Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-98

1976-1 C.B. 31

Section 103

IRS Headnote

Industrial development bonds issued after partial retirement of prior issue. For purposes of the $5,000,000 exempt small issue limitation, a political subdivision that issues industrial development bonds to acquire a factory for a corporation, retires a portion of the bonds, and in the same year issues industrial development bonds to acquire another factory for the same corporation, must treat the retired portion of the first bond issue as a capital expenditure within the meaning of section 103(c)(6)(D)(ii) of the Code in determining the aggregate face amount of the second issue.

Full Text

Rev. Rul. 76-98

Advice has been requested whether, under the circumstances described below, certain prior issues and capital expenditures must be taken into account in determining the aggregate face amount of a small exempt issue of governmental obligations as provided in section 103(c)(6)(D)(ii) of the Internal Revenue Code of 1954.

On January 2, 1974, County M issued bonds (Series A) with a face amount of $2,000,000 and expended the bond proceeds for the purchase, from an unrelated person, of an existing factory located in the County, but not within any incorporated municipality. The equitable owner and sole user of the factory is corporation X. The bonds issued by M are industrial development bonds within the meaning of section 103(c)(2) of the Code. M has made an election under section 103(c)(6)(D) to treat the bonds as an exempt small issue of $5,000,000 or less.

On July 5, 1974, M issued bonds (Series B) with a face amount of $1,500,000 and expended the bond proceeds for the purchase, from an unrelated person, of another existing factory located in the County, but not within any incorporated municipality. X is the equitable owner and sole user of this factory also. The Series B bonds are industrial development bonds within the meaning of section 103(c)(2) of the Code. M has made an election under section 103(c)(6)(D) to treat the bonds as an exempt small issue of $5,000,000 or less. At the time of issuance of these bonds, only $1,900,000 face amount of the Series A bonds remained outstanding.

Section 103(a)(1) of the Code provides that gross income does not include interest on the obligations of a state, territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia.

Section 103(c)(1) of the Code provides that the section 103(a)(1) exemption from taxation is not available with respect to industrial development bonds unless subject to one of the specific exceptions provided in section 103(c).

Section 103(c)(6)(A) of the Code provides that section 103(c)(1) does not apply to a small issue of $1,000,000 or less. However, the aggregate face amount of the bond issue will be determined, for purposes of resolving whether the $1,000,000 limit has been exceeded, by taking into account the face amount of any prior issues which are exempt under section 103(c)(6) and which are issued to finance facilities of the type described in section 103(c)(6)(E). The prior bond issue will be taken into account only to the extent still outstanding at the time of the later issuance.

At the election of the issuer, the small issue exemption is available to an issuance of $5,000,000 or less as provided in section 103(c)(6)(D) of the Code. However, if this election is made, the aggregate face amount of the bond issue will be determined, for purposes of resolving whether the $5,000,000 limit has been exceeded, by taking into account the face amount of prior issues discussed above and any capital expenditures made with respect to facilities of the type described in section 103(c)(6)(E) and paid or incurred three years before or after the issuance of the bonds in question (and financed otherwise than out of the proceeds of a prior exempt issue already being taken into account).

The facilities described in section 103(c)(6)(E) of the Code are those in which the principal user is the same person as the principal user of the facilities financed by the bonds in question or a person related thereto, provided that both facilities are located in the same incorporated municipality or county (but not in any incorporated municipality).

Example (10) in section 1.103-10(f) of the Income Tax Regulations sets forth a situation in which a portion of a prior exempt small issue that was no longer outstanding at the time of issuance of the subsequent small issue is taken into account as a capital expenditure as provided in section 103(c)(6)(D)(ii) of the Code.

Accordingly, in determining the aggregate face amount of the Series A issuance, the $1,500,000 capital expenditure paid with respect to the factory financed by Series B must be added to the $2,000,000 face amount of the Series A bonds. In addition, any other capital expenditures paid or incurred three years before or after January 2, 1974, with respect to facilities located in M, and the principal user of which is X or a related party, must be taken into account in determining the aggregate face amount of the Series A issuance.

In determining the aggregate face amount of the Series B issuance, the $1,900,000 outstanding face amount of the Series A bonds and the $100,000 capital expenditure paid with respect to the factory financed by the Series A bonds (the portion of the Series A bonds that had already been retired at the time of issuance of the Series B bonds) must be taken into account. If the Series A bonds had been issued more than three years before July 5, 1974, and the capital expenditures made in acquiring the factory financed by the Series A bonds had been incurred and paid more than three years before July 5, 1974, the $100,000 capital expenditure would not be taken into account.