Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-12

1978-1 C.B. 25

Sec. 61
Sec. 103

IRS Headnote

Industrial development bonds; steam generation and distribution. Facilities for the generation and distribution of steam will not be considered "facilities for the local furnishing of gas" under section 103(b)(4)(E) of the Code or "facilities for the furnishing of water" under section 103(b)(4)(G), and interest on industrial development bonds issued by a city to finance construction of such facilities to be leased to an association of business entities to provide heat to business buildings in the city will not be excludable from the gross incomes of the bondholders under section 103(a)(1).

Full Text

Rev. Rul. 78-12

Advice has been requested whether, under the circumstances described below, the interest on industrial development bonds to be issued by a city will be excludable from the gross incomes of the bondholders under the provisions of section 103(a)(1) of the Internal Revenue Code of 1954.

City M proposes to issue $45,000,000 of industrial development bonds, as described in section 103(b)(2) of the Code, to finance the construction of a steam generation plant and a steam distribution system: M will lease all of the facilities to an association of business entities for a term of 30 years with the option to renew the lease for six additional five-year terms. The security for the payment of the principal and the interest on the bonds will be the lease payments received from the association.

The association will operate the steam generating plant and will distribute the steam through the distribution system to various business buildings located in M. The steam will be used to heat the buildings.

The specific question presented is whether the industrial development bonds to be issued by M will qualify under the exception provisions of section 103(b)(4)(E) of the Code as financing the construction of "facilities for the local furnishing of gas" or under section 103(b)(4)(G) as financing the construction of "facilities for the furnishing of water."

Section 103(a)(1) of the Code provides that gross income does not include interest on the obligations of a state, a 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(b)(1) of the Code provides that, except as otherwise provided in section 103(b), any industrial development bond shall be treated as an obligation that is not an obligation described in section 103(a)(1).

Section 103(b)(4)(E) of the Code provides, in part, that the provisions of section 103(b)(1) shall not apply to any obligation that is issued as part of an issue substantially all of the proceeds of which are used to provide facilities for the local furnishing of gas.

Section 103(b)(4)(G) of the Code provides that the provisions of section 103(b)(1) shall not apply to any obligation that is issued as part of an issue substantially all of the proceeds of which are used to provide facilities for the furnishing of water if the water is available on reasonable demand to members of the general public.

Rev. Rul. 68-184, 1968-1 C.B. 7 holds, in part, that the business of manufacturing and distributing steam is not a business of furnishing either water or gas through a local distribution system within the meaning of section 46(c)(3) of the Code.

Similarly, the steam generation and distribution facilities to be financed with bond proceeds will not be considered "facilities for the local furnishing of gas" under section 103(b)(4)(E) or "facilities for the furnishing of water" under section 103(b)(4)(G).

Accordingly, the interest on the industrial development bonds to be issued by M will not be excludable from the gross incomes of the bondholders under the provisions of section 103(a)(1) of the Code.