Rev. Rul. 75-359

Advice has been requested concerning the deductibility, under section 170 of the Internal Revenue Code of 1954, of contributions to the organization described below.

X is a voluntary association of counties organized for exclusively public purposes to "provide more adequate and efficient local government in keeping with a democratic society," and to represent the best interests of State Y by performing research in the field of local government, providing training to county officials with respect to their public duties, providing information and materials to permit the more efficient operation of county government, representing the best public interests of the counties at the State legislature.

There are four classes of membership in X: (1) active membership; limited to county court judges, county supervisors, commissioners, and councilmen, representing their counties, (2) honorary membership; for distinguished persons invited to membership by X's board of directors, (3) sustaining membership; for other county and state officials, and (4) associate membership; open to any person, firm or corporation manufacturing or selling materials, equipment or supplies, purchased or used by a county. An insignificant amount of the association's operating funds comes from annual membership dues of 10x dollars for sustaining members and 125x dollars for associate members. The remainder of the operating funds come from the member counties associated with the organization. Only the holders of the active memberships are entitled to vote on association matters.

Section 170(c)(1) of the Code provides, in part, that 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, but only if the contribution or gift is made for exclusively public purposes.

Under section 170(b)(1)(A) of the Code, the deduction for contributions by individuals to a governmental unit described in section 170(c)(1) is allowed up to 50 percent of the taxpayer's "contribution base" for the taxable year.

Under section 1.170A-8(b) of the Income Tax Regulations, in order to qualify for the 50 percent limitation, contributions must be made "to" and not merely "for the use of" the governmental units described in section 170(c)(1) of the Code. Under section 170(b)(1)(B) deductions for contributions for the use of governmental units described in section 170(c)(1) may not exceed 20 percent of the taxpayer's "contribution base."

Section 170(b)(1)(F) of the Code provides that for purposes of section 170, the term "contribution base" means adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under section 172).

A political subdivision is defined in section 1.103-1(b) of the regulations as any division of any state or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit.

The criteria for identifying wholly-owned instrumentalities of states or of political subdivisions are set forth in Rev. Rul. 57-128, 1957-1 C.B. 311:

In cases involving the status of an organization as an 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.

These criteria were developed under sections 3121(b)(7) and 3306(c)(7) of the Code, which exclude from the definition of "employment," services "performed in the employ of a state, or any political subdivision thereof, or any instrumentality of any one or more of the foregoing which is wholly owned" thereby.

In the instant case X satisfies the criteria set forth in Rev. Rul. 57-128 for wholly-owned instrumentalities. However, since X has not been delegated any of the sovereign powers of its member counties or of State Y, X is not a political subdivision as defined in section 1.103-1(b) of the regulations.

Accordingly, since X is not a political subdivision of State Y, contributions to X will not qualify as contributions "to" an organization described in section 170(c)(1) of the Code and will not qualify for the 50 percent limitation in section 170(b)(1)(A). However, because X, an organization separate from its member counties, qualifies as a wholly-owned instrumentality of those counties, which are political subdivisions, and is formed and operated exclusively for the public purposes of the member counties, contributions to X will be deductible as contributions "for the use of" political subdivisions subject to the limitations of section 170(b)(1)(B).