Donations to cities' consolidated department are deductible

Plain-English summary

An organization formed by all incorporated cities in a state asked whether donations to it were deductible under section 170. The cities established it by intergovernmental agreement as their consolidated department to coordinate municipal policy, provide services, support litigation, arrange insurance and purchasing programs, and offer training and information. The member cities controlled its governance, held the powers and interests of owners, supplied most of its revenue, and required its funds to serve governmental purposes. Applying the six instrumentality factors in Revenue Ruling 57-128, the IRS concluded that the organization was a wholly owned instrumentality of political subdivisions. Contributions for its public purposes could therefore be deductible under section 170(a), subject to the section 170(b)(1)(B) limitation.

Ruling snapshot

• Question: Was the consolidated department of the state's incorporated cities a wholly owned governmental instrumentality eligible to receive deductible contributions?
• Outcome: Approved, subject to the applicable section 170 percentage limitation.
• Key authorities: IRC § 170(a), (b)(1)(B), and (c)(1); Rev. Rul. 57-128; Rev. Rul. 75-359; Rev. Rul. 65-26.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201641021
Release Date: 10/7/2016
Index Number: 170.00-00
Person To Contact:
---------------------------------- ------------------, ID No. ------------------
--------------------------------- Telephone Number:
------------------------------------- ----------------------
----------------------------------- Refer Reply To:
In Re: --------------------------------- CC:TEGE:EOEG:ET2
PLR-141647-15
Date:
June 28, 2016

Legend

Organization A = ---------------------------------
Entity V = ---------------------------------------------------
Entity W = -------------------------------------------
Entity X = -------------------------------------------
Foundation Y = -------------------------------------------------
Association Q = -------------------------------------------
Association R = -----------------------------------------------
State B = ----------------------
Statute M = -------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------

Dear --------------------:

This is in response to your letter of December 21, 2015 requesting a letter ruling that
donations to Organization A are tax deductible under § 170 because Organization A, as
a consolidated department of all incorporated cities in State B is a wholly owned
instrumentality of political subdivisions of State B.

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FACTS

The following facts and representations are submitted under penalties of perjury in
support of your request.

Origin and Governing Documents

The facts represented provide that Organization A is a governmental entity formed in
Year 1 by 25 incorporated home rule cities in State B. Organization A’s initial purpose
was to defend its member cities against State intrusions on their home rule authority
and to advocate on behalf of those governments before the State B Legislature.

Subsequently, State B’s Legislature enacted Statute M. Statute M provides that a unit
of local government of State B may enter into a written agreement with any other unit or
units of local government for the performance of any or all functions and activities that a
party to the agreement, its officers or agencies, have authority to perform. Statute M
further explicitly provides that the agreement may provide for the performance of a
function or activity by, among other things, a consolidated department.

In Year 2, all incorporated cities in State B entered into an “intergovernmental
agreement” pursuant to Statute M establishing Organization A as a consolidated
department of all the cities participating in the agreement. The agreement further
provided that Organization A would continue to have the functions and governance as
set forth in Organization A’s Constitution as it existed at that time.

In Year 3, the cities participating in Organization A entered into a new intergovernmental
agreement (hereinafter referred to as the “Intergovernmental Agreement”). The
Intergovernmental Agreement expanded the number of seats on Organization A’s Board
of Directors, and currently governs the purpose, function and structure of Organization
A. In Year 4, the IRS ruled that Organization A is exempt from federal income tax under
§ 501(c)(4). Organization A’s purpose and governance are further set out in
Organization A’s Constitution and Bylaws, which were most recently updated in Year 5.

Purpose and Function

Organization A’s Constitution and Intergovernmental Agreement state that Organization
A has the following purposes and functions:

• To maintain an organization to secure cooperation among the cities of the
State by thorough study of local problems, and in the application of efficient
methods to local government;

• To provide a means whereby officials may interchange ideas and
experiences and obtain expert advice;

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• To collect, compile and distribute to municipal officials information about
municipal government and the administration of municipal affairs;

• To engage in the study and preparation of uniform ordinances and practices;

• To formulate and promote such legislation as will be beneficial to the cities of
State B and the citizens thereof and to oppose legislation detrimental thereto,
but not to expend monies in favor of or in opposition to any public measure
initiated by or referred to the people, or for or against the election of any
candidate for public office;

• To provide such services to cities as cities may authorize and require through
Organization A, including, but not limited to, assistance in collective
bargaining with employees, liability, casualty, and health insurance, and the
provision of joint facilities for local governments with other governmental units
acting singly or cooperatively. To that end, Organization A may create or
participate in appropriate entities and trusts which are suitable and
convenient for carrying out its purposes;

• To secure harmony of action among municipalities in matters that affect the
rights and liabilities of cities;

• To institute or participate in litigation in the name of a member city, upon
request of such city, or in its own name for the purpose of securing a
determination relative to the rights and liabilities of the cities of State B under
any constitutional provision, statute or ordinance; to appear as a friend of the
Court in any Court proceeding wherein the rights and liabilities of cities are
affected; to appoint or employ counsel for the purpose herein mentioned;

• To adopt and amend, from time to time, such rules regulations, constitution
and bylaws as are not inconsistent with the Intergovernmental Agreement;
and

• To do any and all things necessary or proper for the benefit of the cities of
State B which the cities themselves might do singly or in cooperation with
other units or agencies of government.

Among its other activities, Organization A leverages the collective power of the
participating cities to obtain services at a lower cost than cities would otherwise pay, or
that would be difficult for cities to obtain individually. For example, as allowed by State
B’s public purchasing laws, Organization A operates cooperative purchasing programs
for local governments, wherein Organization A negotiates bulk fixed price agreements
with providers of goods and services that Organization A’s participating cities may then
use to procure those goods and services.

Governance

Cities are the only parties to the Intergovernmental Agreement establishing
Organization A, and cities are the only entities eligible for full Organization A
membership, which grants full access to all of Organization A’s programs and services
and gives those cities voting rights in selecting Organization A’s Board of Directors as

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well as approving changes to Organization A’s Constitution. Under the terms of the
Intergovernmental Agreement and Organization A’s Bylaws, Organization A’s governing
body consists of voting and non-voting members. The voting members of Organization
A’s Board of Directors include four Officers (President, Vice-President, Treasurer, and
Immediate Past President) and 11 Directors (two of whom hold an appointed position
with a member city and 9 of whom are elected city officials). Non-voting members of
the Board of Directors include one individual who holds an appointed position with a
member city, past presidents who hold a city elected office, and the Executive Director
of Organization A. The term of office of the voting Officer members is one year, while
the term of office of Directors who hold an elected office with a member city is three
years, and the term of office of Directors who hold an appointed position with a member
city is two years. Candidates for membership on the Board of Directors are selected by
a Nominating Committee, consisting of the Immediate Past President, one other Past
President, two current Board members, and one city official not currently serving on the
Board, all of whom are appointed by the President. All Officers, three Directors who
hold elected positions with member cities, one Director who holds an appointed position
with a member city, and one non-voting Director who holds an appointed position with a
member city are elected each year at Organization A’s annual business meeting.

The Board of Directors has an Executive Committee, consisting of the President, Vice-
President, Treasurer, Immediate Past President, and the most senior voting Director
serving in a position reserved for an individual holding an appointed position with a
member city. The functions of the Executive Committee include, among other things,
providing direction to Organization A’s staff between Board meetings. Additionally, an
Executive Director of Organization A is appointed by the Board of Directors and holds
office at the pleasure of the Board of Directors. The Executive Director manages
Organization A’s employees, and oversees the day-to-day operations of Organization A.
The Executive Director is a non-voting member of the Executive Committee.

As set out in the Intergovernmental Agreement and Organization A’s Constitution,
Organization A’s membership meets at least once annually to vote on matters of policy
and governance. There are no limits on the number of delegates each member city
may send to an annual meeting, and all delegates are to be heard in debate. However,
each member city is entitled to one vote, which is expressed by a voting delegate
(designated by each member city, often by vote of the city’s governing body). At the
annual meeting the voting delegates receive and approve a financial report, elect
Officers and members of the Board of Directors, and if necessary adopt resolutions
governing Organization A’s Constitution (which requires a two-thirds majority vote of the
delegates present).

Because the original primary emphasis of Organization A relates to legislative and legal
advocacy, Organization A has established an extensive process that places control with
the member cities in deciding Organization A’s position on state and federal policy
matters. Specifically, as set out in Organization A’s By-laws, the biennial process

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begins with the establishment of policy committees that are organized by topic. The
President appoints the committee members, who must be either elected or appointed
city officials to be voting members. No person representing private interests may serve
as a voting member on a policy committee. The policy committees meet and make
recommendations to Organization A’s Board on proactive and defensive positions in the
legislative process. The Board then either adopts or rejects those recommendations at
a meeting held before Organization A’s annual meeting. The member cities are then
able to review and if desired modify the Board’s adopted positions at the annual
meeting.

Pursuant to the Intergovernmental Agreement, Organization A may be dissolved by a
two-thirds vote of the participating cities, in which event the cities then participating shall
mutually agree upon the transfer of personnel or the division of assets and liabilities
between the parties.

Subsidiary and Supporting Entities

In order to provide services to cities in the area of collective bargaining with employees,
liability, casualty, and health insurance, and the provision of joint facilities, Organization
A has formed the following four entities to help carry out those purposes:

• Entity V: Entity V is a joint venture between Organization A and Association Q,
which is an association of State B counties. Entity V was formed to provide
human resources and labor relations assistance to local government entities in
State B. Entity V’s operating agreement provides that income or money collected
by or credited to Entity V shall not accrue to the benefit of any private person,
firm, or corporation, but shall accrue only to the parties to Organization A and
Association Q. The operating agreement further provides that in the event Entity
V is terminated, assets, as well as indebtedness or liabilities shall be split
between Organization A and Association Q.

• Entity W: Entity W is an insurance trust for public entities. As allowed by State B
law, Organization A and Association Q formed Entity W to provide pooled liability,
casualty, and health insurance to their member cities and counties, respectively.
In 1987, Entity W received a ruling from the IRS that its income is excludable
from gross income under § 115.

• Entity X: Entity X is a real estate trust formed by Organization A, Association Q,
and Association R (an association of State B school boards), to aid in the
management of real property held by these three entities in common. The real
property includes an undivided percentage ownership interest in the building that
houses the primary place of business for all three entities and the real estate on
which the building is located, as well as property adjacent to that building that is
used for parking and being held for future building expansion. The most current
Declaration of Trust of Entity X states that the executive directors of Organization
A, Association Q and Association R, have full power to control any proceeds from

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the trust estate subject only to the restriction that no part thereof shall be used at
any time for other than governmental purposes. If the trust terminates, the
Declaration of Trust provides that the entire trust estate will be distributed to
Organization A, Association Q, and Association R in accordance with the
beneficial ownership shares, as long as the trust is not distributed for other than
governmental purposes.

• Foundation Y: Foundation Y is a separate, non-profit foundation, the purpose of
which is to solicit grants and receive charitable donations for Organization A.
Foundation Y has a ruling from the IRS that it is tax exempt under § 501(c)(3).

Participation Categories

In accordance with Organization A’s Bylaws, Organization A maintains various
participation categories:

• Full Membership: A city may become a member of Organization A by paying the
membership dues for the current year and adopting the Intergovernmental
Agreement. Full membership entitles a city to all services provided by Entity W
and voting privileges at Organization A’s annual meeting. Any member may
withdraw from membership by giving six months written notice in the form of
council resolution or ordinance to the Executive Director. Additionally, any
member that fails to pay membership dues during the current fiscal year may be
stricken from the membership roll by Organization A’s Board of Directors.

• Associate Membership: Associate member status is available to a variety of
enumerated “public bodies,” such as a State B political subdivision, a State B
municipal or public corporation, or certain intergovernmental agencies, that are
not cities or counties and that, therefore, are ineligible for direct membership in
Organization A or in Association Q. As provided in Organization A’s Bylaws,
Associate membership status is not available to private non-profit or private for-
profit entities. Entities that qualify for associate membership may become
associate members by paying annual dues, in an amount set by the Board of
Directors of Organization A, and upon approval by Organization A’s Executive
Director. Associate members may participate in Entity W and risk management
services, subject to adopted Entity W policies, obtain labor services from Entity
V, receive Organization A publications, and attend Organization A trainings.
Associate members are not entitled to voting privileges, cannot serve on
Organization A committees, and are not entitled to legislative lobby or
intergovernmental relations services. Organization A’s Board of Directors
created the Associate Membership category as part of Organization A’s efforts
to ensure that Entity W, an insurance trust, remained financially healthy and had
adequate participation.

• Sponsorships: Upon approval of the Executive Director, a person or entity may
be allowed to participate in a sponsorship role with Organization A. Sponsors
may be recognized for their sponsorship and receive benefits based on the level

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of financial support or fees provided to Organization A. (Sponsorships are
described in greater detail below.)

In addition, Organization A’s Bylaws state that it may provide services to affiliate groups
for reimbursement, based on available resources and approval by Organization A’s
Board of Directors. For this purpose, an “affiliate organization” is one that is composed
of local government officials, formally organized under a constitution or bylaws, or both,
and recognized by Organization A’s Board of Directors. Furthermore, Organization A’s
Constitution provides that other classes of, and conditions for, non-voting membership
may be established by Organization A’s Board of Directors, which may include separate
boards or commissions of cities and other entities or groups of persons that want one or
more of Organization A’s services.

Revenues and Expenses

The Intergovernmental Agreement provides that no Organization A funds shall be
expended except upon a vote of its Board of Directors and in furtherance of the
objectives and purposes of Organization A. State B law provides that any moneys
collected by an intergovernmental entity, like Organization A, shall not accrue to the
benefit of private persons. The Intergovernmental Agreement further provides that
incidental income from any Organization A activity shall be devoted solely to the
governmental purposes of Organization A and its member cities; and that no profit from
any Organization A activity shall inure to the benefit of any private person, firm, or
corporation. Private businesses are not eligible to participate in the governance of
Organization A or to have any material interest in or control over Organization A.
Therefore, the only transactions Organization A has involving private interests are in the
form of contractual relationships, either where Organization A is paying or receiving a
fee for a service.

As more fully described below, Organization A’s revenues are generally derived from:

• membership and other fees or assessments;
• fees for services provided to cities and affiliate groups;
• revenues derived from the insurance trust;
• real estate transactions; and
• grants and charitable donations.

Membership and Other Fees

Organization A’s Constitution provides that the Board of Directors shall assess the
annual membership fee for cities in an amount sufficient to finance the expenses of
Organization A for the current year. Under the Intergovernmental Agreement, the
amount of the annual fees or assessments must be based upon the populations of the
respective cities entering into the agreement, as determined by the Board of Directors

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no later than January 1 of each calendar year. The Constitution further provides that
the annual membership fee for other, non-voting memberships shall be as determined
by the Board, and the Board may levy assessments in addition to the annual
membership fee and request voluntary contributions for other services and programs
authorized by the Board.

Fee-For-Service Programs

To enhance revenues that offset costs of providing programs to participating cities,
Organization A established two fee for service programs (hereinafter referred to as
“Program 1” and “Program 2”) where Organization A provides a service to a private
interest on a fee for service basis. In all instances, the fee charged to the private
interest equals or exceeds Organization A’s cost in providing the service. In addition,
both programs enhance the purpose of Organization A in linking city officials with their
public duties.

Under Program 1, private, for-profit entities pay a fee of $400, $600, or $1,000 in
exchange for some combination of the following: quarter-page advertising or discounts
on other advertising in Organization A’s monthly publication; advance registration for the
trade show at Organization A’s annual conference; a discount on an exhibitor booth at
Organization A’s annual conference; advertising in Organization A’s online Products
and Services Directory; a subscription to Organization A’s monthly publication and
weekly bulletin (both available free of charge on Organization A’s website); use of
Organization A’s business partner logo; access to Organization A’s membership list at a
lower rate than that charged to the general public; recognition in Organization A’s
annual conference program and on Organization A’s website; and an Organization A
wall calendar.

Program 2, which helps cover the cost of Organization A’s annual conference
(Organization A’s signature annual event for local elected and appointed officials) is
structured similarly to Program 1. Under Program 2, a private business pays a fee of
$500, $750, $1,500, $2,500, $6,000, or $10,000 in exchange for one or more of the
following: recognition as sponsor of certain events at the conference and banner
placement, logo display, or some other recognition during a conference event; the
opportunity to welcome and introduce a speaker; recognition of sponsorship and a full
page advertisement in the annual conference program; an exhibitor booth at the trade
show; admission to the conference; the opportunity for company representatives to
present an informational conference session; logo featured on signs in audio-visual
media at the conference; and recognition on Organization A’s website and in
Organization A’s monthly publication.

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Real Estate Transactions

As noted above with respect to the discussion of Entity X, Organization A owns an
undivided 33.21 percent of the building that is Organization A’s principal place of
business, as well as the real estate on which the building is located. Association Q and
Association R own the remaining interest in the building and the land upon which the
building is located. Those organizations maintain their principal place of business in the
same building as Organization A, and other governmental entities also rent space in the
building. The property is managed by Entity X, which in turn is governed by a board of
trustees made up of the executive directors of Organization A, Association Q and
Association R, who make decisions relating to use and management of the property and
building. Organization A, Association Q and Association R jointly own property adjacent
to the building, which was purchased for future building expansion. That property is
currently occupied by single-family residential rental dwelling units. In accordance with
the trust documents, any revenue net of expenses that is derived from those activities is
used to operate the building, or distributed to Organization A, Association Q, or
Association R in amounts equal to the percentage ownership of each entity.

Grants and Charitable Donations

As noted above, in Year 4, several elected officials undertook an effort to create
Foundation Y, for the purpose of soliciting grants and receiving charitable donations that
would be used to generate data and information for cities and to support and educate
municipal government officials through Organization A trainings, conferences and
workshops.

RULING REQUESTED

Based on the above facts represented, you request a ruling that Organization A, as a
consolidated department of all incorporated cities in State B, is a wholly owned
instrumentality of political subdivisions of State B to which donations are tax deductible
under § 170.

LAW

Section 170(a)(1) provides that there shall be allowed as a deduction any charitable
contribution (as defined in § 170(c)) payment of which is made within the taxable year.

Section 170(c)(1) states that, for purposes of § 170, the term “charitable contribution”
means a contribution or gift to or for the use of a State, a possession of the United
States, or any political subdivision of any of the foregoing, or the United States or the
District of Columbia, but only if the contribution or gift is made for exclusively public
purposes.

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Rev. Rul. 57-128 provides that, in cases involving the status of an organization as a
wholly owned instrumentality of one or more states or political subdivisions, the
following factors are taken into consideration:

(1) whether it is used for a governmental purpose and performs a governmental
function;
(2) whether performance of its function is on behalf of one or more states or
political subdivisions;
(3) whether there are any private interests involved, or whether the states or
political subdivisions involved have the powers and interests of an owner;
(4) whether control and supervision of the organization is vested in public
authority or authorities;
(5) if express or implied statutory or other authority is necessary for the creation
and/or use of such an instrumentality and whether such authority exists; and
(6) the degree of financial autonomy and the source of its operating expenses.

In Rev. Rul. 75-359, 1975-2 C.B. 79, the IRS concluded that a voluntary association
was separate from its member counties and qualified as a wholly-owned instrumentality
of those counties, which were political subdivisions, and was formed and operated
exclusively for the public purposes of the member counties. Therefore, contributions to
the association were deductible as contributions “for the use of” political subdivisions
subject to the limitation of § 170(b)(1)(B).

In Rev. Rul. 65-26, advice was requested regarding whether a municipal league was a
wholly owned instrumentality of political subdivisions of a State for Federal employment
tax purposes. In that case, the municipal league was incorporated by individuals under
the State laws applicable to private, not-for-profit corporations. The purposes of the
municipal corporation were the improvement of municipal government and the
promotion of the general welfare of the cities and villages of the State by appropriate
means, including research, fostering of conferences, and publications. The municipal
league’s governing body was a board of trustees, comprised of qualified officials of
member cities or villages. The league’s activities, in Rev. Rul. 65-26, consisted of
publishing a monthly magazine featuring articles on government matters; conducting
conferences, surveys and research projects on governmental subjects and publishing
the results in pamphlets; and sponsoring or participating in municipal law institutes and
seminars. Income of the league was derived from membership dues, sales of
publications, advertising and conference receipts, and was expended in carrying out its
activities.

The IRS, in Rev. Rul. 65-26, found the league did not meet all of the factors enumerated
in Rev. Rul. 57-128. The IRS concluded the league had not been designated by any
municipal corporation as its agent or instrumentality, as would be possible under the
constitution of the State. The IRS said the activities of the league were governed by its
board of trustees who, although municipal officers, were acting as individuals with no

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power of agency from their respective municipalities. Thus, the IRS stated control and
supervision of the league were not vested in public authority. Accordingly, the IRS held
the league was not a wholly owned instrumentality of political subdivisions of the State.

ANALYSIS

At issue in this case is whether Organization A is a wholly owned instrumentality of
political subdivisions of State B. If Organization A is a wholly owned instrumentality of
political subdivisions of State B, then pursuant to Rev. Rul. 75-359, contributions to
Organization A may constitute charitable contributions (within the meaning of
§ 170(c)(1)) “for the use of” political subdivisions of State B, which are deductible under
§ 170(a), subject to the limitation of § 170(b)(1)(B). A determination of whether
Organization A is a wholly-owned instrumentality of one or more political subdivisions of
State B is made by applying the factors set forth in Rev. Rul. 57-128.

Governmental Purpose and Function

The first factor under Rev. Rul. 57-128 is whether Organization A is used for a
governmental purpose and performs a governmental function. Organization A’s initial
purpose was to defend its member cities against State intrusions on their home rule
authority and to advocate on behalf of those governments before the State B
Legislature. Under Organization A’s current Constitution and the Intergovernmental
Agreement, Organization A analyzes a variety of municipal policy issues and legislative
initiatives, and provides such services to cities as cities may authorize and require
through Organization A. For example, Organization A assists cities in collective
bargaining with employees, as well as with liability, casualty, and health insurance
matters. Additionally, Organization A institutes or participates in litigation in the name of
a member city, upon request of such city, or in its own name for the purpose of securing
a determination relative to the rights and liabilities of the cities of State B under any
constitutional provision, statute or ordinance. Furthermore, Organization A negotiates
bulk fixed price agreements with providers of goods and services that Organization A’s
participating cities may then use to procure those goods and services. Moreover,
Organization A produces publications, training and conferences regarding issues that
are relevant to cities. Thus, Organization A satisfies this factor because its purposes
and functions are governmental in nature.

Performance on Behalf of Political Subdivisions

The second factor under Rev. Rul. 57-128 is whether performance of Organization A’s
function is on behalf of one or more states or political subdivisions. All of the
incorporated cities in State B have entered into the Intergovernmental Agreement
pursuant to Statute M establishing Organization A as a consolidated department of all
the cities participating in the agreement. The incorporated cities of State B are political
subdivisions of the State, and Organization A’s Constitution and the Intergovernmental

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Agreement establish that the performance of Organization A’s function is on behalf of
the incorporated cities and other political subdivisions of state B. Accordingly, the
performance of Organization A’s function is on behalf of such political subdivisions.

Powers and Interests of an Owner

The third factor under Rev. Rul. 57-128 is whether there are any private interests
involved, or whether the states or political subdivisions involved have the powers and
interests of an owner. Cities are the only parties to the Intergovernmental Agreement
establishing Organization A, and cities are the only entities eligible for full Organization
A membership, which grants full access to all of Organization A’s programs and
services and gives those cities voting rights in selecting Organization A’s Board of
Directors as well as approving changes to Organization A’s Constitution. State B law
and the Intergovernmental Agreement provide that no profit from any Organization A
activity shall inure to the benefit of any private person, firm, or corporation. Private
businesses are not eligible to participate in the governance of Organization A or to have
any material interest in or control over Organization A. Therefore, based on the
foregoing, we conclude that Organization A’s member cities, which are political
subdivisions of State B, have the powers and interests of an owner with respect to
Organization A.

Control and Supervision

The fourth factor under Rev. Rul. 57-128 is whether control and supervision of
Organization A is vested in public authority or authorities. In this case, the incorporated
cities of State B are the only parties to the Intergovernmental Agreement establishing
Organization A, and those cities are the only entities eligible for full Organization A
membership, which gives those cities voting rights in selecting Organization A’s Board
of Directors as well as approving changes to Organization A’s Constitution. Under the
terms of the Intergovernmental Agreement and Organization A’s Bylaws, Organization
A’s governing body consists of voting and non-voting members. The voting members of
Organization A’s Board of Directors include four Officers (President, Vice-President,
Treasurer, and Immediate Past President) and 11 Directors (two of whom hold an
appointed position with a member city and 9 of whom are elected city officials). Non-
voting members of the Board of Directors include one individual who holds an appointed
position with a member city, past presidents who hold a city elected office, and the
Executive Director of Organization A. Candidates for membership on the Board of
Directors are selected by a Nominating Committee, consisting of the Immediate Past
President, one other Past President, two current Board members, and one city official
not currently serving on the Board, all of whom are appointed by the President. Since
duly selected representatives of the incorporated State B cities govern Organization A,
and only those cities are eligible to vote in selecting Organization A’s Board of Directors
as well as to approve changes to Organization A’s Constitution, we conclude that
control and supervision of Organization A is vested in public authorities.

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Statutory Authority

The fifth factor under Rev. Rul. 57-128 is whether express or implied statutory or other
authority is necessary for the creation and/or use of Organization A and whether such
authority exists. Statute M provides that a unit of local government of State B may enter
into a written agreement with any other unit or units of local government for the
performance of any or all functions and activities that a party to the agreement, its
officers or agencies, have authority to perform. Statute M further explicitly provides that
the agreement may provide for the performance of a function or activity by, among other
things, a consolidated department. All of the incorporated cities in State B entered into
the Intergovernmental Agreement pursuant to Statute M establishing and continuing to
maintain Organization A as a consolidated department of all the cities participating in
the agreement. Accordingly, we conclude that express or implied statutory authority or
other authority is necessary for the creation and/or use of Organization A and that such
authority exists.

Financial Autonomy and Source of Operating Expenses

The sixth factor under Rev. Rul. 57-128 is the degree of Organization A’s financial
autonomy and the source of its operating expenses. Organization A’s revenues are
generally derived from: membership and other fees or assessments; fees for services
provided to cities and affiliate groups; revenues derived from the Entity W insurance
trust; real estate transactions (including rental income); and grants and charitable
donations. While some of Organization A’s funds come from non-governmental sources
(e.g., sponsorships, advertising, etc.),1 most of its revenues are derived from its member
cities and other governmental entities through fees or assessments, and the Entity W
insurance trust. The finances of Organization A are managed by its Board of Directors
in concert with the will of its member cities as expressed through the elected or
appointed officials representing the member cities. Organization A satisfies the sixth
factor of Rev. Rul. 57-128 because most of its revenue is derived from dues and fees
paid by its member cities. Furthermore, any other income of Organization A is required
by its governing documents to be devoted solely to the governmental purposes of
Organization A and its member cities.

For the reasons stated above, Organization qualifies as a wholly owned instrumentality
of its member cities of State B within the meaning of Rev. Rul. 57-128. Organization A’s
purposes and functions are governmental in nature; Organization A’s function is on
behalf of the incorporated cities and other political subdivisions of state B; the
incorporated cities of State B, which are political subdivisions of State B, have the
powers and interests of an owner; since duly selected representatives of the
incorporated State B cities govern Organization A, and only those cities are eligible to

1 We note that, subject to limited exceptions, § 511 imposes a tax on the unrelated business taxable
income of organizations exempt under § 501(c). See also §1.511-1.

PLR-141647-15 14

vote in selecting Organization A’s Board of Directors as well as to approve changes to
Organization A’s Constitution, control and supervision of Organization A is vested in
public authorities; express statutory authority is necessary for the creation and use of
Organization A and such authority exists; and Organization A’s revenues are generally
derived from the fees and assessments derived from its member cities. Unlike Rev.
Rul. 65-26, the facts in this case indicate the activities of Organization A are governed
by its Board of Directors whose members are municipal officers acting with the power of
agency from their respective municipalities. Therefore, in accordance with Rev. Rul. 75-
359, we conclude that contributions to Organization A may constitute charitable
contributions (within the meaning of § 170(c)(1)) for the use of political subdivisions of
State B, that are deductible under § 170(a), subject to the limitation of § 170(b)(1)(B).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. For example, no opinion is expressed, without limitation, on the income tax
treatment of any of Organization A’s revenue, or whether Organization A has any
unrelated business taxable income within the meaning of § 512(a)(1).

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2016-1, 2016-1 I.R.B. 1,
§ 7.01(15)(b). This office has not verified any of the material submitted in support of the
request for ruling, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2016-1, § 11.05.

Sincerely,

Lynne Camillo
Branch Chief, Employment Tax Branch 2
(Exempt Organizations/Employment Tax/Government
Entities) (Tax Exempt & Government Entities)