Rev. Rul. 80-12

1980-1 C.B. 23, 1980-2 I.R.B. 8.

                       Internal Revenue Service
                                 Revenue Ruling

     INDUSTRIAL DEVELOPMENT BODNS; EXEMPT SMALL ISSUE; CAPITAL EXPENDITURES

                          Published: January 14, 1980

26 CFR 1.103-10: Exemption form certain small issues of industrial development bonds.

(Also Section 61; 1.61-7, 1.103-1.)

  Industrial development bonds; exempt small issue; capital expenditures. A proposed exempt small issue of industrial development bonds will be used to finance an interstate motor vehicle transportation company's maintenance and service center, at which it will overhaul its tractors and trailers that are used in numerous states. None of the tractors or trailers are assigned to a particular terminal or service center, and trailers are interchanged with other companies. The overhauling expenditures will not be considered capital expenditures within the meaning of section 103(b)(6)(D) of the Code.

ISSUE

  Does section 103(a)(1) of the Internal Revenue Code exclude from the gross incomes of bondholders the interest on industrial development bonds to be issued to finance a major maintenance and service center for road tractors and trailers under the circumstances described below?

FACTS

  Corporation X is engaged in the business of transportation of general commodities by motor vehicle in interstate commerce.  X operates a large fleet of road tractors and trailers throughout numerous states.  None of the tractors or trailers are assigned to any of the numerous terminals or service centers operated by X. Trailers belonging to X may be interchanged with trailers owned by others in the transportation business in accordance with industry practice.

  X desires to acquire land and construct and operate a major maintenance and service center in city M.  Approximately 60 percent of X's tractors and trailers will be routed periodically to the center for minor maintenance or major overhauling.  The expenditures for the major overhauling of tractors and trailers will be chargeable to X' capital account.

  M proposes to issue industrial development bonds to finance the construction of X's major maintenance and service center. Prior to the issuance of the bonds, M will elect to treat the issue as a $10,000,000 exempt small issue under section 103(b)(6)(D) of the Code.  There will be no prior exempt small issues outstanding at the time the bonds will be issued and no capital expenditures will have been paid or incurred by M or X with respect to the proposed center or other facilities of X located in Mx during the 3-year period prior to the issuance of the bonds.  The bonds will not be arbitrage bonds within the meaning of section 103(c).

  On May 31, 1979, the governing body of M adopted a resolution to have bonds issued.  M proposes to issue the bonds on July 31, 1979, and acquisition of land and construction of the center will begin on August 31, 1979.

LAW AND ANALYSIS

  Section 103(a)(1) of the Code provides that gross income does not include interest on obligations of a state or political subdivision thereof.

  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 described in section 103(a)(1).

  Section 103(b)(6)(D) of the Code provides that, at the election of the issuer, section 103(b)(1) shall not apply to obligations issued in an aggregate face amount of $10,000,000 or less and substantially all of the proceeds of which are to be used for the acquisition or construction of land or property of a character subject to the allowance for depreciation.  For purposes of determining the aggregate face amount of such bond issue, there must be taken into account the face amount of the bonds to be issued, the outstanding face amount of any prior exempt small issues, and the aggregate amount of capital expenditures with respect to certain facilities.

  Section 1.103-10(b)(2)(ii) of the Income Tax Regulations provides that an expenditure (regardless of how paid, whether in cash, notes, or stock in a taxable or nontaxable transaction) is a section 103(c)(6)(D) (redesignated as section 103(b)(6)(D)) capital expenditure if:

    (a)  The capital expenditure was financed other than out of the proceeds of issues taken into account.

    (b)  The capital expenditures were paid or incurred during the 6-year period that begins 3 years before the date of issuance of the issue and ends 3 years after such date.

    (c)  The principal user of the facility in connection with which the property resulting from the capital expenditures is used and the principal user of the facility financed by the proceeds of the issue in question is the same person or are two or more related persons.

    (d)  Both facilities referred to in (c) were located in the same incorporated municipality or in the same county (outside of the incorporated municipality in such county), and

    (e)  The capital expenditures were properly chargeable to the capital account of any person or state or local governmental unit (whether or not such person is the principal user of the facility or a related person).

  In Rev. Rul. 77-281, 1977-2 C.B. 31, a city proposed to issue industrial development bonds to finance the acquisition of railroad rolling stock for use by a nonexempt corporation in its rail operation.  The rolling stock would be used to provide rail service between two cities located in different states and may be interchanged with other railroads throughout the country. The revenue ruling sets forth two preconditions for qualifying as an exempt small issue under section 103(b)(6)(D) of the Code:  (1) the location of facilities to be financed with an exempt small issue must be established within an incorporation municipality or within a county, and (2) the facility financed by the bonds must be located within the boundaries of the issuer (or within the boundaries of the political subdivision in which the issuer is located).  A facility will be regarded as being located within the boundaries of the issuer if it has a substantial connection therein.  The revenue ruling concludes that the proposed bonds will not qualify as an exempt small issue under section 103(b)(6)(D) because the rolling stock will not satisfy the two preconditions.

  In this case, substantially all of the bond proceeds will be used to acquire land and construct property subject to the allowance for depreciation. Therefore, the bonds will qualify for the exception provisions of section 103(b)(6)(D) of the Code as an exempt small issue.

  Contrast Example (11) of section 1.103-10(f) of the regulations in which the purchase of tractor-trailers and other automotive equipment that were based in the same city as the bond-financed facilities was considered to be a capital expenditure within the meaning of section 103(b)(6)(D) of the Code.

  Because the tractors and trailers owned by X are constantly used throughout X's operating system and the trailers are interchanged with other transportation companies, the location of X's tractors and trailers cannot be established in M or in any other political subdivision. Further, the tractors and trailers have no substantial connection within M.  See Rev. Rul. 77-281. Therefore, the expenditures made at X's major maintenance and service center with respect to overhauling tractors and trailers will not be considered capital expenditures, within the meaning of section 103(b)(6)(D) of the Code and section 1.103-10(b)(2)(ii) of the regulations, for purposes of determining if the aggregate face amount of the bonds will exceed the exempt small issue limitation of $10,000,000.

HOLDING

  The interest on M's bonds will be excludable from the gross incomes of the bondholders under the provisions of section 103(a)(1) of the Code.

Rev. Rul. 80-12, 1980-1 C.B. 23, 1980-2 I.R.B. 8.