Political Subdivision; On-Behalf-Of Issuer (I.R.C. 103; Rev. Rul. 57-187; Rev. Rul. 63-20)


Section 103(a) of the Code excludes from gross income for federal income tax purposes interest on any “State or local bonds.”  A bond is defined as an “obligation” of any State or political subdivision thereof.  For an obligation to exist for Section 103 purposes, it must be incurred by an issuer (see section B below) pursuant to the exercise of its borrowing power, as opposed to some other power, and the bonds must be valid under state law (see section D below).  The following sections provide a discussion of certain of these requirements.


1. States and Political Subdivisions

  • A political subdivisions, for purposes of Section 103, is a governmental unit to which there has been delegated at least one of the three fundamental sovereign powers of the state.  (See also PLR 201104020)
  • Three generally acknowledged sovereign powers of states are the power to tax, the power of eminent domain and the police power (power to regulate).  See Estate of Alexander J. Shamberg, 3 T.C. 131 (1944).  It is not necessary that all three powers be delegated.  However, possession of only an insubstantial amount of any or all sovereign powers is not sufficient.  “All of the facts and circumstances must be taken into consideration, including the public purposes of the entity and its control by a government.” See Rev. Rul. 77-164.  See, also, Philadelphia National Bank case cited below (the Temple University case).
  • Rev. Rul. 61-181: A Los Angeles authority is delegated certain sovereign powers to furnish mass transportation.
  • PLR 8152063: Entity given power of eminent domain and the right to condemn property to improve health conditions of the state.
  • PLR 9122068:  University has eminent domain and police powers for campus police.
  • PLR 8630027:  District’s powers do not represent substantial powers of taxation or eminent domain.  In effect, here the District (wholly controlled by the non-exempt Corporation) has been delegated no materially greater ‘sovereign powers’ over District land (the Corporation’s inventory) than the Corporation inherently will have if the District is never created.
  • PLR 201104020: The issuer is not a political subdivision because it’s power of eminent domain is limited in that the issuer must seek approval from the City Council before exercising the power.  This was found to be only an insubstantial amount of sovereign power.
  • Rev. Rul. 77-164: A community development authority, created under state laws that empower it to collect service and user fees for the construction, operation and maintenance of community facilities, that lacks the power to tax, the power of eminent domain and control over zoning, police and fire protection, does not qualify as a political subdivision within the meaning of I.R.C. 103.
  • PLR 200238001: A district is governed by property owners and elected officials of the County.  The IRS reviews sovereign powers and then the division test.  The IRS concludes that, because at least five (presumably the majority) trustees of the board “are subject to the control of either the County Judge/Executive, an elected official of the County or the control of the property owners of the District.”  This suggests that, if all trustees were subject to the control of the property owners, that would be sufficient.  There is no sense in this PLR that the property owners cannot be the owner of all of the property within the district.
  • PLR 200017018 (Wholly motivated by a public purpose):  Request for ruling that the Authority is a political subdivision of the state.  The Authority was created under state law by local governmental units A, B and C, to provide for the development of ports for transportation-related commerce.  The Authority is governed by a board of directors appointed by its member governmental units.  Upon dissolution, the Authority’s assets will be distributed to its member governmental units.  “In determining whether an entity is a division of a state or local governmental unit, important considerations are the extent the entity is (1) controlled by the state or local government unit, and (2) motivated by a wholly public purpose. […] Indicia that the Authority is governmentally controlled are: (1) the Authority is governed by a board of directors appointed by its member governmental units A, B and C; (2) the Authority’s net revenues inure to the benefit of the State and its municipalities; and (3) the Authority’s assets will be distributed to its member governmental units upon dissolution.  The Authority is motivated by a wholly public purpose.”  Accordingly, the Authority is a political subdivision for purposes of I.R.C. 103.
  • “Public purpose” in the context of a wholly public purpose:  See Treas. Reg. 1.141-5(d)(4)(ii):  “Essential governmental functions. For purposes of paragraph (d) of this section, improvements to utilities and systems that are owned by a governmental person and that are available for use by the general public (such as sidewalks, streets and street-lights; electric, telephone, and cable television systems; sewage treatment and disposal systems; and municipal water facilities) serve essential governmental functions.  For other types of facilities, the extent to which the service provided by the facility is customarily performed (and financed with governmental bonds) by governments with general taxing powers is a primary factor in determining whether the facility serves an essential governmental function.  For example, parks that are owned by a governmental person and that are available for use by the general public serve an essential governmental function.  Except as otherwise provided in this paragraph (d)(4)(ii), commercial or industrial facilities and improvements to property owned by a nongovernmental person do not serve an essential governmental function.  Permitting installment payments of property taxes or other taxes is not an essential governmental function.”
  • PLR 201735020 (Police Power):  Division established by State as part of State’s public transportation system was held to be a political subdivision.  Division is governed by a board of directors the members of which are appointed by the governing bodies of the counties in the metro area and by the chief executive official of a city.  Board members can be removed for cause by a majority of board members or by the governor of State.  Division has certain powers which the IRS considers to be substantial police powers.  Ruling incorporates the flawed IRS conclusion that a political subdivision must be a division of a state or local government. Specifically, the ruling unduly focuses on the specific public purpose of Division and control by State and certain other governmental entities.
  • PLR 201741010:  Corporation established to provide long-term energy solutions and maximize the value of natural gas located in the state for its residents determined to be a political subdivision under section 103.

2. “On Behalf Of” Issuers: Overview

  • If an entity fails to satisfy the requirements necessary to be treated as a political subdivision, it may still issue tax-exempt obligations if in so doing it is deemed to be acting on behalf of a state or local governmental unit.  See Rev. Rul. 77-164; Philadelphia National Bank v. United States, 666 F.2d 834 (3d Cir. (Pa.) 1981).
  • There are two types of “on behalf of” issuers: (1) entities formed under state law for the express purpose of issuing bonds to effect a public purpose, i.e., constituted authorities; and (2) entities formed under applicable state nonprofit corporation law which comply with the requirements of Rev. Rul. 63-20.  Rev. (Proc. 82-26 sets forth the conditions under which the IRS will grant a favorable advance ruling on whether a nonprofit corporation’s obligations are exempt under Code Section 103(a)(1).)
  • Don’t confuse “on-behalf-of” issuer status (discussed in this posting) with “instrumentality” status (discussed in this posting).  Instrumentality status is only relevant to determining whether the entity is “governmental person” for purposes of the private activity bond test (and for charitable contributions and FICA taxes).
  • For a good overview of “on behalf of” issuers, see George Pitt’s “63-20 Handbook.

2.1. “On Behalf Of” Issuers: Constituted Authorities (Rev. Rul. 57-187)

  • Constituted authorities are entities specifically authorized by state law to issue bonds on behalf of political subdivisions of a state, among other specific powers granted to such entities in order to further public purposes.
  • Alabama board ruling (Rev. Rul. 57-187): Describes that obligations by this entity were deemed issued on behalf of the political subdivision.  Nearly all conduit public authority enabling legislation is based on Rev. Rul. 57-187.
  • There is generally no difference for federal tax purposes between an issuance by the political subdivision and the issuance by an on-behalf-of constituted authority.
  • Statutes can include municipal ordinances enacted under a home rule charter, but do not otherwise include intergovernmental agreements, as described in a private letter ruling of the mid-1980s.  The statutory reference to the “constituted authority” must be fairly specific and, for example, should refer to the authority by name or be otherwise specific to the authority.  One Chicago-based bond counsel firm apparently requested a ruling regarding constituted authority status in a western state which had a liberally-worded statute.  The IRS proposed or even issued an adverse ruling.
  • Rev. Rul. 57-187:  Industrial development boards were authorized by state law for incorporation in municipalities to promote industry and develop trade in Alabama.  In furtherance of those purposes the boards were empowered to acquire, improve, furnish, equip, lease, sell and convey industrial projects and to issue bonds in furtherance of the boards’ purposes.  The boards were controlled by the local municipality’s governing body.  State law provided that bonds were payable solely out of revenues from the boards, sales or lease of projects.  Each board was a public nonprofit corporation whose earnings and property upon dissolution reverted to the municipality in which it was located.  The IRS ruled that bonds issued by the industrial development boards were obligations issued “on behalf of a political subdivision” by a constituted authority.  Characteristics in Rev. Rul. 57-187:  (1) the issuance of the bonds must be authorized by specific statute; (2) the bond issuance must have a public purpose (which includes promotion of trade, industry and economic development); (3) the governing body of the authority must be controlled by the political subdivision; (4) the authority must have the power to acquire, lease and sell property and issue bonds in furtherance of its purposes; (5) earnings cannot inure to the benefit of private persons; (6) upon dissolution, title to all bond financed property must revert to the political subdivision.
  • Rev. Rul. 60-248:  Bonds, notes, and other obligations issued by the New York State Housing Finance Agency, established pursuant to an Act of the New York State Legislature for the purpose of financing the construction of low rent housing facilities, are considered as issued on behalf of the State and the interest received therefrom is exempt from federal income tax.  Agency’s membership consists of the State Commissioner of Housing, the State Director of the Budget, the State Commissioner of Taxation and Finance, and two other members appointed by the Governor. The Governor may remove any member of the Agency for inefficiency, neglect of duty, or misconduct in office. The Agency and its corporate existence are to continue for as long as it shall have bonds, notes, and other obligations outstanding, and until its existence is terminated by law. Upon termination, all its rights and properties shall pass to and be vested in the State of New York.
  • PLR 201104020: Authority was not an on-behalf-of issuer because a majority of the board members was not controlled by the City.
  • PLR 200936012: Corporation’s board is appointed by the County. Corporation meets the requirements of Rev. Rul. 57-187 as an on-behalf-of issuer.
  • TAM 200646017:  Public school academy doesn’t have sovereign powers (though it does meet the division analysis, particularly because of the control element) but is an on-behalf-of issuer of the state because it meets the requirements of Rev. Rul. 57-187.
  • PLR 8912008: University issues bonds on behalf of the state.
  • PLR 8906058:  Authority created under state law to assist with planning and development of the county issues bonds on behalf of the county.
  • PLR 8542104 (Jul. 29, 1985): Authority is created by City ordinance pursuant to a state statute to issue bonds for creation of certain public facilities.  Bonds will be issued on behalf of the City, which approves the Authority’s Articles of Incorporation, provides for perpetual existence and distribution of assets to City in event of dissolution.  The City has the right to appoint and remove Board of Directors.  The City’s home rule status causes the ordinance to be considered state statute for purposes of creation of the Authority.  Authority therefore is a constituted authority. (“Focus on the Family ruling.”)
  • PLR 8507034:  IRS held that a housing finance joint powers board was not a “constituted authority” within the meaning of Treas. Reg. 1.103-1(b) because the statute under which the board was created did not specifically authorize the board to issue obligations on behalf of a state or local governmental unit for a specific purpose.  Instead, the statute generally permitted the board to issue bonds under any law under which the governmental units were independently authorized to issue bonds.
  • PLR 8419029:  Lease purchase financing entered into by entity is considered entered into on behalf of the university even though not all of the entity’s board members are controlled by the university – a majority is sufficient.
  • PLR 8405131:
  • PLR 8232044:
  • PLR 8215025:
  • PLR 8207036:  The IRS rules that an entity organized by more than one municipality does not affect the application of the criteria in Rev. Rul. 57-187.
  • PLR 8139124:  Board is a department of the state responsible for advising the state regarding supervision of aeronautics within the state.  The authorizing act for the board authorizes the board to issue bonds on behalf of the state to finance projects suitable for use by commercial enterprises that provide scheduled air transportation services within the state.  Without any analysis, the Service concludes that the board is an on behalf of issuer of the state.  Side issues in the ruling are the requirement for locating small issue bond facility within the jurisdiction of the issuer where the financed property may travel outside of the jurisdiction.  The project consisted of aircraft.
  • PLR 8125023:  The Authority was established in County Y by an act of the State Legislature (the Act) designed to promote industry and develop trade by inducing manufacturing, industrial, governmental and commercial enterprises to locate in or remain in the State. Pursuant to the Act, the Authority is governed by a board of commissioners appointed by the governing body of County Y.
  • PLR 200022028:  Request for a ruling that (1) income derived from the Corporation as a result from its proposed activities will be excludable under I.R.C. 115, (2) the Bonds to be issued by the Corporation will be considered issued on behalf of the State under I.R.C. 103 and (3) the Corporation is an instrumentality of the State under I.R.C. 141.  Corporation was created by act of the State legislature as a subsidiary of the Authority.  The Corporation has the power to issue bonds on behalf of the State for certain projects.  The Authority was specifically created by the Act as an instrumentality of the State, with the power to perform such governmental functions as issuing bonds.  The Authority was a valid “constituted authority” under Rev. Rul. 57-187.  The members of the Corporation’s board are the members of the Authority’s board.  The Bond proceeds were going to be used by a Company to develop and construct a destination resort on property anchored by a theme park.  As a condition to receiving the ruling regarding on-behalf-of issuer status, the Authority and the Corporation had to amend their bylaws to provide the State with direct control over the Corporation.  The point of this PLR is that there may not be stacking of on-behalf-of issuers.  This concept may be equally applicable to instrumentalities such that stacking of instrumentalities is not valid. (Wir)
  • Advice Memorandum AM-2014-005 (Jun. 18, 2014):  An Indian tribal government that receives an allocation of volume cap to issue tribal economic development bonds may designate an “on behalf of issuer,” within the rules applicable to bonds issued under I.R.C. 103, that is formed under the laws of that tribal government to issue those bonds.  The proceeds of any bonds issued by such an “on behalf of” issuer will be treated as if they were proceeds of bonds issued by the Indian tribal government that received the allocation.  See Notice 2009-51.
  • PLR 201442037:  Income derived by authority created by Agency and County to manage water matters is income derived from exercise of essential governmental function and will accrue to state or political subdivision thereof for IRC § 115(1) purposes, and the Authority is a constituted authority for purposes of Treas. Reg. 1.103-1(b).
  • TAM 200646017, August 1, 2006: Michigan Charter School.  Based on the facts relating to Michigan state law, the charter school is considered an on-behalf-of issuer.

2.2. “On Behalf Of” Issuers: 63-20 Corporations

  • 63-20 Corporations are typically used where applicable state law has not specifically authorized the formation of public corporations which would qualify as constituted authorities under Rev. Rul. 57-187.
  • The criteria required for constituted authorities under Rev. Rul. 57-187 and the five requirements for 63-20 corporations are substantially the same.  The most significant difference is the type of authorizing statute under which each is organized.
  • Rev. Rul. 54-296 (superceded by 63-20): Bonds issued by the nonprofit are deemed as having been issued on behalf of the lessee/user of the facilities during the life of the bonds and would become owner of the facilities thereafter.
  • Rev. Rul. 59-41(superceded by 63-20): Similar to 54-296, but now it was permissible even if the facilities not actually used by the political subdivision so long as the facilities were seen as public in nature (in the sense that the political subdivision might otherwise be required to provide them and could therefore be viewed as having been relieved of a burden rightfully belonging to it, i.e. Water and wastewater facilities).
  • Rev. Rul. 63-20: Involved a nonprofit corporation issuer who was not the owner and operator of the facilities but was to be a conduit.  Must show the following to establish a 63-20 issuer (as clarified by 82-26):
    • Corporation must engage in activities that are essentially public in nature;
      • Activities and purposes of the corporation are those permitted under the nonprofit law of the state; and
      • Property to be provided by the corporation’s bonds must be located in the geographical boundaries of or have a substantial connection with the governmental unit on whose behalf the obligations are issued;
    • Corporation must be a nonprofit, except to the extent of retiring indebtedness (Corporate income must not inure to any private person);
      • Organized under nonprofit laws of the state in which the governmental unit is located; and
      • Articles of Incorporation provide that corporation is one not organized for profit;
    • State or political subdivision must have a beneficial interest in the corporation while the bonds remain outstanding, and upon retirement of the bonds, it must obtain full legal title to the property of the corporation with respect to which the bonds were issued;
      • Refers to interest in the bond-financed property, not in the corporation, and can be established by the following:
        • Purchase option at any time (can be compatible with customary 10 year call protection);
        • Purchase option in event of default;
        • Declaration of beneficial interest (file declaration in real estate records to put the “world” on notice);
        • Governmental unit has exclusive beneficial use equivalent to 95% or more of fair rental value for life of obligations; OR nonprofit has exclusive beneficial use equivalent to 95% or more of fair rental value for life of obligations and governmental unit appoints or approves the appointment of at leat 80% of the members of the governing board of the corporation and the power to remove, for cause, either directly or indirectly or through judicial proceedings, any member of the governing board and appoint a successor; OR Governmental unit has the right at any time to obtain unencumbered fee title and exclusive possession of the property financed by the bonds, and any additions to that property by placing in escrow an amount that will be sufficient to defease the obligations and paying reasonable costs incident to the defeasance (This is described in more detail in 82-26)
      • Full legal title requirement customarily provided for by having the corporation deposit a warranty deed and bill of sale with the bond trustee together with an irrevocable letter of instructions to deliver these documents to the political subdivision when the bonds are retired;
      • Financing of equipment may require statement in indenture by which borrower must maintain, renew, repair and replace the equipment so that fully equipped and operational facility exists at the time of the gift;
      • Full legal title means unencumbered title;
      • No delay in gift;
      • Must have level debt service schedules;
      • Cannot finance working capital or intangible property, because this negates gift effect;
    • Corporation must have been approved by the state, or a political subdivision thereof, either of which must also have approved the specific obligations issued by the corporation;
      • Customarily fulfilled by the adopting of a resolution of the governing body of the political subdivision prior to the issuance declaring the proposed financing by the nonprofit corporation will be beneficial to the political subdivision and agreeing to accept a gift of the bond-financed property (without binding the governing body at the time of such tender to accept the gift).
      • May be necessary to show legal reasoning supporting conclusion that political subdivision has the power to accept gifts of the type proposed to be financed. Do not need to show that the political subdivision could have issud for that purpose or has the power to operate.
    • [Only one “sponsoring” political subdivision.] Some bond counsel may disagree with the authority underlying this requirement;
    • No stacking of “on behalf of” entities.
  • Rev. Rul. 82-26: Clarifies elements of 63-20.
  • PLR 7605210220A (May 21, 1976):  Community Hospital issues bonds on behalf of County to finance improvements to a hospital, and to acquire a hospital facility.  The financing is structured to comply with 63-20, but there are issues regarding fair market value determination and management of the facility that are discussed in the PLR.
  • PLR 7742055 (Jul. 22, 1977):  Proposed notes to be issued by nonprofit 501(c)(3) “Association” for hospital construction are considered issued “on behalf of” the City – a political subdivision.  The Association and the City entered into a lease that provides that title to all buildings and improvements located on the leased land will vest in the City upon completion of their construction or annexation to the property.  The lease also provides that it will terminate immediately upon the repayment of the Notes or the City’s paying the Association all necessary funds to pay or provide for all amounts due under the Notes.  The City’s health officer is an ex-officio member of the Association’s Board of Directors.  The analysis is a type of 63-20 analysis.


IRS PLR 200923005, February 9, 2009:  Authority created by statute to implement solid waste systems that has the power of eminent domain and whose directors are appointed by governor or legislative leaders qualifies as a “political subdivision” under Section 1.103-1(b).

IRS PLR 200837004, September 12, 2008:  (1) Authority is a political subdivision of the State for purposes of Section 103 of the Code, because the Authority has been delegated the right to exercise sovereign power, is controlled by the State and is motivated by a wholly public purpose, and (2) Corporation’s income is excludible from gross income under Section 115(1) of the Code because the Corporation’s income is derived from the exercise of an essential governmental function and will accrue to a state or political subdivision thereof for purposes of Section 115(1).

IRS PLR 201104020, January 28, 2011: An authority created by state statute found (1) not to be a political subdivision because it didn’t possess enough sovereign power and (2) not to be an on-behalf-of issuer under Rev. Rul. 57-187 because the governing body of the entity was not controlled by a political subdivision.


1. Examples in Colorado

School districts.  A school district in Colorado is a “school district, political subdivision and body corporate of the State.”  As an express political subdivision of the State, it is a valid issuer for federal income tax purposes.  Obligations of school districts are valid bonds under state law for federal income tax purposes based on either of the following statutory authorizations:

  1. Pursuant to article 42 (Bonded Indebtedness) of title 22 (Education) of the Colorado Revised Statutes, as amended (“C.R.S.”), a school district may issue general obligation bonds, subject to voter approval of a ballot issue authorizing the bonds;
  2. Pursuant to the Public Securities Refunding Act set forth in article 56 (Public Securities Refunding Act) of title 11 (Financial Institutions), C.R.S., a school district (as “public body” within the meaning of C.R.S. 11-56-103(7)) may issue general obligation bonds to refund outstanding general obligation bonds (principal and interest in arrears or to become due), subject to certain limitations and conditions (e.g.,  the underwriter must provide certain disclosures regarding financial matters, and the refunding bonds must be issued for certain permitted purposes).

Charter schools.  In Colorado, a charter school is typically created as a Colorado nonprofit corporation pursuant to the Charter Schools Act set forth in article 30.5 of title 22, C.R.S., and a charter contract considered and approved by the local board of education of the applicable school district or the state’s chartering institute – the State Board of Education.  A charter school in Colorado usually has no sovereign powers (and is therefore not a political subdivision of the state), and is not established by statute (and is therefore not a constituted authority).  It is not entirely clear whether a charter school, the board of which is not elected or controlled by the state or school district, can nonetheless be considered an on-behalf of issuer.  Some bond counsel have determined that the totality of the circumstances may determine status of the bonds as governmental versus private activity bonds – one significant factor being whether the charter school’s property is transferred to the school district when the charter school is dissolved.

See PLR 201217025 regarding a discussion of a charter school’s obligation to file a Form 990 even though the charter school is also a governmental unit.  The IRS describes certain factors indicating control by a governmental entity.


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