Rev. Rul. 77-165

Advice has been requested whether, under the circumstances described below, a state university will qualify as a political subdivision within the meaning of section 1.103-1(b) of the Income Tax Regulations.

U, a state university, was established under the laws of state X and is supported by legislative appropriations from the general funds of X based on budgets submitted by U. U is authorized to create a police force for the purpose of regulating traffic, motor vehicles and speed limits only on the campus and to issue citations, impose fines, and arrest persons for the purpose of detaining them until the city police arrive. Under state law the legislature may make limited and specific delegations of the state's power of eminent domain to the university. Such delegations must be by specific legislation stating the purpose to which exercise of the power by the university is restricted. Several delegations have been made for such purposes as acquiring a residence hall and a university dining hall.

Section 1.103-1(b) of the regulations provides, in part, that the term "political subdivision" denotes any division of any state or local governmental unit that is a municipal corporation or that has been delegated the right to exercise part of the sovereign power of the unit.

Three generally acknowledged sovereign powers of states are the power to tax, the power of eminent domain, and the police power. Estate of Alexander J. Shamberg, 3 T.C. 131 (1944), acq., 1945 C.B. 6, aff'd 144 F.2d 998 (2d Cir. 1944), 1945 C.B. 335, cert. denied, 323 U.S. 792 (1944). It is not necessary that all three of these 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.

In the instant case, support of U by legislative appropriations from state X does not represent the right of U to exercise the power of taxation. The right to exercise the power of eminent domain in specific projects designated by the legislature of state X does not represent a substantial right to exercise the power of eminent domain. Although U has been granted the limited power of regulating traffic within its confines and a limited arrest power, the delegation of these limited powers is not a delegation of a substantial police power to U.

Accordingly, since U does not possess a substantial right to exercise the sovereign powers of the state, U does not qualify as a political subdivision within the meaning of section 1.103-1(b) of the regulations. Therefore, interest paid on obligations issued by U will not be exempt from Federal income tax under section 103(a)(1) of the Code unless such obligations are issued by U on behalf of a state or local governmental unit in accordance with section 1.103-1(b).