[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.103-9]
[Page 379-381]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.103-9 Interest on bonds to finance industrial parks.
(a) General rule. (1) Under section 103(c)(5), interest paid on an
issue of obligations issued by a State or local governmental unit (as
defined in Sec. 1.103-1) is not includable in gross income if
substantially all of the proceeds of such issue is to be used to finance
the acquisition or development of land as the site for an industrial
park (referred to in this section as ``industrial park bonds'').
However, interest on an obligation of such an issue is includable in
gross income if the obligation is held by a substantial user or a
related person (as described in section 103(c)(7) and Sec. 1.103-11). If
substantially all of the proceeds of a bond issue is to be so used to
finance an industrial park, the debt obligations are treated as
obligations described in section 103(a)(1) and Sec. 1.103-1 even though
[[Page 380]]
such obligations are industrial development bonds within the meaning of
section 103(c)(2) and Sec. 1.103-7. Whether substantially all of the
proceeds of an issue of governmental obligations are used to finance an
industrial park is determined consistently with the rules for exempt
facilities in Sec. 1.103-8(a)(1)(i).
(2) The provisions of subparagraph (1) of this paragraph shall also
apply to an issue of obligations substantially all of the proceeds of
which is to be used to acquire or develop land as the site for an
industrial park described in section 103(c)(5) and this section and for
either or both of the following purposes: (i) To finance exempt
facilities described in section 103(c)(4) and Sec. 1.103-8, (ii) to
finance facilities to be used by an exempt person.
(3) Section 103(c)(5) only becomes applicable where the bond issue
meets both the trade or business and the security interest tests so that
the obligations are industrial development bonds within the meaning of
section 103(c)(2). For the interrelationship of the rules provided in
this section and the exemption for certain small issues provided in
section 103(c)(6), see Sec. 1.103-10.
(b) Definition of an industrial park. For purposes of section
103(c)(5) and this section, the term ``industrial park'' means a tract
of land, other than a tract of land intended for use by a single
enterprise, suitable primarily for use as building sites by a group of
enterprises engaged in industrial, distribution, or wholesale businesses
if either--
(1) The control and administration of the tract is vested in an
exempt person (within the meaning of paragraph (b)(2) of Sec. 1.103-7),
or
(2) The uses of the tract are normally (i) regulated by protective
minimum restrictions, ordinarily including the size of individual sites,
parking and loading regulations, and building setback lines, and (ii)
designed to be compatible, under a comprehensive plan, with the
community in which the industrial park is located and with the uses of
the surrounding land.
(c) Development of land defined. For purposes of section 103(c)(5)
and this section, the term ``development of land'' includes the
provision of certain improvements to an industrial park site if such
improvements are incidental to the use of the land as an industrial
park. Such incidental improvements include the building or installation
of incidental water, sewer, sewage and waste disposal, drainage, or
similar facilities (whether surface, subsurface, or both). Such
incidental improvements include the provision of incidental
transportation facilities, such as hard-surface roads (including curbs
and gutters) and railroad spurs and sidings; power distribution
facilities, such as gas and electric lines; and communication
facilities. The provision of structures or buildings of any kind is not
included within the meaning of the term ``development of land,'' except
for those structures or buildings which are necessary in connection with
the incidental improvements encompassed by the term, such as, for
example, a water pumphouse and storage tank needed in connection with
the incidental provision of water facilities in an industrial park.
(d) Examples. The application of the rules contained in section
103(c)(5) and this section are illustrated by the following examples:
Example (1). City A and corporations X, Y, and Z (unrelated
companies) enter into an arrangement under which A is to acquire a tract
of land suitable for use as an industrial park. The arrangement provides
that: (1) A will issue $10 million of bonds to be used for the
acquisition and development of a suitable tract of land; (2) the tract
will be controlled and administered by A, pursuant to a comprehensive
zoning plan, for the use of a group of enterprises; (3) A will install
necessary water, sewer, and drainage facilities on the tract; (4) A will
sell substantial portions of the developed tract to X for use as a
factory site and to Y for use as a warehouse site; (5) A will lease a
sizeable portion of the tract to Z for 20 years as a distribution center
site; and (6) the developed tract and the proceeds from the sale or
lease of parts of the tract will be the security for the bonds. The
bonds are industrial development bonds. Since, however, the proceeds of
the issue are to be used for the acquisition and development of a tract
of land as the site for an industrial park under section 103(c)(5),
section 103(c)(1) does not apply unless the provisions of section
103(c)(7) and Sec. 1.103-11 apply.
Example (2). The facts are the same as in example (1) except that $1
million of the proceeds of the $10 million issue are to be used
[[Page 381]]
for the construction of a factory by corporation W or X. The bonds are
industrial development bonds. Under these circumstances, substantially
all of the proceeds are treated as used or to be used for the
acquisition and development of a tract of land as the site for an
industrial park described in section 103(c)(5). Accordingly, section
103(c)(1) does not apply unless the provisions of section 103(c)(7) and
Sec. 1.103-11 apply.
[T.D. 7199, 37 FR 15494, Aug. 3, 1972, as amended by T.D. 7511, 42 FR
54285, Oct. 5, 1977]