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Transportation Funding & Financing

Non-Profit 63-20 Corporations

In order to meet their financing needs, state and local governments can issue tax exempt toll revenue bonds through either established conduit issuers or creation of not-for-profit corporations pursuant to Internal Revenue Service (IRS) Revenue Ruling 63-20. While governments normally prefer to utilize an established entity for conduit issues, IRS Revenue Ruling 63-20 provides a viable alternative and has been used to finance a number of major projects around the country.

A non-profit corporation is a private, non-stock corporation that may be formed under the nonprofit corporation act of a state. The formation does not require special legislation, nor does it require a referendum in the local or sponsoring jurisdiction. Non-profits may be formed for any lawful purpose other than for pecuniary profit, including, without limitation, any charitable, benevolent, educational, civic, or scientific purpose. Non-Profits are regulated by the State Attorney General, act, by state tax authorities for compliance with the requirements relating to their state income tax exemption, and by the Internal Revenue Service for compliance with the requirements relating to their Federal income tax exemption and the issuance of tax-exempt debt.

The following summary of IRS Section 63-20 Ruling establishes the conditions which corporations must meet in order to be considered "non-profit" organizations.

A. 63-20 Rev. ruling

  1. Entities issuing bonds on behalf of a State or local government. If an entity fails to satisfy the requirements necessary to be treated as a political subdivision, it may still issue tax-exempt obligations if in so doing it is deemed to be acting on behalf of a state or local governmental unit. See Rev. Rul. 77-164; Philadelphia National Bank v. United States, 666 F.2d 834 (3rd Cir.)

  2. Qualifying issuers

    1. Constituted Authorities: Entities specifically authorized by state law to issue bonds on behalf of political subdivisions of a state. In Rev. Rul. 57-187, industrial development boards were authorized by state law for incorporation in municipalities to promote industry and develop trade. Criteria

      1. the issuance of bonds must be authorized by a specific state statute:

      2. the bond issuance must have a public purpose (which includes promotion of trade, industry and economic development);

      3. the governing body of the authority must be controlled by the political subdivision;

      4. the authority must have the power to acquire, lease, and sell property and issue bonds in furtherance of its purposes;

      5. earnings cannot inure to the benefit of private persons; and

      6. upon dissolution, title to all bond-financed property must revert to the political subdivision.

    2. 63-20 Corporations. The so-called "63-20 corporations" are corporations formed under general state nonprofit corporation law the obligations of which are treated as issued on behalf of a political subdivision. Such corporations typically would not otherwise be "constituted authorities". Criteria

      1. the corporation must engage in activities which are essentially public in nature;

      2. the corporation must be one which is not organized for profit (except to the extent of retiring indebtedness);

      3. the corporate income must not inure to and private person;

      4. the state or a political subdivision thereof must have a beneficial interest in the corporation while the indebtedness remains outstanding and it must obtain full legal title to the property of the corporation with respect to which the indebtedness was incurred upon the retirement of such indebtedness; and,

      5. the corporation must have been approved by the state or a political subdivision thereof, either of which must also have approved the specific obligations issued by the corporation. Requirement that the sponsoring political subdivision have a beneficial interest in the 63-20 corporation while its bonds are outstanding and that it obtain full legal title to the 63-20 corporation's property upon retirement.

      6. the [sponsoring governmental] unit may not agree or otherwise be obligated to convey a fee interest in the property to any person who was a user of the property to any person who was a user of the property or a related person...within 90 days after the unit defeases the obligations...;

      7. a reasonable estimate of a fair market value of the property on the latest maturity date of the obligations...is equal to at least 20 percent of the original cost of the property financed by the obligations ..., and viii. a reasonable estimate of the remaining useful life of the property on the latest maturity date of the obligations... is the longer of one year or 20 percent of the originally estimated useful life of the property financed by the obligations."

  3. Limits on use of 63/20 In Philadelphia National Bank v. United States, 666 F.2d 834 (ed Cir. 1981), the court interpreted Reg. section 1.103-1(b) with respect to entities issuing bonds on behalf of political subdivisions. The issue was whether loans made to Temple University by a private bank, which were obtained to defray operating expenses while the university awaited legislative appropriations, were obligations issued on behalf of the State of Pennsylvania. The court cited White's Estate, 144 R.2d 1019 (2nd Cir. 1944), cert. denied. 323 U.S. 729 (1945), for the proposition that entities issuing bonds on behalf of political subdivisions must be acting as alter egos of the political subdivisions, and held that Temple University was not a "constituted authority." It was not acting as an alter ego of Pennsylvania because there was "no identity of interest, control or intent" between the University and the State.