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IRS Political Subdivision Proposal Could Be Controversial – Tax Notes

By Fred Stokeld

Nearly three years after publishing a technical advice memorandum that some critics have said is at odds with the commonly understood standard for political subdivisions for purposes of tax exempt bonds, the IRS has published proposed regulations on political subdivisions that could prove just as controversial.

The proposed regs (REG-129067-15 ), released Treasury February 22, say that to qualify as a political subdivision an entity must be governmentally controlled, with control defined as ongoing rights or power to direct significant actions of the entity, according to the preamble. In general, the control must be vested either in a general purpose state or local governmental unit or in an electorate established under applicable state or local law. An entity controlled by an electorate would not be governmentally controlled when the outcome of exercising that control is determined solely by the votes of an “unreasonably small number of private persons,” the proposed regs say.

A political subdivision must also serve a governmental purpose and provide a significant public benefit, with no more than incidental benefit to private persons. And an existing requirement that a political subdivision have the power to exercise at least one sovereign power — eminent domain, police power, or taxing power — is retained in the proposed regs.

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