Rev. Rul. 80-11

1980-1 C.B. 22, 1980-2 I.R.B. 7.

                       Internal Revenue Service
                                 Revenue Ruling

       INDUSTRIAL DEVELOPMENT BONDS; GAS DISTRIBUTION SYSTEM; ADDITIONS,
                         IMPROVEMENTS, AND RELACEMENTS

                          Published: January 14, 1980

26 CFR 1.103-8: Interest on bonds to finance certain exempt facilities.

  Industrial development bonds; gas distribution system; additions, improvements, and replacements. Certain specified additions, improvements, and replacements relating to an existing gas distribution system qualify as facilities for the local furnishing of gas within the meaning of section 103(b)(4)(E) of the Code, and the interest on industrial development bonds issued to finance these items is excludable from gross income.

ISSUE

  Are certain specified additions, improvements, and replacements of portions of an existing gas distribution system facilities for the local furnishing of gas within the meaning of section 103(b)(4)(E) of the Internal Revenue Code so that interest on industrial development bonds that finance these items is excludable from gross income?

FACTS

  The Development Authority of county X (the Authority), a political subdivision of state Y, is authorized under state law to issue revenue bonds for the purpose of promoting industrial development in the county.

  The Authority issued industrial development bonds for the purpose of acquiring and constructing property to be used by the local public utility in its business of furnishing gas to its customers that are located solely within two contiguous counties. All property acquired or constructed will be of a character subject to the allowance for depreciation provided in section 167 of the Code.  A financing agreement between the county and the local public utility provides for aggregate basic payments sufficient to pay the principal and interest on the bonds.  In addition, the taxpayer has complied with the timing limitations of section 1.103-8(a)(5)(iii) of the Income Tax Regulations.  Construction will be done under the supervision of the public utility.

  The bond proceeds will be expended for the following items, all of which are capital expenditures:

    (1)  Improvement and expansion of the distribution system due to demands for new service.

    (2)  Relocation of existing main and service pipelines where the old piping systems have to be removed or abandoned due to conflict with local zoning or building codes.

    (3)  Installation of measuring, regulating, and pressure control equipment.  Included herein is electronic telemetry equipment to allow remote control of the regulations in the distribution system, as well as gas meters and regulators for customer service.

    (4)  Installation of cathodic protection for corrosion control as required by the office of pipeline safety.  This includes a new rectifier system and newly installed anodes as protective devices on both a new and previously installed pipe.

    (5)  Improvements to the propaneair peak shaving plant.  This includes additional protective structures, as required by local governmental agencies, as well as additional electronic and telemetry equipment to facilitate remote control of the plant.

    (6)  Miscellaneous line stopping equipment and tools purchased for use in the expansion and improvement of the system.

LAW AND ANALYSIS

  Section 103(a)(1) of the Code provides that gross income does not include the interest on the obligations of a state, or any of its political subdivisions.

  Section 103(b)(1) of the Code provides that industrial development bonds shall not be treated as an obligation described in section 103(a)(1) unless substantially all of the proceeds are used to provide the facilities exempt by section 103(b)(4).

  Section 103(b)(4)(E) of the Code designates one of the exempt categories as those used for the local furnishing of gas.

  Section 1.103-8(f)(2)(iii) of the regulations defines 'facilities for the local furnishing of electric energy or gas' as property that:

    (a)  Is either property of a character subject to the allowance for depreciation provided in section 167 or land,

    (b)  Is used to produce, collect, generate, transmit, store, distribute, or convey electric energy or gas,

    (c)  Is used in the trade or business of furnishing electric energy or gas, and

    (d)  Is a part of a system providing service to the general populace of one or more communities or municipalities, but in no event more than two contiguous counties.  . . .

  Section 1.103-8(a)(3) of the regulations provides that an exempt facility includes land, buildings, and other property

functionally related and subordinate to the facility.

  In the instant case, the items of property financed with bond proceeds will become part of the existing system used to produce, collect, generate, transmit, store, distribute, or convey gas.  Each item of property qualifies under section 1.103-8(f)(2)(iii) of the regulations as a facility for the local furnishing of gas or as property that is functionally related and subordinate to such a facility within the meaning of section 1.103-8(a)(3).

HOLDING

  The specified additions, improvements, and replacements of portions of the existing gas distribution system described above are facilities for the local furnishing of gas within the meaning of section 103(b)(4)(E) of the Code. The interest on industrial development bonds that finance these items is excludable from gross income under the provisions of section 103.

Rev. Rul. 80-11, 1980-1 C.B. 22, 1980-2 I.R.B. 7.