Development Trust Income is Excludable

Today the IRS released private letter ruling LTR 200736022, which in pertinent part holds that the income of a trust that was created to promote economic development is excludable from gross income under section 115(1) and that the trust will be considered an instrumentality of the city under section 170(c)(1) if certain changes are made to its by-laws. Specifically, the article states that

the trust is used for a governmental purpose and performs a governmental function by supporting and furthering the purposes and functions of tax exempt governmental function. The governmental corporation’s function is to promote industry, develop trade, and further the use of the agricultural products and natural and human resources of City and State.

Assets of trust are to be used only to induce new businesses to locate in the City and to foster the prosperity of existing businesses. Such uses are declared to be for a public purpose by the Internal Revenue Code. The Express authority for the establishment of trust is found within the Internal Revenue Code, and though the governmental non-profit entity is financially autonomous, the City will retain substantial control and supervision.

Thus, in conclusion, pursuant to the letter ruling, “Accordingly, (1) Corporation will be an instrumentality of City, provided that Corporation amends its by-laws so as to provide that City may remove, with or without cause, at any time any member of Corporation's governing body, and (2) Fund will be an instrumentality of City by virtue of it being controlled by Corporation, and indirectly controlled by City, provided that Corporation amends Fund's trust agreement so as to provide that Corporation may remove, with or without cause, at any time any member of the Fund's investment committee, as of the effective date of such duly adopted amendments.”

Read the full letter ruling here.