Rev. Rul. 88-51
1988-1 C.B. 74, 1988-25 I.R.B. 5.
Internal Revenue Service
Revenue Ruling
MASS COMMUTING VEHICLES; MASS COMMUTING FACILITIES
Published: June 20, 1988
26 CFR 1.103-8: Interest on bonds to finance certain exempt facilities
(Also Section 142.)
Mass commuting vehicles; mass commuting facilities. Mass commuting vehicles are not included within the term "mass commuting facilities" for purposes of former section 103(b)(4)(D) or current section 142(a)(3) of the Code. Rev. Rul. 76-11 clarified.
Generally, if government obligations are used to finance 'mass commuting facilities,' the interest on those obligations is tax exempt.
ISSUE. At issue is whether mass commuting vehicles are included in the term 'mass commuting facilities' for purposes of former section 103(b)(4)(D) or current section 142(a)(3).
HOLDING. The Service has held that mass commuting vehicles are not included in the term 'mass commuting facilities' for purposes of former section 103(b)(4)(D) or current section 142(a)(3). Thus, interest on obligations used to finance the acquisition of mass commuting vehicles is generally not exempt from tax.
ANALYSIS. Before ruling on 'mass commuting vehicles,' the Service noted that Rev. Rul. 76-11, 1976-1 C.B. 30, held that a rapid transit rail system, including the system's vehicles, qualified as 'mass commuting facilities.' In addition, the Service said, ERTA section 811 added former Code section 103(b)(4)(I) which, for a limited time (1981-1984), acted to exempt from Federal income tax interest on industrial development bonds used to finance mass commuting vehicles; under former section 103(b)(9)(B), former section 103(b)(4)(I) did not apply to any obligation issued after December 31, 1984. Citing the legislative history of new section 141 (which states that commuting facilities would not include mass commuting vehicles), the Service concluded that it would not include mass commuting vehicles within the term 'mass commuting facilities' for purposes of former section 103(b)(4)(D) or current section 142(a)(3). Rev. Rul. 76-11 is clarified to remove any inference that the vehicles mentioned in Rev. Rul. 76-11 are included in the term 'mass commuting facilities.'
ISSUE
Are mass commuting vehicles included in the term 'mass commuting facilities' for purposes of former section 103(b)(4)(D) or current section 142(a)(3) of the Internal Revenue Code?
LAW AND ANALYSIS
Section 1301 of the Tax Reform Act of 1986 (1986 Act), 1986-3 (Vol. 1) C.B. 519-75, reorganized and amended the Code provisions governing the tax exemption of interest on obligations of a state or its political subdivisions.
Prior to the 1986 Act, former section 103(a)(1) of the Code provided generally that gross income did not include interest on the obligations of a state or its political subdivisions.
Former section 103(b)(1) of the Code provided in part, that, except as otherwise provided in section 103(b), any industrial development bond was to be treated as an obligation not described in section 103(a)(1).
Former section 103(b)(4)(D) of the Code provided, in part, that section 103(b)(1) would not apply to industrial development bonds issued as part of an issue substantially all the proceeds of which were to be used to provide 'mass commuting facilities.'
Rev. Rul. 76-11, 1976-1 C.B. 30, considers whether interest on bonds issued to finance the acquisition and construction of a rapid transit system (monorail) is tax-exempt. In describing the system, the ruling mentions the system vehicles. The ruling concludes that, in determining whether the interest on the bonds is exempt, 'the proposed rapid transit system will constitute ' mass commuting facilities' to the extent defined in section 1.103-8(e)(2)(iii) [currently section 1.103-8(e)(2)(iv)] of the Income Tax Regulations.'
Section 1.103-8(e)(2)(iv) of the Income Tax Regulations, issued under former section 103(b)(4)(D) of the Code, provides that a 'mass commuting facility' includes real property together with improvements and personal property used therein, such as machinery, equipment and furniture, serving the general public commuting on a day-to-day basis by bus, subway, rail, ferry, or other conveyance that moves over prescribed routes. Under this regulation, such term also includes terminals and facilities that are functionally related and subordinate to the mass commuting facility, such as parking garages, car barns, and repair shops. Use of mass commuting facilities by noncommuters in common with commuters is immaterial. Thus, a terminal leased to a common carrier bus line that serves both commuters and long distance travelers would qualify as an exempt facility.
Former section 103(b)(4)(I) of the Code provided that section 103(b)(1) would not apply to industrial development bonds issued as part of an issue substantially all the proceeds of which were to be used to provide 'qualified mass commuting vehicles.'
Former section 103(b)(9)(A) of the Code provided that, for purposes of section 103(b)(4)(I), the term 'qualified mass commuting vehicle' meant any bus, subway car, rail car, ferry, or similar equipment (i) that was leased to a mass transit system wholly owned by one or more governmental units (or agencies or instrumentalities thereof), and (ii) that was used by such system in providing mass commuting services (or, in the case of a ferry, mass transportation services).
Former section 103(b)(9)(B) of the Code provided that section 103(b)(4)(I) would not apply to any obligation issued after December 31, 1984.
Former section 103(b)(4)(I) of the Code was added by section 811 of the Economic Recovery Tax Act of 1981, 1981-2 C.B. 256, 349, because Congress wanted, for a limited time period (1981-1984), to exempt from federal income tax interest on industrial development bonds used to finance mass commuting vehicles. H.R. Rep. No. 97-201, 97th Cong., 1st Sess. 269-70 (1981), 1981-2 C.B. 352, 404. See H.R. Rep. No. 97-215 (Conference Report), 97th Cong., 1st Sess. 269-70 (1981), 1981-2 C.B. 481, 518-19.
Under the 1986 Act, section 103(a) of the Code provides generally that gross income does not include interest on any state or local bond.
Section 103(b)(1) of the Code provides that section 103(a) shall not apply to any private activity bond that is not a qualified bond (within the meaning of section 141).
Section 141(e)(1)(A) of the Code provides that the term 'qualified bond' means any private activity bond (as defined in section 141(a)) if such bond is an 'exempt facility bond.'
Section 142(a)(3) of the Code provides that, for purposes of section 141(e)(1)(A), the term 'exempt facility bond' includes any bond issued as part of an issue 95 percent or more of the net proceeds of which are to be used to provide 'mass commuting facilities.'
The Conference Committee Report accompanying the 1986 Act states that under prior law the term mass commuting facilities did not include mass commuting vehicles, and that such term generally would continue to be defined in the same manner as under prior law for purposes of new section 142(a)(3) of the Code. H.R. Rep. No. 99-841 (Conference Report), 99th Cong., 2d Sess. II-702 (1986), 1986-3 (Vol. 4) C.B. 702.
HOLDING
Mass commuting vehicles are not included within the term 'mass commuting facilities' for purposes of former section 103(b)(4)(D) or current section 142(a)(3) of the Code.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 76-11 is clarified to remove any inference that the vehicles mentioned in Rev. Rul. 76-11 are included in the term 'mass commuting facilities.'
DRAFTING INFORMATION
The principal author of this revenue ruling is Gene Overton of the Individual Tax Division. For further information regarding this revenue ruling contact Mr. Overton on (202) 566-3650 (not a toll-free call).
Rev. Rul. 88-51, 1988-1 C.B. 74, 1988-25 I.R.B. 5.