Rev. Rul. 69-453

Advice has been requested whether a soil and water conservation district in the State of Connecticut is a wholly owned instrumentality of the State or a political subdivision thereof, for purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act (chapters 21 and 23, respectively, subtitle C, Internal Revenue Code of 1954).

The district was originally an unincorporated association of landowners. Later it was incorporated under the Nonstock Corporation Act of the State of Connecticut. The district's certificate of incorporation shows that its purposes are to make surveys and investigations and do research concerning the problems of soil erosion and its control; to cooperate with or enter into agreements with landowners to develop conservation practices upon their lands; and to assist community conservation commissions and provide soil maps for planning and zoning boards. The certificate of incorporation provides that the board of supervisors, which is elected by the landowners, will develop, with the help of the landowners and operators and assistance from the Soil Conservation Service of the United States Department of Agriculture (1) a district program outlining long-term soil and water conservation objectives and (2) an annual plan as a general guide for carrying on work within the district to attain such objectives.

A memorandum of understanding established a basis for cooperation and assistance among the district, the Connecticut Commissioner of Agriculture and Natural Resources, and the United States Department of Agriculture in their common objective of soil and water conservation.

The State Commissioner agrees (1) to assist the supervisors and the Department in carrying forward the principles of the memorandum; (2) to encourage the supervisors to discover and put into action local resources in an effort to solve soil and water conservation problems; (3) to currently develop and furnish the supervisors suggestions concerning the nature of their duties and the effectiveness of their methods for carrying on their work; (4) to assist the supervisors in every practicable manner through resources available to him and to endeavor to obtain for them assistance from local, State, and Federal agencies; and (5) to provide the supervisors with summaries and analyses of annual reports of other boards and to initiate liaison work between the various boards of supervisors in the interest of a maximum quantity of effective work throughout the State.

The district agrees (1) that it will upon request or upon its own initiative make recommendations to departmental agencies carrying on conservation work within the district with respect to the development and administration of conservation activities and the overall conservation problems and work plans of the district to best effectuate the purpose of these activities; (2) that it will prepare, with the approval of the State Commissioner, an annual work plan to serve as a guide in carrying out its program during the year ahead; and (3) that, with the approval of the State Commissioner, it will be responsible for determining the kind, amount, and priority of work to be performed by it on farms and other land, and for seeing that the provisions of cooperative agreements it enters into with owners and operators of land are carried out.

The district's operations are managed by the board of supervisors. The supervisors do not take an oath of office and are not bonded. They attend monthly meetings, for which the State pays them at a fixed rate but no State official or body has the authority to remove the supervisors from office.

The participating landowners present to the supervisors proposals for conservation work on their property. The proposals are reviewed and, if they are accepted, contracts are entered into between the landowners and the district. The contracts require the district to provide the necessary equipment and the equipment operator and set forth the hourly rates for the use of the equipment and the hire of the operator. The supervisors need not obtain permission from the Connecticut Commissioner of Agriculture and Natural Resources to enter into the contracts and no Federal or State official can exercise a veto over their activities. The contract is not signed by the State Commissioner and the district is bound to carry out its obligations thereunder. The State Commissioner cannot order or direct the supervisors to do anything that they do not approve or do not consider to be in the best interests of the district, the only sanction being to deny the district the use of State equipment, in which event the district would use its own equipment to complete the conservation work.

The district purchases its own supplies and carries its own general liability insurance and workmen's compensation insurance. Its revenue comes from billing landowners for the work it does on their properties. These funds are deposited in a commercial bank checking account or savings account maintained in the district's name, under the complete control of the supervisors. The treasurer of the district handles all funds and pays all expenses, including the salary of the equipment operator. An annual financial and operational report for the past year and for contemplated projects is made, which is furnished to the United States Department of Agriculture and the State of Connecticut. The State audits the annual financial report only if requested to do so by the supervisors. In the event the district's operations are terminated, the State would have no claim to its assets other than as a general creditor. The assets would be distributed according to the statute providing for dissolution of a nonstock corporation in Connecticut.

Section 3121(b)(7) of the Federal Insurance Contributions Act excepts from "employment" service performed in the employ of a State, or any political subdivision thereof, or any instrumentality of any one or more of the foregoing which is wholly owned thereby, with exceptions not here material. Section 3306(c)(7) of the Federal Unemployment Tax Act contains a similar provision.

In resolving the question whether an organization is an instrumentality of a state or political subdivision thereof, the following factors are taken into consideration: (1) whether it is used for a governmental purpose and performs a governmental function; (2) whether performance of its function is on behalf of one or more states or political subdivisions; (3) whether there are any private interests involved or whether the states or political subdivisions involved have the powers and interests of an owner; (4) whether control and supervision of the organization is vested in public authority or authorities; (5) whether express or implied statutory or other authority is necessary or exists for the creation and use of the organization; and (6) the degree of financial autonomy and the source of its operating funds. Rev. Rul. 57-128, C.B. 1957-1, 311.

The district is a private nonstock corporation that acts on behalf of private individuals in keeping with the purposes stated in its certificate of incorporation. Any benefit conferred upon the public is merely incidental to this primary purpose. The corporation was formed by private individuals who have complete control over the corporate operations, the control over revenue and expenditures being especially evident.

The State law that concerns the district is regulatory in nature. The State Commissioner has authority to assist private individuals in forming conservation districts but he does not have the power to operate them. The State Commissioner has issued regulations suggesting certain modes of procedure and requiring an annual report on the district's operations and financial status. Also, he has made himself an ex officio member, without vote, of the district's board of supervisors. These regulations however are designed to insure the integrity of the corporation but not to direct its operation. The district, like any other corporation that has an effect on the public interest, is subjected to State regulations designed to protect the public interest.

Accordingly, the soil and water conservation district is not a wholly owned instrumentality of the State of Connecticut or a political subdivision thereof, for purposes of sections 3121(b)(7) and 3306(c)(7) of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively. Furthermore, the district is the employer of the supervisors who conduct its affairs and of the equipment operators, for purpose of those Acts and the Collection of Income Tax at Source on Wages (chapter 24, subtitle C, of the Code).

Compare Revenue Ruling 57-120, C.B. 1957-1, 310, and Revenue Ruling 59-373, C.B. 1959-2, 37, which hold that soil conservation districts are political subdivisions of the States therein involved.