Rev. Rul. 79-323

ISSUE

Are amounts paid to an industrial commission under the circumstances described below deductible as charitable contributions under section 170 of the Internal Revenue Code?

FACTS

A state legislature established a commission to study the problems of industrial life in a particular geographic area. The commission is to maintain, where possible, the industries already located in the area and invite and attract additional industries in order to diversify the area's industrial base. The area in which the commission functions includes several municipalities that are political subdivisions of the state. The commission membership is made up of representatives appointed by elected officials from each of the municipalities that have chosen to participate in the activities of the commission. The representatives' terms of appointment are limited and a member municipality may withdraw at any time upon giving proper notice. Also, the commission can be terminated by the state legislature at any time.

To accomplish its goals the commission is authorized to erect new buildings or otherwise provide for the housing of industries. It may acquire land by purchase, gift, or otherwise, borrow money, sell property, and issue revenue bonds. The commission may also establish a per capita assessment, limited in amount, against all the municipalities, for the purpose of covering operating expenses. Finally, the commission may make studies of existing resources and determine what resources can be brought to the area in order to increase economic growth.

The financial and other activities of the commission are subject to review by the state and the member municipalities, and the purposes for which moneys are spent by the commission must be consistent with the intent of the state legislature in establishing the commission.

LAW AND ANALYSIS

Section 170 of the Code provides, subject to certain limitations, a deduction for contributions or gifts to, or for the use of, organizations described in section 170(c), payment of which is made within the taxable year.

Section 170(c) of the Code defines the term "charitable contribution" to include contributions of gifts to or for the use of a state, a possession of the United States, or any political subdivision of any one of the foregoing, or the United States or the District of Columbia but only if the contribution or gift is made exclusively for public purposes.

With regard to the requirement that the gift be for "exclusively public purposes," Rev. Rul. 67-446, 1967-2 C.B. 119, concludes that contributions to a city to enable it to furnish new facilities outside the city to two railroads in exchange for the railroads' removal of their inner city facilities and relinquishment of their right of way through the city are allowable deductions under section 170(c)(1) of the Code. See Rev. Rul. 69-90, 1969-1 C.B. 63, which reaches a similar conclusion in connection with the construction of a public parking lot.

The commission, by promoting the general economic health of a region and by maintaining and attracting industry, benefits the residents of the region either directly by increased payments by industries for services and materials or indirectly through the general influx of money into the area. Therefore, the commission serves an exclusively public purpose.

Generally, in order for contributions to be "to or for the use of" a governmental entity, the contributions must be made either directly to the governmental entity or to an organization acting on behalf of such governmental entity, provided that there are sufficient assurances that the contributions will be used solely for the benefit of the general public. Such assurances ordinarily exist if there is a substantial governmental check on the autonomy of such an organization.

In the present case, the commission was established by a state legislature and can be terminated by the state legislature at any time. The commission is composed of representatives appointed by elected officials from each of the municipalities that have chosen to participate in the activities of the commission. The activities of the commission are subject to review by the state and participating municipalities. The commission is acting on behalf of and is subject to substantial control by the state and the participating municipalities; and there is, therefore, a substantial governmental check on its autonomy.

Furthermore, there is no indication that gifts to the commission will inure to the benefit of private interests except indirectly in the course of advancing the public purposes of promoting the economic health and stability of the area.

HOLDING

Amounts paid to the commission in this case are for "exclusively public purposes," and, therefore, are deductible as charitable contributions under section 170(c)(1) of the Code, subject to the percentage limitations of section 170(b)(1)(B).