Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-14

1977-1 C.B. 18

Section 61
Section 103

IRS Headnote

Municipal electric distribution system; bond interest. Bonds issued by a city to finance the expansion of an electrical distribution system, owned and operated by the city and for which the city purchases electricity for resale from a private utility company, are not industrial development bonds under section 103(b) of the Code, and interest paid on the bonds will be excludable from the gross incomes of the bondholders under section 103(a)(1).

Full Text

Rev. Rul. 77-14

Due to a rapid increase in population, City X proposes to issue revenue bonds to finance the expansion of an existing electrical distribution system that X has owned and operated for the past 60 years. X possesses the exclusive right to own and operate the electrical distribution system within its jurisdiction and no other parties possess any interest in the system.

X does not own or operate electrical generating facilities. All electrical energy is purchased wholesale from a private utility company. X resells the electrical energy at a markup to all members of the general public located within the city. The proposed bonds will not be arbitrage bonds within the meaning of section 103(c) of the Internal Revenue Code of 1954.

Held, for purposes only of the "trade or business test" under section 1.103-7(b)(3) of the Income Tax Regulations, the mere purchase of electrical output from a nonexempt person does not cause X's distribution system to be deemed used by such nonexempt person in its trade or business. Thus, the bonds to be issued by X will not be industrial development bonds under section 103(b) of the Code. Therefore, the interest to be paid on the bonds will be excludable from the gross incomes of the bondholders under section 103(a)(1).