Health authority qualified as a political subdivision

Plain-English summary

A public corporation formed under state law to provide health care services asked whether it was a political subdivision for federal tax purposes. State law authorized the authority to exercise eminent domain without special restrictions beyond the rules generally applicable to the state and its agencies. The county appointed every member of the authority's governing board, filled vacancies, received annual activity and budget reports, and received an audit through the court clerk. The IRS concluded that the authority exercised a substantial part of a sovereign power and was controlled by the county. It therefore qualified as a political subdivision under Treasury Regulation Section 1.103-1(b).

Ruling snapshot

• Question: Was the public health authority a political subdivision under Treasury Regulation Section 1.103-1(b)?
• 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: 201816007 Third Party Communication: None
Release Date: 4/20/2018 Date of Communication: Not Applicable
Index Number: 103.02-01
Person To Contact:
------------------------------------------------ -----------------------------, ID No. -------------
---------------------------------------- -----------------
-------------------------------- Telephone Number:
---------------------------------- ----------------------
Refer Reply To:
CC:TEGE:EOEG:E01
PLR-124275-17
Date:
December 21, 2017

Legend

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

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

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

County = ------------------------------------

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

This letter is in response to your letter dated August 4, 2017, as revised by subsequent
correspondence, for rulings on behalf of the Authority and a trust. The Authority
requested that it is a political subdivision as defined in § 1.103-1(b) of the Income Tax
Regulations, which we referred to the Bonds Branch for technical assistance. This
ruling is solely addressed to the Authority and the ruling it requested. We will address
the other issues in another letter, in response to the trust’s separate request for rulings.

Facts and Representations

The Authority is a public corporation formed pursuant to the Act, a law of the State, for
the purposes enumerated in the Act, including provision of health care services within
the County. The Authority’s bylaws state that promotion of the general health of the
community is an objective of the Authority. The Act states that the Authority is deemed
to exercise public and essential governmental functions.

The Act authorizes the Authority to acquire by the exercise of the right of eminent
domain any property essential to the purposes of the Authority. This authorization to
exercise the sovereign power of eminent domain comes with no special restrictions and
is subject only to the same general rules applicable to any exercise of eminent domain
by the State or an agency of the State.

PLR-124275-17 2

The County’s governing board appoints all members and fills all vacancies on the
Authority’s governing board. The Act instructs the Authority to provide to the County’s
governing board an annual report setting forth the activities and budget of the Authority.
The Act also requires that an annual audit of the Authority’s financial affairs, books, and
records be conducted and filed with the clerk of the superior court in the County.

Law and Analysis

The Internal Revenue Code (“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
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.

The Authority was formed as a public corporation pursuant to a State law. The
Authority’s purpose is to provide health care services and to promote general health
within the County. The Act authorizes the Authority to exercise a substantial amount of
the sovereign power of eminent domain. The Authority’s governing board is controlled
by the County and must report on the Authority’s activities, budget, and financial affairs.
Based on these facts, we conclude that the Authority is a division of a state or local
governmental unit that has been delegated the right to exercise part of the sovereign
power of that unit, as provided in § 1.103-1(b).

Conclusion

We conclude that the Authority is a political subdivision as defined in § 1.103-1(b) of the
Income Tax Regulations.

The ruling contained in this letter is based upon information and representations
submitted by or on behalf of the Authority and accompanied by a penalty of perjury
statement executed by an appropriate party, as specified in Rev. Proc. 2017-1, 2017-1
I.R.B. 1, section 7.01(15)(b). This office has not verified any of the material submitted in

PLR-124275-17 3

support of the request for ruling, and such material is subject to verification on
examination. 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.

The Associate Office will revoke or modify a letter ruling and apply the revocation
retroactively if: (1) there has been a misstatement or omission of controlling facts; (2)
the facts at the time of the transaction are materially different from the controlling facts
on which the ruling is based; or (3) the transaction involves a continuing action or
series of actions and the controlling facts change during the course of the transaction.
See Rev. Proc. 2017-1, section 11.05.

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 ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
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,


                                   ____________________________________
                                   David L. Marshall
                                   Assistant Branch Chief, Exempt Organizations
                                   Branch 1 (Exempt Organizations/Employment
                                   Tax/Government Entities)
                                   (TEGE Associate Chief Counsel)