Climate infrastructure authority receives governmental income and contribution rulings

Plain-English summary

A county and city formed a state-law authority to undertake and support infrastructure projects that mitigate climate-change effects, including flood barriers, stormwater remediation, coastal restoration, roadway protection, and electric-vehicle charging infrastructure. The political subdivisions appoint the authority's board and director, control its organizing documents, oversee its finances, and receive its property if it terminates. Its funding comes from government grants, its earnings may benefit only the county and city except as needed for public purposes or debt service, and private benefits must remain incidental. The IRS ruled that the authority performs an essential governmental function and that its income accrues to the county and city, so the income is excluded under section 115(1). The authority is not itself a political subdivision, but the IRS found it to be a wholly owned instrumentality of the county and city. Contributions made to it exclusively for public purposes are therefore deductible under section 170, subject to the otherwise applicable limits.

Ruling snapshot

• Question: Is the authority's income excluded as governmental income, and are public-purpose contributions to it deductible?
• Outcome: Approved on both questions
• Key authorities: IRC §§ 115(1), 170(a), 170(c)(1); Rev. Rul. 57-128; Rev. Rul. 75-359; Rev. Rul. 77-261; Rev. Rul. 90-74

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202443008 Third Party Communication: None
Release Date: 10/25/2024 Date of Communication: Not Applicable
Index Number: 115.00-00
Person To Contact:
------------------------------------------------------------ -------------------------, ID No. -----------------
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------------------ Telephone Number:
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Refer Reply To:
CC:EEE:EOET:EO2
PLR-102514-24
Date:
July 25, 2024

LEGEND

Authority = -------------------------------------------------------------------
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State = ------------
State Law = -------------------------------------------------------------------
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County = -------------------------------------------
City = -------------------------------------
Date = ------------------
X = -------------
Y = ---------------

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

This letter ruling responds to a letter from your authorized representatives dated
January 26, 2024, and supplemental documentation dated March 22, 2024, requesting
rulings under sections 115 and 170 of the Internal Revenue Code.1

FACTS

Authority is a State corporation, incorporated pursuant to State Law by County and City,
political subdivisions of State. State Law specifically authorizes State political
subdivisions to incorporate organizations such as Authority that, in addition to complying

1 Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended
(the “Code”).

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with other requirements provided in State Law, have as their purpose the undertaking or
support of infrastructure projects that mitigate the effects of climate change.
Infrastructure projects include financing the capital costs associated with flood barriers,
green spaces, building elevation, and stormwater remediation technology.

State Law permits Authority to assume costs incurred for the acquisition, design,
construction, renovation, and expansion of these projects. Authority is tasked with
acting as the “general contractor” for these projects, ensuring they are satisfactorily
completed according to the terms of the grants they receive for these projects. Upon
completing its responsibilities regarding these projects, Authority transfers any
ownership and control it assumed back to County and City.

County and City established Authority by, as directed by State Law, adopting enabling
legislation describing Authority and its powers. The enabling legislation included
Authority’s articles of incorporation, which were subsequently adopted on Date and then
submitted by County’s Executive to, and accepted by, State’s Tax Department, as
required by State Law. Upon this acceptance, State considers Authority to be a “body
politic… and instrumentality” of City and County.

Authority’s articles of incorporation limit its purpose to “undertake and support projects
in [City] and in [County] that mitigate the impact of climate change[.]” Authority has only
those powers granted to it by State Law and City and County law and is not authorized
to issue stock. Only County, with the consent of City, may amend Authority’s articles of
incorporation. State Law, the County and City enabling legislation, and Authority’s
organizing documents establish that, except as necessary to pay any debt service or
implement its public purpose, Authority’s net earnings may only benefit City and County
and prohibit more than incidental benefits to private persons and interests. Authority
represents that, consistent with these requirements, it ensures that private interests do
not benefit more than incidentally from Authority’s activities. If Authority is terminated,
State, County, and City law require that all Authority property be transferred to County
and City.

Authority is governed by a 12-member board entirely appointed by County and City.
Board members are (i) uncompensated for their efforts, (ii) must be residents of City or
County, (iii) demonstrate relevant subject-matter experience, (iv) annually certify a
conflict-of-interest statement, and (v) take no financial interest in any Authority project.
Before undertaking their responsibilities, each Authority board-member is required to
swear a constitutional oath of office before a County court clerk. Authority’s board is
aided by a Director appointed by County’s Executive, who will also serve as a County
employee and also may not take any financial interest in any Authority project, as well
as an advisory committee comprised of County and City officers with relevant subject-
matter portfolios.

PLR-102514-24 3

State law vests authority in County and City to determine Authority’s sources of
revenue. Authority’s organizing activity is funded by initial grants from County totaling
$X. Authority may, and has, raised additional revenue by way of project-specific grants
from government entities including the federal government. To date Authority has
received project-specific grants from State, County, and federal agencies including the
Departments of Energy and Transportation and the National Parks Service. The grants
total $Y for projects such as floodplain restoration, coastal erosion restoration and
beach renourishment, roadway protection, and motor-vehicle electric charging
infrastructure support.

Authority is enabled to issue bonds to finance projects but has not done so and has not
indicated any plans to do so in the future. Any bonds issued by Authority will be (i)
determined appropriate by County, with advice of City, (ii) issued subject to standard
operating procedures and associated with specific projects to be financed, and (iii) not
backed by the credit of County or City.

Authority will provide annual written reports on its activities and audited financial
statements to State, County, and City, as required by State, County, and City law.
Authority is also required to make its books and other records available to County and
City officials for inspection as County and City deem appropriate.

RULINGS REQUESTED

1. Authority’s income is excludable from gross income pursuant to section 115(1)
   because Authority’s income is derived from its performance of an essential
   government function and accrues to County and City; and

2. Contributions to Authority are deductible under section 170 because Authority
   meets the instrumentality criteria provided in Rev. Rul. 57-128 for the purposes of
   section 170(c)(1).

LAW AND ANALYSIS

Ruling 1

Law

Section 115(1) provides that gross income does not include income derived from any
public utility or the exercise of any essential governmental function and accruing to a
state or political subdivision thereof.

Rev. Rul. 77-261, 1977-2 C.B. 45, holds that the income from an investment fund,
established pursuant to state law for the temporary investment of cash balances of a
State and its participating political subdivisions, is excludable from gross income under

PLR-102514-24 4

section 115. The ruling explains that section 115(1) represents the desire of Congress
to not restrict in any way the ability of a State (or, by implication, its political
subdivisions) to participate in enterprises useful in carrying out those projects desirable
to the State in their exercise of sovereign powers. Section 115(1), therefore, refers to
the income of any State or municipality resulting from a corporation engaged in public
utilities or some other government function that accrues to the State or its political
subdivisions. The ruling concludes that the investment fund is a separate entity from the
State and its political subdivisions but the income from its investment activity was
income from the exercise of an essential governmental function, and since the State
and its participating political subdivisions had an unrestricted right to their proportionate
share of the investment fund's income, the fund's income accrued to them.

Rev. Rul. 90-74, 1990-2 C.B. 34, holds that income of an organization formed,
operated, and funded by political subdivisions of a State to pool their casualty risks is
excluded from gross income under section 115(1). In this ruling, the political
subdivisions were authorized by state law to form and become members of these pools
as long as the governing body of the participating political subdivision authorized the
political subdivision’s participation and appointed individuals to represent the political
subdivision in the governing affairs of the pools. Members funded the pools with general
revenue. Upon dissolution, all pool assets would be distributed to member political
subdivisions. The ruling states that the determination as to whether a function is an
essential government function depends on the facts and circumstances of each case. In
addition to benefitting the political subdivisions by protecting their financial integrity, the
ruling cites the significant involvement of the political subdivisions in the formation and
operation of the pools to conclude they are an essential government function. Finally,
the ruling concludes, as evidence that the activity is the exercise of an essential
government function, that private interests do not, except for incidental benefits to
employees of the participating State and political subdivisions, participate in or benefit
from the organizations.

Rev. Rul. 71-589, 1971-2 C.B. 94, holds that income from property willed by an
individual to be held in trust by a political subdivision as a fund to be used for certain
enumerated charitable purposes was excluded from gross income under section 115(1).
Although neither the assets or income of the trust accrued directly to the political
subdivision, the fact that the gift of the trust was accepted and used by the political
subdivision’s board of commissioners for designated public purposes ordinarily
recognized as municipal functions was sufficient to conclude that the trust’s income
accrued to the political subdivision.

Analysis

Authority represents that County and City are political subdivisions of State. To the
extent that Authority generates income from the exercise of any essential government

PLR-102514-24 5

function of County or City that accrues to County or City, that income is not includable in
Authority’s gross income pursuant to section 115(1).

Authority’s activities constitute the exercise of an essential government function of
County and City. Rev. Rul. 77-261 explains that section 115(1) allows for States and
political subdivisions to participate in income-generating enterprises useful and
desirable to those entities in exercising their sovereign powers. State passed State Law
to specifically authorize political subdivisions such as County and City to form
organizations like Authority to further the purposes identified by State in State Law.
County and City did so, complying with all requirements under State Law, engaging in
significant control of Authority and direction of its activities. City and County expressly
provided Authority’s power to pursue its mission, control its organizing documents,
appoint Authority’s board and Director, and have oversight over its financial books,
records, and instruments. Authority provides ongoing reporting to County, City, and
State. County provided initial funding for Authority’s operations and Authority has
subsequently been entirely funded by grants from County, City, State, and the federal
government. County, City, and State have all demonstrated that Authority is useful and
desirable to their exercising of their sovereign powers.

Rev. Rul. 90-74 holds that the determination as to whether an activity is an essential
government function depends on all the facts and circumstances. As discussed, County
and City’s significant involvement in Authority demonstrates their intent to exercise an
essential government function through Authority’s activities. This involvement is
consistent with the facts provided in Rev. Rul. 90-74. Rev. Rul. 90-74 also concludes
that an essential government function requires that private interests do not, except for
more than incidentally, benefit from the activities. Authority assumes oversight of
projects funded by County, City, and other public entities, transferring ownership and
control of these projects to these entities upon completion. Authority adheres to strict
rules, either by law or its own organizing documents, including conflicts-of-interest
statements and requirements that limit the ability of Authority insiders and other persons
to privately benefit from Authority’s activity. If Authority is terminated, title to all Authority
property transfers to County and City. County, City, and State directly benefit from
Authority’s exercise of the functions delegated to it. Any private interests benefit from
Authority’s activity only incidentally, either in their capacity as project contractors, or
members of the general public.

Authority’s income related to its exercise of essential government functions accrues to
County and City. Rev. Rul. 71-589 explains that income accepted and used by an entity
for an essential government function is income that accrues to political subdivisions.
County and City control and direct authority’s activities furthering the specific purpose
identified by State in State Law. County and City law and Authority’s organizing
documents require it to be organized and operated exclusively to further the essential
government functions identified by County and City as the purpose of Authority.
Authority’s net earnings are prohibited by State, County, and City law from being used

PLR-102514-24 6

to benefit private interests. In these circumstances, Authority’s income accrues to
political subdivisions.

Authority’s income is excludable from gross income under section 115(1) because it is
derived from its performance of an essential government function and accrues to
County and City.

Ruling 2

Law

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

Section 170(c)(1) states that, for purposes of section 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.

The determinative question as to whether an entity has the status of a political
subdivision is whether it has been delegated any of a state’s sovereign powers. The
three generally acknowledged sovereign powers are the police power, the power to tax,
and the power of eminent domain. Estate of Shamberg, 3 T.C. 131, 143, aff’d, 144 F.2d
998 (2d Cir.), cert. denied, 323 U.S. 792 (1944). It is not necessary that all three of
these powers be delegated in order to treat an entity as a political subdivision for
purposes of the Internal Revenue Code. Id.

Section 170(c)(1) does not refer to instrumentalities of a political subdivision. However,
the long-standing position of the Internal Revenue Service is that contributions or gifts to
an instrumentality of a state or an instrumentality of a political subdivision are
considered to be “for the use of” of a state or a political subdivision rather than gifts ”to”
a state or political subdivision. The significance of this distinction is that a gift “for the
use of” a state or political subdivision is subject to the 30-percent limitation of section
170(b)(1)(B). See Rev. Rul. 75-359, 1975-2 C.B. 79.

Rev. Rul. 57-128, 1957-1 C.B. 311, provides that, in cases involving the status of an
organization as a wholly-owned instrumentality of a state or political subdivision, the
following factors are considered —

(1) whether the organization is used for a governmental purpose and performs a
governmental function;

PLR-102514-24 7

(2) whether the organization’s function is performed on behalf of a state or political
subdivision;

(3) whether any private interests are involved, or whether a state or political
subdivision has the powers and interests of an owner;

(4) whether the control and supervision of the organization is vested in a public
authority;

(5) whether express or implied statutory or other authority is necessary for the
creation or use of the organization, and whether such authority exists; and

(6) the degree of the organization’s financial autonomy and the source of its
operating expenses.

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

Rev. Rul. 69-453, 1969-2 C.B. 182, applied the six factors of Rev. Rul. 57-128 to hold
that a soil and water conservation district formed as a private non-stock corporation by
private individuals was not an instrumentality of the state. The ruling found that the state
had no authority or control over the district’s expenditures, that it had no authority to
remove any member of the district’s board, and that the district funded its operations
through fees that it charged landowners for work done for the purpose of soil
conservation. The ruling noted that the state had no claim to the district’s assets after
the district’s dissolution.

Rev. Rul. 65-196, 1965-2 C.B. 388, held that a sports area commission formed pursuant
to an agreement (which was authorized by the enactment of a state law legalizing such
agreements) among a city and two villages to erect and operate an athletic stadium was
an instrumentality of political subdivisions of the state. The commission was composed
of members appointed by the councils of the city and the villages as their
representatives. Each member was required to be a citizen and resident of the state
and could not be a member of the governing body of the city or the villages. The sole
source of financing for the commission came from bonds issued by the city; the city was
authorized to issue bonds upon the request of the commission to fund the athletic
stadium. The ruling found that the commission was an instrumentality of the city and the
two villages by whose agreement it was formed, because it met substantially all of the
Rev. Rul. 57-128 factors: the commission was created by the city and the villages as
their instrumentality, and validated by state law; the commission members were

PLR-102514-24 8

delegated certain authority under the terms of the agreement among the city and the
villages; control and supervision of the assets of the commission were in the hands of
the city and the villages; there were no private interests involved; and the city, upon the
commission’s direction, was responsible for the project’s finances.

Analysis

As stated above, section 170(c)(1) generally defines the term “charitable contribution,”
for purposes of section 170(a)(1), to include a contribution or gift to or for the use of a
state or any political subdivision of the state, provided the contribution or gift is made for
exclusively public purposes.

Authority is not itself a political subdivision of State. Therefore, contributions to Authority
cannot constitute charitable contributions to a political subdivision of State for purposes
of section 170(c)(1). However, pursuant to Rev. Rul. 75-359, contributions to Authority
may constitute charitable contributions for the use of a political subdivision of State,
which are deductible under section 170(a), subject to the limitation of section
170(b)(1)(B), if Authority qualifies as a separate, wholly-owned instrumentality of one or
more political subdivisions of State. Whether Authority is a wholly-owned instrumentality
of a state or political subdivision of a state is determined by applying the six factors of
Rev. Rul. 57-128.

The first factor under Rev. Rul. 57-128 is whether Authority is used for a governmental
purpose and performs a governmental function. Authority was created by County and
City, which are political subdivisions of State, as authorized by State Law, to undertake
or support infrastructure projects that mitigate the effects of climate change in City and
County. Thus, State, through its legislature, has identified the development of this
infrastructure as a legitimate function of the counties and cities within State.
Accordingly, we conclude that Authority is used for a governmental purpose and
performs a governmental function.

The second factor under Rev. Rul. 57-128 is whether the performance of Authority’s
function is on behalf of a state or political subdivision. Authority’s board is appointed by
County and City and its Director is appointed by the County Executive pursuant to
County and City law as authorized by State Law. Therefore, Authority’s function is
carried out on behalf of County and City for the general purpose of mitigating the effects
of climate change to individuals living in County and City. Consequently, we find that
Authority’s function is performed on behalf of County and City, which are political
subdivisions of State.

The third factor under Rev. Rul. 57-128 is whether any private interests are involved, or
whether a state or political subdivision has the powers and interests of an owner. State
County, and City law provide that except as necessary to pay debt service or implement
the public purposes or programs of County or City, the net earnings of Authority may

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benefit only County and City and may not benefit any person. Authority represents that
no private interests will participate in, or benefit from Authority except in a manner
incidental to the public benefit provided by Authority. Annually, Authority’s board
members are required to execute a statement affirming whether or not they have an
interest that is or may be perceived to be an actual or possible conflict of interest.

Additionally, State, County, and City law provides that if Authority ever terminates, title
to all Authority’s property shall be transferred to County and City and all Authority’s
obligations shall be transferred to and assumed by County and City.

Consequently, we conclude that no private interests are involved in Authority. Rather,
we find that political subdivisions of State have the powers and interests of an owner
with respect to Authority.

The fourth factor under Rev. Rul. 57-128 is whether the control and supervision of
Authority is vested in a public authority. County and City created Authority as authorized
by State, County, and City law. Authority is governed by the board, the members of
which are appointed by County and City. Authority is required by law to provide State,
County, and City with an annual report and audited financial statements. Therefore, we
conclude that the control and supervision of Authority is vested in a public authority.

The fifth factor under Rev. Rul. 57-128 is whether express or implied statutory or other
authority is required to create or use Authority, and whether such authority exists.
Pursuant to State Law, a local government may create an authority by local law.
Accordingly, County’s Executive formed Authority by filing articles of incorporation with
State’s Tax Department. County, with the concurrence of City, can set or change the
powers, structure, organization, procedures, programs, or other activities of Authority.
Consequently, we conclude that express statutory authority is necessary for the creation
and use of Authority and that such authority does exist.

The sixth factor under Rev. Rul. 57-128 is the degree of Authority’s financial autonomy
and the source of its operating expenses. Authority has represented that its activities
are financed by State, County, and U.S. federal grants. The financial affairs of Authority
are managed by the board, which is appointed by County and City, and supervised by
State, County, and City officials. Therefore, we find Authority is not financially
autonomous from any political subdivision of State.

For the reasons stated above, application of the factors set forth in Rev. Rul. 57-28
weigh in favor of a finding that Authority is a wholly-owned instrumentality of one or
more political subdivisions of State, specifically, County and City. Therefore,
contributions made to Authority exclusively for a public purpose may be deductible by
donors as charitable contributions under section 170(c)(1) to the extent otherwise
provided under section 170.

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CONCLUSIONS

Therefore, we rule that:

1. because Authority’s income is derived from its performance of an essential
   government function and accrues to County and City, it is excludable from gross
   income under section 115(1); and

2. Because Authority is an instrumentality for purposes of section 170(c)(1),
   contributions to it are deductible to the extent otherwise allowable by section 170.

                                       ****
   

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Authority and accompanied by penalties of perjury
statements executed by an individual with authority to bind Authority and upon the
understanding that there will be no material changes in the facts. See Rev. Proc. 2024-1
§ 7.01(16), 2024-1 I.R.B. 1. This office has not verified any of the material submitted in
support of the request for this ruling, and such material is subject to verification on
examination. The Associate Chief Counsel (Employee Benefits, Exempt Organizations,
and Employment Taxes) will revoke or modify a letter ruling and apply the revocation
retroactively if: 1) there has been a misstatement or omission of controlling facts; 2) the
facts at the time of the transaction are materially different from the controlling facts on
which the letter ruling was based; or 3) the transaction involves a continuing action or
series of actions and the controlling facts change during the course of the transaction.
See Rev. Proc. 2024-1 § 11.05, 2024-1 I.R.B. 1.

This letter does not address the applicability of any section of the Code or Treasury
regulations other than those sections specifically described. Except as expressly
provided herein, no opinion is expressed or implied concerning the federal tax
consequences of any fact or issue discussed or referenced in this letter.

This letter is directed only to Authority. Section 6110(k)(3) provides that it may not be
used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to Authority’s authorized representatives.

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If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

                                    Sincerely,



                                    Andrew F. Megosh, Jr.
                                    Senior Tax Law Specialist
                                    Exempt Organizations Branch 2
                                    (Employee Benefits, Exempt Organizations, and
                                    Employment Taxes)

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