Request By:
Hon. James H. Fallin
Hancock County Judge
Hawesville, Kentucky 42348
Opinion
Opinion By: Steven L. Beshear, Attorney General; John H. Gray, Assistant Attorney General
Thank you for your letter of August 17, 1981 in which you ask if a District Health Department would be eligible for a tax free interest rate at a local bank for the purpose of financing an office building.
It is the opinion of this office that a District Health Department would be so entitled.
Section 103(A)(1) of the Internal Revenue Code provides that gross income does not include interest on the obligations of a state, a territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia. Therefore, if a District Health Department were to qualify as a political subdivision of the state, the interest that it would pay to a bank on a purchase money loan would not be income to the bank for federal tax purposes.
Section 1.103-1(B) of the Income Tax Regulations provides, in part, that a political subdivision is any subdivision of a state or local government unit that is a municipal corporation or that has been delegated the right to exercise part of the sovereign power of the state or governmental unit.
Revenue Ruling 77-164, 1977-1 C.C. 20, and Revenue Ruling 77-165, 1977-1 C.B. 21, state that three generally acknowledged sovereign powers of states are the power to tax, the power of eminent domain and the police power. The Revenue Rulings provide that in determining whether an entity is a political subdivision of a state it is not necessary that all three of these powers be delegated. However, possession of only an insubstantial amount of any or all sovereign powers is not sufficient. All of the facts and circumstances must be taken into consideration, including the public purposes of the entity and its control by a government.
In Revenue Ruling 61-181, 1961-1 C.B. 21, for example, the authority in question possessed the power of eminent domain, but did not have the power to tax. Although neither specifically indicated in the facts, nor specifically addressed in the holding, it appears that the authority also lacked the police power. The authority was held to be a political subdivision.
Although it does not seem that under KRS 212.720-760 a District Health Department has the power to tax, it is felt that a District Health Department has sufficient police power under KRS Chapter 212 to qualify as a political subdivision for purposes of Section 1.103-1(B) of the Income Tax Regulations. These powers are set out at KRS 212.245 and KRS 212.890. Also, a District Health Department containing a city of the first class would have eminent domain powers under KRS 212.590.
It is the opinion of this office, therefore, that the interest paid on a loan with a local bank by a District Health Department would be exempt from federal income tax under Section 103 of the Internal Revenue Code.
Please bear in mind that this opinion is the opinion of this office only and that the ultimate resolution on your question would lie with the Internal Revenue Service.