Rev. Rul. 79-95

ISSUE

Whether a certain transit authority that operates a mass transit system comes within the scope of the various federal excise tax exemptions for states and local governments. FACTS

The transit authority was created as a body politic and corporate under a state municipality authorities act. Its purpose is to provide a continuing mass transit system for the benefit of the general public. Among the powers granted the authority under the enabling act are: (1) the power to fix, alter, charge, and collect rates and other charges in the area served by its facilities at reasonable and uniform rates, (2) the power of eminent domain, and (3) the power to appoint police officers who shall have the same right as other police officers in the state with respect to the property of the authority.

LAW AND ANALYSIS

The applicable sections of the Internal Revenue Code of 1954 and regulations are section 4041(g)(2) relating to the exemption from the special fuels tax, section 4221(a)(4) relating to the exemption from certain manufacturers excise taxes, section 4253(i) relating to the exemption from the communications and facilities tax, and section 4483(a) relating to the exemption from the highway use tax.

The term "political subdivision" is not defined by sections 4041(g)(2), 4221(a)(4), or 4253(i) of the Code or the regulations promulgated thereunder. However, the term political subdivision has been defined consistently for all federal tax purposes as denoting either a division of a State or local government that is a municipal corporation or a division of such State or local government that has been delegated the right to exercise sovereign power. See Rev. Rul. 77-143, 1977-1 C.B. 340, which holds a port authority, created to lease, erect, construct, make, equip, and maintain port facilities, that can fix rates and condemn property, is a political subdivision. Also, in 38 O.A.G. 563-565 (1937), it was pointed out that for Federal excise tax purposes the term political subdivision "may designate a true governmental subdivision * * * or * * * it may have a broader meaning denoting any subdivision of the State created for a public purpose although authorized to exercise a portion of the sovereign power of the State only to a limited degree."

The sovereign powers are the power of taxation, the power of eminent domain, and police or regulatory power. In order to qualify as a political subdivision, an entity need not possess all three powers, but what powers it does possess must be substantial in their effect. See Rev. Rul. 78-276, 1978-2 C.B. 256.

HOLDING

Since the transit authority, created under a state statute, provides a mass transit system for the benefit of the general public and, under the enabling act, has the power of eminent domain and police or regulatory power, the transit authority is a political subdivision of a state and comes within the scope of the federal excise tax exemptions for states and political subdivisions. Thus, where taxable articles are sold to the transit authority for its exclusive use, where communication services or facilities are furnished to the authority, or where highway vehicles are used on the highway by the authority, the excise tax exemptions provided by sections 4041(g)(2), 4221(a)(4), 4253, and 4483(a) apply, provided all other requirements of the law and regulations applicable to these exemptions are met.