(1), in determining yields on student loan notes.
(h) Determinations of yield. For purposes of this section, the yield on an issue shall be determined on the basis of the issue price (within the meaning of section 1273 and 1274).
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