CORPORATION DESCRIBED IN REV. RUL. 68-590 MUST INCLUDE IN GROSS INCOME AMOUNTS RECEIVED BY BOND TRUSTEE FROM NET BOND PROCEEDS INVESTMENT

Rev. Rul. 86-66

ISSUE

Will the corporation described in Rev. Rul. 68-590, 1968-2 C.B. 66, be required to include in its gross income, under section 61 of the Internal Revenue Code, income received by the bond trustee from the investment of the net bond proceeds during a construction period and from the investment of the reserve fund where the investment income inures to the benefit of the corporation?

FACTS

Rev. Rul. 68-590 describes a typical industrial development bond financing arrangement involving the use of tax-exempt bonds to finance the purchase or construction of a project for a private industrial corporation. The revenue ruling treats the corporation as the owner of the project for federal income tax purposes.

Rev. Rul. 68-590 sets for the eight tax consequences of treating the corporation as owner of the project for federal income tax purposes. However, an additional question has arisen regarding the federal income tax treatment of any investment income received by the bond trustee when the trustee invests the net bond proceeds during the construction period or invests the portion of bond proceeds placed in a reserve fund, where the investment income is used to redeem bonds.

LAW AND ANALYSIS

Section 61(a) of the Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived.

Rev. Rul. 68-590 concludes that the corporation described therein must take into account any premium or discount on the bonds under section 61 of the Code. The rulings also concludes that the corporation may deduct the trustee's fees pursuant to section 162. Thus, the corporation is treated as the owner of the net bond proceeds as well as the owner of the project financed with the bond proceeds. Accordingly, any investment income received by the bond trustee when the trustee invests the net bond proceeds during a temporary period, or invests the portion of bond proceeds placed in a reserve fund, under circumstances in which the investment income inures to the benefit of the corporation, will be considered the gross income of the corporation.

HOLDING

The corporation must include it its gross income, under section 61 of the Code, income received by the bond trustee from the investment of the net bond proceeds during a construction period and from the investment of the reserve fund. However, for industrial development bonds issued after December 31, 1984, an amount required to be paid to the United States under section 103(c)(6)(D) is not gross income and no deduction is allowed for any amount paid to the United States under section 103(c)(6)(D). See section 103(c)(6)(G).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 68-590 is amplified.