Commuter-rail division is a political subdivision

Plain-English summary

A state-created division operated commuter rail within a metropolitan transportation system and asked whether it was a political subdivision for federal tax purposes. State and local governments appointed its board, the governor could remove board members for cause, and a regional authority oversaw its plans and budget. The division could regulate its facilities, impose fines and penalties, set routes and fares, and provide a police force through a controlled corporation. The IRS concluded that the division was a governmental unit with substantial police power. It therefore qualified as a political subdivision for purposes of section 103.

Ruling snapshot

• Question: Was the commuter-rail division a political subdivision for purposes of section 103?
• Outcome: approved
• Key authorities: IRC § 103; Treas. Reg. § 1.103-1(b); Rev. Rul. 77-164

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201735020                                              Third Party Communication: Government
Release Date: 9/1/2017                                         Agency
                                                               Date of Communication: April 25, 2017
Index Number: 103.00-00
                                                               Person To Contact:
------------------------------------------------------------   -----------------------, ID No. -------------------
--------------------------------                               ---------------------------------------------------
--------------------------                                     Telephone Number:
--------------------------------                               ---------------------
-------------------------------------                          Refer Reply To:
                                                               CC:FIP:B05
                                                               PLR-139748-16
                                                               Date:
                                                               May 30, 2017




Legend

Division                   =        -------------------------------------------------------

State                      =        -------------------

Act                        =        ---------------------------------------------------------------------------------

Authority                  =        ---------------------------------------------------

Corporation                =         --------------------------------------------------------------------------------
----------------------------------------------------

City                       =        --------------------

Year 1                     =        -------

a                          =        --

b                          =        --

c                          =        ---

d                          =        ---

e                          =        --

f                          =        ---

PLR-139748-16                                 2

Dear --------------:

This letter is in response to the request for a ruling submitted on behalf of the Division
that the Division is a political subdivision of State for purposes of § 1.103-1(b) of the
Income Tax Regulations.

FACTS AND REPRESENTATIONS

Under State’s constitution, public transportation is an essential public purpose for which
public funds may be expended. Under the Act, a State law, the a-county City
metropolitan area (Metro Area) public transportation needs are served by Authority and
its b divisions, each of which have separate responsibilities with respect to the Metro
Area public transportation. Division is one of the b divisions of Authority.

Authority was established as a unit of local government by a referendum held in the a
counties of the Metro Area. Authority is governed by a c-member board of directors (the
Authority Board). The members of the Authority Board are appointed by the heads of
the governing bodies of the a counties in the Metro Area and by the chief executive
official of City. No member of the Authority Board may be a member of the governing
body of any division.

Under the Act, Authority adopts plans that implement the public policy of State to
provide public transportation in the Metro Area, set goals, objectives and standards for
the provision of public transportation, and coordinates investment in the public
transportation facilities to enhance the integration of the public transportation in the
Metro Area. Authority also provides financial oversight of the b divisions and allocates
State and local tax revenue to the b divisions in accordance with a statutory formula.

Division was established by State as part of the Metro Area public transportation system
to provide public transportation by commuter rail within the Metro Area. Division is
governed by a d-member board of directors (the Division Board). The members of the
Division Board are appointed by the governing bodies of the counties in the Metro Area,
and by the chief executive official of City. Division Board members serve for a period of
e years. The members of the Division Board may be removed for cause either by a
qualified majority of the members of the Division Board or by the governor of State.

Division has the power to issue revenue bonds to acquire, construct, or improve public
transportation facilities it operates, subject to the approval of the Authority Board.
Division has the power to acquire property by, among other types of contracts,
installment or conditional purchase contracts and leases, which can be paid for in
annual installments with a term of up to f years.

Division also has the power to pass ordinances and make all rules and regulations
proper and necessary to regulate the use, operation, and maintenance of its property

PLR-139748-16                                 3

and facilities and, by ordinance, to prescribe fines or penalties for violations thereof. In
addition, Division may establish, enforce, and facilitate the achievement and
maintenance of standards of safety against accidents with respect to public
transportation provided by Division or by other transportation agencies or contractors
within its jurisdiction.

Division determines the level and nature of public transportation by commuter rail in the
Metro Area to meet the plans, goals, and objectives adopted by Authority. Division
determines the level of fares and charges for the public transportation it provides so that
it can meet certain revenue standards established by Authority.

Division controls its own finances. Division proposes its budget, subject to a public
hearing and the approval by Authority. Authority approves the budget if the budget
meets the specific criteria set by the Act and is consistent with Authority’s established
requirements, plans, and objectives. The Division budget includes funding for the police
force maintained by Corporation.

Corporation is a separate corporate entity that, since Year 1, when the relevant part of
the Act was amended, has operated Division’s commuter rail facilities. The governing
board of Corporation consists of the members of the Division Board. Division
supervises, directs, and may dissolve Corporation. The Act confers certain powers
upon Corporation as are delegated to it by Division. One of such powers is the power to
establish and maintain a police force that aids, coordinates, and supplements other
police forces in protecting persons and property and reducing the threats of crime with
regard to public transportation within Division’s jurisdiction. This police force has the
same powers with regard to protection of persons and property as those exercised by
municipal police.

LAW AND ANALYSIS

The Internal Revenue Code does not define the term “political subdivision.” Section
1.103-1(b) provides 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. As thus defined, a political
subdivision of any state or local governmental unit may or may not, for purposes of this
section, include special assessment districts such as road, water, sewer, gas, light,
reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar
districts and divisions of these units.

The three generally acknowledged sovereign powers of states are the power to tax, the
power of eminent domain, and the police power. Commissioner v. Estate of Alexander
V. Shamberg, 3 T.C. 131 (1944), acq. 1945 C.B. 6, aff'd, 144 F.2d 998 (2d Cir. 1944),
cert. denied, 323 U.S. 792, 65 S. Ct. 433, 89 L. Ed. 631 (1945). It is not necessary that
all three of these powers be delegated in order to treat an entity as a political

PLR-139748-16                                  4

subdivision for purposes of the Code. However, possession of only an insubstantial
amount of any or all of the 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. Rev. Rul. 77-164, 1977-1 C.B. 20.

Division is charged by State law with providing public transportation by commuter rail
within the Authority’s jurisdiction, traditionally a public purpose and declared as such by
the State constitution. Division is controlled by State, Authority, and all of the Metro
Area county and City governments. Division Board members are appointed by the
governing bodies of the counties and City comprising the Metro Area. Division Board
members may be removed by the governor of State for cause. As part of Authority’s
responsibility of coordinating, planning, and facilitating the provision of public
transportation in the Metro Area, it oversees the operation of Division and approves its
budget. Based on these facts, we conclude that Division is a division of a state or local
government for purposes of § 1.103-1(b).

Division sets the routes of, and charges for, the public transportation by commuter rail in
the Metro Area. Division possesses the power to pass rules and regulations proper and
necessary to regulate the use, operation, and maintenance of its property and facilities
that have effect on the public within its jurisdiction; Division may also impose fines and
penalties for violations of those rules and regulations. In addition, Division is authorized
to provide, through Corporation, a police force to protect persons and property and
enforce rules and regulations related to commuter rail. Accordingly, under all of the
facts and circumstances, we conclude that Division possesses substantial police power.

CONCLUSION

Based on the above, we conclude that Division is a political subdivision for purposes of
§ 103 of the Code.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed

PLR-139748-16                                5


by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Financial Institutions & Products)

                                                   /S/
                                      By: _______________________
                                      Timothy L. Jones
                                      Senior Counsel
                                      Branch 5