Rev. Rul. 83-131

ISSUE

The Internal Revenue Service has reconsidered Rev. Rul. 57-193, 1957I C.B. 364, which holds that electric and telephone membership corporations established under the General Statutes of North Carolina come within the scope of the federal excise tax exemptions for state and local governments.

FACTS

Rev. Rul. 57-193 states that electric and telephone membership corporations were established under Chapter 117 of the General Statutes of the State of North Carolina. The statute (1) provided that electric membership corporations formed under its provisions were public agencies with the same rights as other political subdivisions of the state; (2) required that the State Rural Electrification Authority must investigate and pass upon applications to form electric membership corporations; (3) required that upon dissolution of electric membership corporations, all assets remaining after the payment of debts would pass to and become the property of the state; (4) granted the same tax exemption to the property of electric membership corporations that was granted to property owned by counties and municipalities of the state; (5) stated that the State Rural Electrification Authority could exercise the power of eminent domain on behalf of the electric membership corporations; and (6) stated that electric membership corporations could not be organized for profit.

Chapter 117 also provided that telephone membership corporations could be organized in the same manner as electric membership corporations (with certain exceptions not here relevant).

However, since the publication of Rev. Rul. 57-193, North Carolina amended its laws concerning electric membership corporations. The revised statute relating to taxes and assessments provides that as of April 20, 1965, no electric membership corporation organized, reorganized, or domesticated under its provisions is a public agency. Such a corporation is not a political subdivision of the state, nor does it have the rights of one. Upon dissolution, all assets remaining after the payment of debts will be distributed among members of the corporation rather than distributed to the state, as was previously provided.

Chapter 117 was also amended to provide that an electric membership corporation does not need the Rural Electrification Authority's rulings or participation in order to exercise the right of eminent domain to construct, operate and maintain electric generation, transmission, distribution, and related facilities.

The applicable current North Carolina statutes relating to telephone membership corporations, are generally the same as those in effect at the time Rev. Rul. 57-193 was published.

The electric and telephone membership corporations in question are organized and controlled by the user members and managed by a board of directors. The corporations possess financial autonomy and are the source of their operating funds. The corporations provide utility services, and they operate and exercise their powers on behalf of their members.

Rev. Rul. 57-193 holds that such membership corporations come within the scope of the exemptions from federal excise taxes provided for states or their political subdivisions.

LAW AND ANALYSIS

Section 4041(g)(2) of the Internal Revenue Code exempts sales for the exclusive use of any state, political subdivision of a state, or the District of Columbia from the taxes on diesel and special fuels imposed by section 4041. Comparable exemptions from the manufacturers excise taxes, the tax on communications, and the highway use tax are provided by sections 4221(a)(4), 4253(i) and 4483(a), respectively.

The term "political subdivision" is not defined by section 4041 (b)(2), 4221(a)(4), 4253(i), or 4483(a) of the Code or the applicable regulations. 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 a 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 that a port authority is a political subdivision because it was created to lease, erect ' construct, make, equip, and maintain port facilities, and because it can fix rates and condemn property.

The corporations in the present case are not divisions of a state or local government unit but are financially autonomous and not controlled by a state or local government. Also, they are not motivated by wholly public purposes.

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. 79-95, 1979-1 C.B. 331. Although the corporations in this case can exercise eminent domain to a limited degree, they cannot tax and do not have police powers. Thus, the corporations do not have sufficient sovereign power to qualify as political subdivisions.

Although the corporations are not political subdivisions, they still would come within the scope of the exemptions in question if sales to them could be considered to be made for the exclusive use of a state or local government.

In determining whether a sale to, or use by, an organization is for the exclusive use of a state or local government, it must be established that the organization is either (a) controlled, directly or indirectly, by an agency of a state or local government, or (b) is performing a traditional governmental function on a nonprofit basis. See Rev. Rul. 70-214, 1970-1 C.B. 230; Rev. Rul. 71-485, 1971-2 C.B. 371; and Rev. Rul. 74-253, 1974-1 C.B. 316.

Ordinarily an organization will not be considered to be performing a traditional governmental function for purposes of the exemption unless it is performing an essential governmental function that state or local governments generally have performed directly and that would have to be carried on by the state or local government if the organization did not exist. The term traditional governmental function does not include activities of an organization merely because they are of the type that could appropriately be carried on by a state or local government if it chose to do so, or merely because they supplement existing government activities. The separate exemptions provided for hospitals (section 4253(h)) and schools (section 4041(g)(4), 4221(a)(5), and 4253(j)) make clear that the state and local government exemptions were not intended to apply to every organization that performs an important social or charitable function that is also sometimes performed by government. See Rev. Rul. 82-30, 1982-1 C.B. 165.

The membership corporations in question are not controlled directly or indirectly by a state or local government. Rather, the business and affairs of the corporations are controlled by a board of directors that is independent of such authority.

In addition, neither providing electric services nor providing telephone services is a traditional governmental function because electric and telephone services are not generally provided by state or local governments directly.

HOLDING

When taxable articles are sold to the North Carolina electric and telephone membership corporations or when taxable communications services and facilities are furnished to the corporations, the excise tax exemptions provided by section 4041(g)(2), 4221(a)(4), and 4253(i) of the Code do not apply. Further, the exemption from the highway use tax provided by section 4483(a) does not apply to the operation of vehicles by the corporations.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 57-193 is revoked.

NONRETROACTIVE APPLICATION

Under the authority granted by section 7805(b) of the Code, this revenue ruling will not be applied to sales of articles and the furnishing of services to (1) electric membership corporations coming within the scope of Rev. Rul. 57-193 prior to April 20, 1965, the effective date of the change in state law, and (2) telephone membership corporations coming within the scope of Rev. Rul. 57-193, prior to January 1, 1984.