Rev. Rul. 60-248

Advice has been requested whether interest received on obligations issued by the New York State Housing Finance Agency is exempt from Federal income tax.

In order to alleviate the shortage of safe and sanitary housing accommodations available to low income families, the New York State Legislature created the New York State Housing Finance Agency for the purpose of financing the construction of low-rent housing facilities through amending the Public Housing Law of the State of New York, Chapter 44-A, McKinney's Consolidated Laws of New York Annotated, by adding to such law Article XII-A, known as the New York State Housing Finance Agency Act. In furtherance of its purpose, the Agency issues bonds, notes, and other obligations to the investing public and makes the funds obtained therefrom available for mortgage loans, at low-interest rates, to private housing corporations organized to develop low-rent housing facilities in accordance with State regulations. 1960 Laws of New York, 183rd Session, Chap. 671, Sections 1 and 2.

The Act provides that the Agency shall be a corporate governmental agency, constituting a public benefit corporation. Its 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. Article XII-A, Section 342.

The Agency has the power to sue and be sued; to make and execute contracts; to make rules and regulations governing the use of its property and facilities, which rules and regulations are to be filed with the New York Department of State like any other agency of the State; to appoint officers, agents, and employees, prescribe their duties and fix their compensation, subject to the provisions of the State Civil Service Law and to the rules of the State Civil Service Commission; to borrow money and issue negotiable bonds, notes, and other obligations to provide for the rights of the holders thereof; to make mortgage loans subject to the approval of the Commissioner of Housing, who is guided for this purpose by the provisions of law governing State loans under Article XII of the Public Housing Law; in connection with any property on which it has made a mortgage loan, to protect or enforce any right conferred upon it by any law, mortgage, contract, or other agreement; and to do any and all things necessary to carry out its purpose. Article XII-A, Section 343.

Transfers of officers and employees of the agency between it and other State agencies and departments are made without examination and without loss of any civil service status or rights. Article XII-A, Section 344.

The Act provides that the bonds and notes issued by the Agency are fully and unconditionally guaranteed by the State, both as to principal and interest, to the extent authorized by the State constitution at the time the obligations are issued. However, the Agency may issue notes and bonds without the guaranty of the State. The Act also provides for the subrogation of the State upon default of payment on State-guaranteed obligations and for extensive involvement of the State Comptroller in the issuance and sale of such obligations. Article XII-A, Section 347.

To assure the continued operation and solvency of the agency, provision is made for the accumulation in a capital reserve fund of an amount equal to the maximum amount of principal and interest maturing and becoming due in any succeeding calendar year on all bonds of the agency then outstanding. In order further to assure such maintenance of the capital reserve fund, there shall be annually apportioned and paid to the agency for deposit in the capital reserve fund such sum, if any, as shall be certified by the Chairman of the Agency to the Governor and Director of the Budget as necessary to restore the capital reserve fund to an amount equal to the maximum amount of principal and interest maturing and becoming due in any succeeding calendar year on the bonds of the agency then outstanding. Article XII-A, Section 346.

The State Comptroller, or his legally authorized representative, is authorized and empowered from time to time to examine the books and accounts of the Agency. Article XII-A, Section 350. The Agency submits a complete and detailed report of its finances, operations, and accomplishments to the Governor at the end of the fiscal year. Article XII-A, Section 355.

The property of the Agency and its income and operations are exempt from State taxation. Article XII-A, Section 352. The bonds and notes of the Agency and the income therefrom are free from State and local taxation, except for estate and gift taxes and taxes on transfers. Article XII-A, Section 353.

Section 103(a)(1) of the Internal Revenue Code of 1954 provides, in part, that gross income does not include interest on the obligations of a State or a political subdivision thereof.

Section 1.103-1 of the Income Tax Regulations provides, in part, that obligations issued by or on behalf of a State, or a duly organized political subdivision acting by constituted authorities empowered to issue such obligations, are the obligations of a State or a political subdivision thereof.

Accordingly, in view of the responsibility which the State of New York has assumed by reason of its actions and the substantial control which it, in effect, has over the management and operation of the Agency, it is held that the obligations issued by the New York State Housing Finance Agency are considered as issued on behalf of the State by a duly constituted authority empowered to issue such obligations, and the interest received from such obligations is exempt from Federal income tax under the provisions of section 103(a)(1) of the Code.