Were a nonprofit-financed county jail and the interest paid to holders of lease-payment certificates exempt from South Carolina property and income tax?

Plain-English summary

South Carolina Private Letter Ruling 88-7 reached two favorable but distinct conclusions for a county jail financing:

1. The jail facility was exempt from property tax because it was leased on a nonprofit basis to the county and used for the general public purpose of operating a jail.
2. The interest portions of lease payments passed through to certificate holders were exempt from South Carolina income tax only if the Internal Revenue Service accepted the arrangement as obligations of a South Carolina political subdivision and exempted the interest on the federal return.

The jail's incidental office space did not defeat the property-tax exemption because the offices supported the facility's operation rather than replacing its public purpose.

How the jail financing was structured

XYZ County owned the land for a new jail. The county formed a new nonprofit corporation that was exempt from federal income tax under Internal Revenue Code section 501(c)(3).

The planned transactions were:

• the county would lease the land to the nonprofit;
• the nonprofit would complete construction of the jail;
• the nonprofit would lease the completed facility back to the county;
• the nonprofit would assign its leasehold interest to ABC Bank as trustee; and
• the bank would sell certificates of participation in the county's lease payments to the public.

The ruling stated that the nonprofit would receive no profit from the transaction.

The county's lease payments separately stated principal and interest so that the lease would be treated as an installment sales contract for federal income-tax purposes. Certificate holders would receive their shares of both components and report the interest as income, subject to the claimed exemption.

Why the jail qualified for the property-tax exemption

Section 12-37-220(B)(18) exempted real property leased on a nonprofit basis to a state agency, county, municipality, or other political subdivision while used for a general public purpose. The statute excluded property used for office space or warehousing.

The ruling used a common-law description of public purpose that included promoting the public's health, safety, morals, welfare, security, prosperity, and contentment. A jail promoted the county's safety, morals, and security, so the Commission found a qualifying public purpose.

Although the jail included office space, the Commission relied on Charleston Aviation Authority v. Wasson for the principle that incidental use for another purpose did not prevent property from being used exclusively for a public purpose. The offices were incidental to operating the jail.

Why the certificate interest exemption was conditional

Section 12-7-410 tied South Carolina individual gross income, adjusted gross income, and taxable income to the federal calculation, subject to state modifications.

The Commission concluded that sections 12-1-60 and 12-7-430(b)(1) would exempt the interest portions of the lease payments if the IRS accepted the arrangement as obligations of a South Carolina political subdivision and allowed the interest exemption federally.

The state answer therefore depended on the federal characterization. The ruling did not grant an unconditional exemption if the IRS rejected that treatment.

What this means for you

Counties and public-facility planners

PLR 88-7 treated a nonprofit lease structure as eligible where the county used the property for a general public purpose and the nonprofit received no profit from the transaction.

Nonprofit facility owners

The property exemption required a nonprofit lease to government and qualifying public use. The nonprofit's federal section 501(c)(3) status was part of the facts, but the ruling applied the specific state property-tax statute.

Public-finance and certificate holders

The interest exemption was not automatic. It depended on the IRS accepting the certificates and lease arrangement as obligations of a political subdivision and exempting the interest federally.

Property-tax professionals

Incidental office space did not defeat the jail exemption on these facts. The ruling distinguished office space supporting the exempt facility from property used as office space in its own right.

Readers applying the ruling today

PLR 88-7 addressed a particular lease, nonprofit, trustee, certificate, and federal-tax structure under 1987 law. Current property-tax statutes, public-purpose tests, financing rules, federal tax treatment, and transaction documents must be reviewed independently.

Common questions

Q: Was the jail facility exempt from property tax?

A: Yes. It was leased on a nonprofit basis to the county and used for the public purpose of operating a jail.

Q: Did office space inside the jail destroy the exemption?

A: No. The Commission treated the office space as incidental to the jail's operation.

Q: Were certificate holders' interest payments automatically exempt?

A: No. The state exemption depended on the IRS accepting the arrangement as obligations of a South Carolina political subdivision and exempting the interest federally.

Q: Did the nonprofit earn a profit from the financing?

A: No. The ruling's facts said the nonprofit corporation would not receive any profit from the transaction.

Q: What did certificate holders receive?

A: They received portions of the county's separately stated principal and interest lease payments.

Q: Why is the issued date in 1987 for a ruling numbered 88-7?

A: The official PDF identifies the document as SC Private Letter Ruling 88-7 and its signature block states April 13, 1987; this page preserves both official details.

Q: Can another county or investor rely on PLR 88-7?

A: No. The ruling states that it applied only to the requesting taxpayer's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 12-37-220(B)(18) (Supp. 1987) — property leased on a nonprofit basis to government for a general public purpose
• S.C. Code section 12-1-60 (1976) — qualifying governmental-obligation interest
• S.C. Code sections 12-7-410 and 12-7-430(b)(1) (Supp. 1987) — South Carolina income starting point and exempt-interest modification
• S.C. Code section 12-3-170 (1976) — private-letter-ruling authority
• Lott v. City of Orlando, 142 Fla. 338, 196 So. 313 (1939) — public-purpose definition quoted in the ruling
• Charleston Aviation Authority v. Robert C. Wasson, 289 S.E.2d 416 (1982) — incidental use and exclusive public purpose

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR88-7.pdf

Original ruling text

SC PRIVATE LETTER RULING #88-7

TO:

XYZ County Jail Association, Inc.

SUBJECT:

Tax Exempt Status of XYZ County Jail Facility

REFERENCE:

S.C. Code Ann. Section 12-37-220(B)(18) (Supp. 1987)
S.C. Code Ann. Section 12-1-60 (1976)
S.C. Code Ann. Section 12-7-410 (Supp. 1987)
S.C. Code Ann. Section 12-7-430(b) (Supp. 1987)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:

1. Is the XYZ County jail facility exempt from property taxes pursuant to 12-37-220(B)(18)?
2. Are the interest portions of the lease payments received by certificate holders exempt from
   taxation as certificates of indebtedness of XYZ County?
   Facts:
3. XYZ County, South Carolina currently owns the land on which a new jail facility is being
   built. They have formed a new eleemosynary corporation which is exempt from Federal
   income tax pursuant to 501(c)(3) of the Internal Revenue Code. XYZ County intends to lease
   this parcel of real estate to the new eleemosynary corporation. The eleemosynary corporation
   will then complete construction of the new jail facility. At the completion of construction, the
   new jail facility will be leased back to the County by the eleemosynary organization. The
   eleemosynary corporation will then assign all of its leasehold interest in the jail facility to
   ABC Bank as trustee. ABC Bank will sell "Certificates of Participation" in the lease
   payments to be made by the county to members of the general public. The new South
   Carolina eleemosynary corporation will not receive any profits from the transaction.
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2. Rental payments under the lease will consist of specifically and separately stated principal
and interest components so that the lease will be treated as an installment sales contract for
Federal income tax purposes. The holders of the certificate will be entitled to receive
portions of the lease payments, both principal and interest, and will treat as income the
interest portion of those payments. For Federal income tax purposes, the interest portion of
the payments received by the certificate holders will be exempt from taxation.
Discussion:

1. The terms of Section 12-37-220(B)(18) provide an exemption of ad valorem taxes for:
   Real property leased on a nonprofit basis, to a state agency, county, municipality or other
   political sub-division so long as it is used for a general public purpose; provided, however,
   this exemption shall not apply to property used for office space or warehousing.
   The South Carolina Code does not define the term "general public purpose" but common law
   holds that the objective of a public purpose is "the promotion of the public health, safety,
   morals, welfare, security, prosperity, and contentment of all the inhabitants or residents
   within a given political division." (Lott v. City of Orlando, 142 Fla. 338, 196 So. 313
   (1939)). Using this as a guide, a jail facility would promote the safety, morals, and security
   of XYZ County. As such, it is used for a public purpose and falls within the provisions of
   12-37-220(B)(18). It should be noted, however, that this statute specifically excludes
   property used for office space. The Supreme Court in Charleston Aviation Authority v.
   Robert C. Wasson, 289 S.E. 2d 416 (1982) stated that a property may be used exclusively for
   a public purpose notwithstanding the incidental use for other purposes. Therefore the jail
   facility would qualify for the exemption, notwithstanding the fact that it may contain office
   space which is incidental to the facility's operation.
   Section 12-7-410 provides that the South Carolina gross income, adjusted gross income and
   taxable income of an individual is the same as determined under the Internal Revenue Code
   with the modifications specified in Section 12-7-430 and 12-7-435. The interest portions of
   the lease payments received by the certificate holders would be exempt from taxation
   pursuant to Section 12-1-60 and Section 12-7-430(b)(1) provided that the Internal Revenue
   Service accepts this arrangement as obligations of a subdivision of this state and exempts the
   interest.
   Conclusion:
2. The XYZ County jail facility will be exempt from property tax pursuant to 12-37220(B)(18).
3. The interest portions of the lease payments received by certificate holders will be exempt
   from taxation pursuant to 12-1-60 and 12-7-430(b)(1) provided that the Internal Revenue
   Service allows the exemption on the federal return.
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SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard, Jr.
S. Hunter Howard, Jr., Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/A. Crawford Clarkson, Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
, 1987
April 13

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