Rev. Rul. 57-151

Advice has been requested whether the income realized by the Oklahoma County Utility Services Authority, a trust created under State laws for the furtherance of public functions, and the interest paid on obligations issued by it are exempt from Federal income tax.

Under the terms of an Oklahoma statute entitled `Trusts for the Furtherance of Public Functions,' Title 60 Oklahoma Statutes 1951, sections 176-180, as amended by Laws 1953, express trusts may be created with the State or any political subdivision thereof as the beneficiary for the purpose of furthering any authorized function of the beneficiary. Title 60, section 176, Oklahoma Statutes. Before the trusts can become effective, the beneficial interest therein must be formally accepted by the Governor of the State or by the governing body of the political subdivision which is named as the beneficiary in the trust instrument. Title 60, section 177. The statute designates the trustees under such an instrument as an agency of the State and provides that the trust may be terminated only by agreement of the trustees and the governing body of the beneficiary, with the approval of the Governor of the State. Title 60, sections 178 and 180.

The Oklahoma County Utility Services Authority is a trust created, pursuant to the provisions of the statute referred to above, for the purpose of providing municipal utility services, such as water supply, fire protection and sewage disposal, for the residents in the outlying areas of Oklahoma County. The Board of County Commissioners of Oklahoma County has formally accepted the beneficial interest in the trust and has thereby rendered the trust effective. Under the terms of the trust instrument, the Authority is empowered to issue first mortgage revenue bonds, secured on trust properties and unsecured debenture notes. The revenues of the Authority primarily abailable for meeting its obligations are derived from the sale of water produced and distributed, although the Authority may have other revenues from other operations in which it may engage in the performance of trust purposes. No obligation of the trust, however, shall ever become a liability of the beneficiary. No funds of the Authority may be diverted to any private use and, upon termination of the trust after payment of all debts and obligations, the remainder of the trust assets shall be distributed to the beneficiary. The Supremem Court of the State of Oklahoma sustained the validity of the trust and the acceptance of the beneficial interest by the Board of County Commissioners of Oklahoma County, and held that the trustees under the trust instrument are an agency of the State of Oklahoma and its regularly constituted authority for the performance of the functions for which the trust was created. Board of County Commissioners v. Warren , Okl., 285 P.2d 1034 (1955).

On the basis of the facts present in this case, it is held that the income to be earned by the Oklahoma County Utility Services Authority from the furnishing of municipal utility services such as water supply, fire protection and sewage disposal, and which income will never accrue to the benefit of any person, firm, or corporation except the county which is the beneficiary of the trust, will not be subject to Federal income tax. It is further held that the mortgage bonds and debenture notes to be issued by the Authority for the purpose of financing the facilities to be used in providing municipal utility services will be considered as issued in behalf of the County, a political subdivision, and the interest paid thereon will be exempt from Federal income tax under section 103(a)(1) of the Internal Revenue Code of 1954. Cf. Rev. Rul. 54-296, C.B. 1954-2, 59.