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Proposed regulations: Definition of “political subdivision” for tax-exempt bond purposes

IRS definition of political subdivision

The Treasury Department and IRS today released for publication in the Federal Register a notice of proposed rulemaking (REG-129067-15) concerning the definition of a “political subdivision” for purposes of tax-exempt bonds issued by state and local governments.


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The proposed regulations [PDF 228 KB] are being issued to specify the elements of a "political subdivision." State and local governments that issue tax-exempt bonds and users of property financed with tax-exempt bonds will be affected by this guidance. However, under certain transition rules, the proposed definition of political subdivision will not apply for purposes of determining whether outstanding bonds are obligations of a political subdivision and will not apply to existing entities for a transition period.


The proposed regulations clarify and further develop the eligibility requirements for a political subdivision. To qualify as a political subdivision under the proposed regulations, an entity must meet three requirements (taking into account all of the facts and circumstances): 

  • Sovereign powers: The proposed regulations continue, without substantive change, a longstanding requirement that a political subdivision be empowered to exercise a substantial amount of at least one of the generally recognized sovereign powers—eminent domain, police power, and taxing power.
  • Governmental purpose: The proposed regulations modify the existing requirement to determine whether the entity serves a public purpose by requiring a political subdivision to serve a governmental purpose. A governmental purpose requires, among other things, that the purpose for which the entity was created, as set out in its enabling legislation, be a public purpose and that the entity actually serve that purpose. It also requires that the entity operate in a manner that provides a significant public benefit with no more than incidental benefit to private persons. 
  • Governmental control: The proposed regulations provide that a political subdivision must be governmentally controlled, defined as: (1) ongoing rights or powers to direct significant actions of the entity; and (2) generally vested in either a general purpose state or local governmental unit or in an electorate established under an applicable state or local law of general application. The proposed regulations also set forth whether the number of private persons controlling the electorate is unreasonably small.

The regulations are proposed to be effective 90 days after final regulations are published. As briefly noted above, there are numerous transition rules listed in the proposed regulations.


For more information, contact the Managing Director-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group

D. Greg Goller | +1 (703) 286- 8391 |

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