Rev. Rul. 59-373

Advice has been requested whether the interest received on obligations issued by soil conservation districts created under the Colorado Soil Conservation Act, which was embodied in Chapter 128, Colorado Revised Statutes, 1953, hereinafter referred to as the Statutes, is excludable from gross income for Federal income tax purposes under section 103 of the Internal Revenue Code of 1954.

Section 128-1-1 of the Statutes declares that the purposes of soil conservation districts are to provide for the conservation and preservation of natural resources, the control of wind and water erosion, and the reduction of damage resulting from floods. To accomplish these purposes the Statutes provide for the creation of a state board to which petitions for the organization of soil conservation districts are addressed. Upon receipt of such a petition, the state board sets a date for a local referendum. If a majority of the landowners in the area vote in favor of a district, the state board certifies the establishment of a soil conservation district.

The district is governed by a board of five supervisors, two of whom are appointed by the state board and three of whom are elected in the district election. The district is authorized under section 128-1-8 of the Statutes to acquire real and personal property, to receive income from such properties, to expend such income, and to sell, lease or otherwise dispose of any of such properties in carrying out the purposes of the Statutes. The district is authorized to accept grants, services and materials and borrow money from the United States or from any corporation or agency created by the United States to loan or grant money, or from the State of Colorado, or from any other source, provided that in no event may such a district pledge the faith and credit of the State of Colorado, or any county or other political subdivision thereof, except such district.

Under section 128-1-9 of the Statutes, a district is authorized to adopt land use ordinances and to levy taxes or make assessments upon tracts of land to be benefited by such ordinances. Section 128-1-11 of the Statutes provides that such taxes or assessments shall be added to all other taxes levied or assessed against such land and shall be collected as are other property taxes. If an owner of land does not comply with a land use ordinance, section 128-1-12 of the Statutes provides that the supervisor of a district, on ten days' notice, may enter on such owner's land and do such work as may be necessary to effectuate the ordinance. Section 128-1-14 of the Statutes declares that an owner of land within a district, who fails or refuses to perform all of the conditions required by the land use ordinances as adopted by such district, shall be deemed guilty of a misdemeanor and upon conviction shall be punished by a fine.

Section 128-1-17 of the Statutes provides that the county commissioners of any county in which a conservation district may lie shall cooperate with the supervisors of such district in carrying out the purposes of the Act, and to that end may use the equipment of the county and men employed by the county to do such physical work as may be required by the supervisors. Any county agent whose jurisdiction shall lie in a conservation district is authorized under section 128-1-16 to be ex officio a member of the board of supervisors of such district.

Section 128-1-18 of the Statutes provides that on dissolution, the assets of a conservation district are sold and the net proceeds thereof are deposited with the State Treasurer to the credit of the state board to defray the costs of establishing other soil conservation districts. If at any time after such fund is established there shall be no soil conservation districts in existence in the State, the state board shall so notify the State Controller and any balance remaining in such fund shall be transferred to the general fund of the State.

Section 103 of the Code provides, in part, as follows:

(a) * * * Gross income does not include interest on-

(2) the obligations of a State, a Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia; * * *.

Section 1.103-1 of the Income Tax Regulations provides, in part, that the term `political subdivision' for purposes of this section denotes any division of a State to which has been delegated the right to exercise part of the sovereign power of the State. It may or may not for purposes of this section include special assessment districts so created, such as reclamation, irrigation, and similar divisions or districts.

For the purpose of section 103 of the Code, it has been held that divisions of a state which are formed to achieve a recognized public purpose and whose revenue and assets inure only to the benefit of the state constitute political subdivisions of the state even though the sovereign powers delegated to the division are limited in degree. See 30 Op.A.G. 252; Op. A.G. 10, C.B. 1937-1, 328; Commissioner v. Estate of Alexander J. Shamberg , 144 Fed.(2d) 998, Ct. D. 1648, C.B. 1945, 335, certiorari denied, 323 U.S. 792. Furthermore, it has been held that for the purpose of section 103 of the Code, it is immaterial that the obligations issued by a political subdivision pledge only the credit of the subdivision and not that of the state. See Rev. Rul. 58-452, C.B. 1958-2, 37.

In the instant case, the soil conservation districts of the State of Colorado are created to carry out a recognized public purpose and are vested in this regard with limited rule making and taxing powers. Prior to their dissolution, their revenues and assets are available only for the purpose of carrying out soil conservation programs and, upon dissolution, the assets of a conservation district are sold and the net proceeds are deposited with the State Treasurer to the credit of the state board to defray the costs of establishing other soil conservation districts. If at any time after such fund is established there shall be no soil conservation districts in existence in the state, then any balance remaining in the state fund shall be transferred to the general fund of the State.

Accordingly, it is held that soil conservation districts created under the laws of the State of Colorado constitute political subdivisions of that State within the meaning of section 103 of the Code. Therefore, interest on obligations issued by such districts is excludable from gross income of recipients thereof in computing their Federal income tax liabilities.