Rev. Rul. 73-563

Advice has been requested whether, under the circumstances described below, a rapid transit authority (authority) qualifies as a political subdivision of a state.

The authority, a public corporation, was created by an act of the State legislature to plan, acquire, finance, maintain and administer a rapid transit system within a specific geographic area encompassing several participating counties. The development of a mass transit system by the authority is declared to be an essential governmental function by the State constitution.

The governing body of the authority is the Board of Directors that is comprised of members appointed by each of the participating local governmental bodies.

The authority is empowered to hold public hearings and, on the basis of such hearings, to set rates for the rapid transit system and to determine what routes it will serve. The authority is not subject to the jurisdiction of the State Public Service Commission.

The authority is authorized to contract for, or provide and maintain, a security force to preserve and protect the facilities and property owned or operated by the authority within the territory served by the transit system and to preserve and protect the public peace, health, and safety.

The authority has the power to issue bonds and other evidences of indebtedness the payment of which is secured by a pledge of its revenues. Such obligations are not deemed to be obligations of any of the participating local governments. The interest on such obligations is exempt from all taxation within the State. The properties of the authority and its income are exempt from any State or local tax.

The authority does not have the power of eminent domain but the participating governing bodies may, for purposes of the authority, exercise the broadest power of eminent domain available to them and convey property so acquired to the authority for the cost of acquisition.

The authority has no power to impose any tax. However, the Act provides for financial participation between the authority and the local governments by authorizing the local governments to levy a retail sales and use tax which is to be used to finance the operation of the transit system.

Section 1.103-1 of the Income Tax Regulations provides, in part, that the term "political subdivision" denotes 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.

Three generally recognized sovereign powers of states are the police power, the power to tax, and the power of eminent domain. See Alexander J. Shamberg, 3 T.C. 131, (1944) acq., 1945 C.B. 6, aff'd, 144 F. 2d 998 (2d Cir. 1944), cert. denied, 323 U.S. 792 (1944).

Although the authority in the instant case is not authorized to exercise directly the power to tax and the power of eminent domain, the State legislature has conferred the benefit of such powers on the authority by providing channels through which such powers may be exercised by the participating local governmental bodies to assist the authority.

In Alexander J. Shamberg it was held that State police powers include the power to promulgate and enforce transportation regulations. Since the authority in the instant case has the power to set rates, determine routes, and enforce its regulations by maintaining a security force, it is considered to possess police powers. Thus, the authority has been granted a sufficient portion of the sovereign powers of the State to perform the essential governmental function for which it was created.

Accordingly, in this case, the authority qualifies as a political subdivision of the State within the meaning of section 1.103-1 of the regulations.