Rev. Rul. 57-187

Advice has been requested whether interest received on bonds issued by an Industrial Development Board formed under Title 37, Chapter 17 of the Code of Alabama, is exempt from Federal income tax.

Under Title 37, Chapter 17 of the Alabama Code 1940, sections 815-830, as amended, the legislature has authorized the incorporation in the several municipalities of public corporations designated as Industrial Development Boards to acquire, own, lease and dispose of properties to the end that such corporations may be able to promote industry and develop trade by inducing manufacturing, industrial and commercial enterprises to locate in the State. Title 37, Section 816.

Under the statute an Industrial Development Board may be formed only after the governing body of the municipality concerned has given its formal approval to the creation of the Board and to the form of certificate of incorporation. Title 37, Section 817. The board of directors of each Industrial Development Board is elected by the governing body of the municipality concerned and serves without compensation. Title 37, Section 821. The corporate powers include the power to acquire, improve, maintain, equip and furnish projects, to lease such projects and collect rent; to sell and convey any and all of its property whenever the board of directors shall find such action to be in furtherance of the purposes for which the corporation was organized; and to issue bonds for the purpose of carrying out any of its powers. Title 37, Section 822.

All bonds shall be payable solely out of revenues and receipts derived from the leasing or sale by the corporation of its projects. Title 37, Section 823. The municipality shall not be liable for the payment of principal or interest on any of the bonds of the corporation. Title 37, Section 826.

Industrial Development Boards are exempt from all State taxation, and interest on bonds issued by an Industrial Development Board is likewise exempt from State taxes. Title 37, Section 825. Industrial Development Boards are nonprofit corporations and no part of their net earnings may inure to the benefit of any private person. Title 37, Section 827. Upon dissolution of an Industrial Development Board, the title to all property owned by it shall vest in and become the property of the municipality in which the Board is located. Title 37, Section 828.

Section 103(a) of the Internal Revenue gross income interest on the obligations of a State, a Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia.

Section 1.103-1 of the Income Tax Regulations provides in part, `* * * Obligations issued by or on behalf of the State, Territory, or possession of the United States, or a duly organized political subdivision acting by constituted authorities empowered to issue such obligations, or the obligations of a State, Territory, or possession of the United States, or a political subdivision thereof. * * *'

Revenue Ruling 54-106, C.B. 1954-1, 28, holds that bonds issued by or in behalf of a municipality for the purpose of financing the acquisition or construction of municipally owned industrial plants for lease to private enterprise constitute obligations of a political subdivision. The same principle is equally applicable to bonds issued by an Industrial Development Board in behalf of a municipality.

Accordingly, in view of the circumstances in the instant case, it is held that bonds issued by an Industrial Development Board formed under Title 37, Chapter 17 of the Code of Alabama, are considered issued in behalf of a municipality, a political subdivision of the State. Interest received on such bonds is exempt from Federal income tax under section 103(a)(1) of the Code.