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TITLE 26-INTERNAL REVENUE CODE term of the issue which is materially higher (taking into account any discount or premi- um) than the yield on obligations of such issue, or (B) to replace funds which were used di- rectly or indirectly to acquire securities or obligations described in subparagraph (A). (3) Exception Paragraph (1) shall not apply to any obliga- tion- (A) which is issued as part of an issue sub- stantially all of the proceeds of which are reasonably expected to be used to provide permanent financing for real property used or to be used for residential purposes for the personnel of an educational organiza- tion described in section 170(b)(1)(A)(ii) which grants baccalaureate or higher de- grees, or to replace funds which were so used, and (B) the yield on which over the term of the issue is not reasonably expected, at the time of issuance of such issue, to be sub- stantially lower than the yield on obliga- tions acquired or to be acquired in providing such financing. This paragraph .hall not apply with respect to any obligation for any period during which it is held by a person who is a substantial user of property financed by the proceeds of the issue of which such obligation is a part, or by a member of the family (within the meaning of section 318(a)(1)) of any such person. (4) Special rules For purposes of paragraph (1), an obliga- tion shall not be treated as an arbitrage bond solely by reason of the fact that- (A) the proceeds of the issue of which such obligation is a part may be invested for a temporary period in securities or other ob- ligations until such proceeds are needed for the purpose for which such issue was issued, or (B) an amount of the proceeds of the issue of which such obligation is a part may be invested in securities or other obligations which are part of a reasonably required re- serve or replacement fund. The amount referred to in subparagraph (B) shall not exceed 15 percent of the proceeds of the issue of which such obligation is a part unless the issuer establishes that a higher amount is necessary. (5) Student loan incentive payments Payments made by the Commissioner of Education pursuant to section 2 of the Emer- gency Insured Student Loan Act of 1969 are not to be taken into account, for purposes of subsection (d)(2)(A), in determining yields on student loan notes. (6) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the purposes of this subsection. (d) Certain irrigation dams A dam for the furnishing of water for irriga- tion purposes which has a subordinate use in connection with the generation of electric energy by water shall be treated as meeting the requirements of subsection (c)(4)(G) if- (1) substantially all of the stored water is contractually available for release from such dam for irrigation purposes, and (2) the water so released is available on rea- sonable demand to members of the general public. (e) Qualified scholarship funding bonds For purposes of subsection (a), the term "qualified scholarship funding bonds" means obligations issued by a corporation which- (1) is a corporation not for profit estab- lished and operated exclusively for the pur- pose of acquiring student loan notes incurred under the Higher Education Act of 1965, and (2) is organized at the request of a State or one or more political subdivisions thereof or is requested to exercise such power by one or more political subdivisions and required by its corporate charter and bylaws, or required by State law, to devote any income (after pay- ment of expenses, debt service, and the cre- ation of reserves for the same) to the pur- chase of additional student loan notes or to pay over any income to the State or a politi- cal subdivision thereof. (e) Cross references For provisions relating to the taxable status of- (1) Puerto Rican bonds, see section 3 of the Act of March 2, 1917, as amended (48 U.S.C. 745). (2) Virgin Islands insular and municipal bonds, see section 1 of the Act of October 27, 1949 (48 U.S.C. 1403). (3) Certain obligations issued under title I of the Housing Act of 1949, see section 102(g) of title I of such Act (42 U.S.C. 1452(g)). (24) Exempt-interest dlvidends.-For treatment of exempt-interest dividends, see section 852(b)(5)(B). (Aug. 16, 1954, ch. 736, 68A Stat. 29; June 28, 1968, Pub. L. 90-364, title I, § 107(a), 82 Stat. 266; Oct. 24, 1968, Pub. L. 90-634, title IV, § 401(a), 82 Stat. 1349; Dec. 30, 1969, Pub. L. 91- 172, title VI, § 601(a), 83 Stat. G56; Dec. 10, 1971, Pub. L. 92-178, title III, § 315(a), (b), 85 Stat. 529; Dec. 23, 1975, Pub. L. 94-164, § 7(a), 89 Stat. 976; Dec. 31, 1975, Pub. L. 94-182, title III, § 301(a), 89 Stat. 1056; Oct. 4, 1976, Pub. L. 94- 455, title XIX, §§ 1901(a)(17), (b)(8)(B), 1906(b)(13)(A), title XXI, §§ 2105(a)-(c), 2137(d), 90 Stat. 1765, 1766, 1794, 1834, 1902, 1931.) REFERENCES IN TEXT The references in subsec. (c)(1) and (2)(A) to subsec. (a)(4), which references were added to subsec. (c)(1) and (2)(A) by section 2105(c)(2) of Pub. L. 94-455, probably are intended to be references to subsec. (a)(2) since subsec. (a)(4) of this section was redesig- nated (a)(2) by section 1901(a)(17)(A) of Pub. L. 94-455 and since there is no subsec. (a)(4) remaining in this section as amended by Pub. L. 94-455. Section 2 of the Emergency Insured Student Loan Act of 1969, referred to in subsec. (c)(5), was classified to section 1078a of Title 20, Education, and was re- pealed effective Oct. 1, 1977, by Pub. L. 94-482, title I, § 127(c)(2), Oct. 12, 1976, 90 Stat. 2142. The Higher Education Act of 1965, referred to in subsec. (e) relating to qualified scholarship funding bonds, is Pub. L. 89-329, Nov. 8, 1965, 79 Stat. 1219, as amended, which Is classified principally to chapter 28 (§ 1001 et seq.) of Title 20, Education. For complete classification of this Act to the Code, see Short Title note set out under section 1001 of Title 20 and Tables volume. Page 114 § 103