Rev. Rul. 65-196

Advice has been requested whether a `Sports Area Commission,' organized and operated under the circumstances described below, is a wholly-owned instrumentality of one or more political subdivisions of a State for the purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act.

Three municipal corporations, a city and two villages, entered into an agreement to provide their residents and the residents of adjacent communities additional facilities for recreational activities. One of the main projects is the construction of a stadium to be used for sporting events and other types of entertainment. A `Sports Area Commission' was formed pursuant to the agreement to carry out the project. The commission is comprised of members appointed by the councils of the city and villages as their representatives. Each member is required to be a citizen and resident of the State and may not be a member of the governing body of a participating municipality. The members are paid a specified amount, plus necessary expenses, for attending commission meetings.

The commission is delegated specific powers, duties, and functions set forth in the agreement dealing generally with the establishment, operation, and management of the facilities. It employs a manager of operations and other necessary personnel.

The agreement provides for the city, upon the commission's request and recommendation, to authorize, sell, issue, execute, and deliver revenue bonds of the city to provide money for the establishment of the project and the capital costs and charges of the initial improvements. Also, the bonds shall be authorized by an ordinance of the city enacted in accordance with its charter and applicable State laws. The bonds shall never be or become general obligations of the city. Neither the faith and credit of the city is pledged nor is the use of the taxing powers of the city permitted to pay the principal or interest on the bonds. Furthermore, the city agrees to establish a special fund, designated as `Sports Area Fund,' in its treasury and on the accounts of its treasurer, and to maintain and continue the fund until all the revenue bonds issued by the city shall have been paid. Each bond bears the statement that the bond principal and interest is payable solely out of a `bond and interest account' of the `Sports Area Fund.' The sole source of income of the account is the net revenue to be derived from the operations of the sports area.

All physical properties acquired under the agreement shall be held and owned by the participating municipalities in an undivided interest proportional to the population of the municipalities. If the project is terminated the properties shall be sold and, after payment of all debts including the revenue bonds, the net proceeds shall be divided among the participating municipalities according to the population proportion.

The commission was validated by the enactment of a State law which, in part, legalizes agreements between cities and villages for the joint acquisition of lands for use as a recreational and sports area, confirms the right to acquire such lands by eminent domain, and exempts the properties from all State and local taxes while owned by the participating municipalities.

Section 3121(b)(7) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954) excepts from `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, with certain exceptions not here material. Section 3306(c)(7) of the Federal Unemployment Tax Act (chapter 23, subtitle C of the Code) contains a similar provision.

In cases involving the status of an organization as an instrumentality of a State or political subdivision thereof, 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) whether express or implied statutory or other authority is necessary or exists for the creation and use of the organization; and (6) the degree of financial autonomy and the source of its operating funds. See Rev. Rul. 57-128, C.B. 1957-1, 311.

In the instant case, substantially all of the factors enumerated above are met. The commission was created by the city and villages as their instrumentality, and validated by State law. The commission members are delegated certain authority under the terms of the agreement between the city and villages. Control and supervision of the assets of the commission are in the hands of the city and villages. There are no private interests involved. The city, upon the commission's direction, is responsible for the project's finances.

Accordingly, it is held that the `Sports Area Commission' is an instrumentality wholly owned by one or more political subdivisions of the State. Therefore, services performed in its employ are excepted from `employment' by reason of the provisions of sections 3121(b)(7) and 3306(c)(7) of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively, and the remuneration for such services is not subject to taxes imposed by the two acts. However, the remuneration is subject to the withholding of income tax under section 3402 of the Code.