gross income under section 61, unless they are a gift, payments on a loan, or excludable under some section of the Code.

HOLDING ISSUE (2)

The payments received by A are includible in A's gross income under section 61 of the Code, since facts are not present to indicate that the payments are excludable under any section of the Code.

PROSPECTIVE APPLICATION

"loan" value of an annuity contract, are taxable to an employee under the circumstances described. See Rev. Rul. 81-126, page 206.

26 CFR 1.72-15: Applicability of section 72 to accident or health plans. (Also Sections 101, 105; 1.101-2, 1.105-1.)

Civil Service disability retirement; death benefit exclusion. If no election is made by a disabled federal employee to treat disability retirement income as annuity income, the payments received by the spouse under a joint and survivor annuity upon the death of the employee before age 65 qualify for the death benefit exclusion. If the election is made, the payments received by the employee constitute annuity income and the amounts received by the spouse do not qualify for the death beneEFFECT ON OTHER REVENUE fit exclusion. Rev. Rul. 61-161 RULINGS

Pursuant to the authority contained in section 7805 (b) of the Code, this revenue ruling will not be applied to disallow deductions under section 215

for payments made on or before January 12, 1981, the date this revenue ruling is published in the Internal Revenue Bulletin.

I.T. 4108, 1952-2 C.B. 113, holds in part, that similar payments continued to be "periodic payments in discharge of a legal obligation imposed because of the marital relationship under a decree of divorce" and were, therefore, includible in the recipient's gross income and deductible by the payor under section 22(k) and 23(u) of the Internal Revenue Code of 1939, the predecessors of sections 71(a) (1) and 215, respectively, of the 1954 Code. I.T. 4108 is modified to the extent that it holds that such payments were made in discharge of a legal obligation of the payor and, therefore, includible in the recipient's gross income and deductible by the payor. I.T. 4108, as modified, is superseded.

Section 72.-Annuities; Certain
Proceeds of Endowment and Life
Insurance Contracts

26 CFR 1.72-11: Amounts not received as annuity payments.

Whether amounts received before the annuity starting date from an insurance company, representing in whole or in part the

superseded.

Rev. Rul. 81-121

The purpose of this revenue ruling is to restate, under current statute,, Rev. Rul. 61-161, 1961-2 C.B. 15.

The issue in Rev. Rul. 61-161 is whether the employee death benefit exclusion provided by section 101(b) of the Internal Revenue Code is applicable to a joint and survivor annu ity benefit where the employee, retired on disability, died before attaining "retirement age".

A, a federal employee covered by the United States Civil Service Retirement System, retired in 1978, at age 58, because of total and permanent 58, because of total and permanent disability. Under a joint and survivor annuity option, A elected to receive smaller monthly payments in order that A's spouse, B, would receive benefits if A were to predecease B. A did not make the irrevocable election under section 105(d) (6) of the Code to treat disability income payments as annuity income, taxable under section 72, rather than as disability income. A died the following year, and after A's death B began receiving annuity bene

fits in accordance with the joint and survivor annuity option.

Section 101 (b) (1) of the Code provides that amounts received by the beneficiaries or the estate of an employee shall be excluded from gross income if such amounts are paid by or on behalf of an employer and are paid by reason of the death of the employee. Section 101(b)(2) (A) limits the amount of such exclusion to $5,000 in the aggregate. Section 1.101-2(e) (1) (ii) of the Income Tax Regulations provides that no exclusion is allowable for amounts received by a surviving annuitant under a joint and survivor annuity contract if the annuity starting date occurs before the death of the employee.

Section 101 (b) (2) (D) of the Code provides that, in the case of any amount to which section 72 (relating to annuities, etc.) applies, the amount which is excludable under section 101 (b) (1) shall be determined by reference to the value of such amount as of the day on which the employee died, and shall, for purposes of section 72, be treated as additional consideration paid by the employee.

Section 105(a) of the Code states that amounts received by an employee through accident or health insurance for personal injuries or sickness shall, except as otherwise provided in that section, be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer. Section 105(d)(1) permits an exclusion of certain disability payments from gross income by taxpayers under age 65 at the close of the taxable year who retired on disability and, upon retiring, were permanently and totally disabled.

Section 105(d) (6) of the Code states that, for purposes of section 72, the annuity starting date of an individual described in section 105(d) (1) shall not be deemed to occur before the beginning of the taxable year in which the taxpayer attains age 65, or

before the beginning of an earlier taxable for which the taxpayer year makes an irrevocable election not to seek the benefits of that subsection for such year and all subsequent years.

The disability income payments received by A in the above example did not constitute an annuity within the meaning of section 72 of the Code but, rather, were disability payments excludable from gross income to the extent provided by section 105(d). Consequently, the annuity payments made to B, by reason of A's death prior to age 65, constituted payments to a primary annuitant rather than payments to a secondary annuitant under a joint and survivor annuity contract, in applying the rules of sections 72 and 101(b) of the Code.

Accordingly, the death benefit exclusion provided by section 101(b) of the Code is applicable to the benefits payable to B, limited to (1) $5,000 or (2) the excess of the total present value of the annuity over the amount to which the employee had a nonfor. feitable right, whichever is the lesser. The amount of such an exclusion constitutes additional consideration paid for the annuity by the employee, in accordance with section 101(b) (2) (D), for purposes of computing excludable amounts under section 72.

If A had made the irrevocable election under section 105(d) (6) of the Code, however, A's annuity starting date would have occurred in the taxable year for which the election was made. Under these circumstances the disability income payments received by A would have constituted an annuity within the meaning of section 72 because A elected to treat disability income as such. Thus, the amounts received by B in such situation, paid to B after the annuity starting date, would be deemed to have been received by B as a surviving annuitant under a joint and survivor annuity contract, and B would not have been entitled to the death benefit exclusion provided under section 101 (b) of the Code.

Rev. Rul. 61-161 is superseded because the position stated therein is restated, under current law, in this revenue ruling.

Section 77.-Commodity Credit
Loans

26 CFR 1.77-1: Election to consider Commodity Credit Corporation loans as income. (Also Section 1381; 1.1381-1.)

Farmers' cooperative; Commodity Credit Corporation loans; advances to patrons. A farmers' cooperative that uses the open pool method of accounting elected to include in income price support loans received from the Commodity Credit Corporation (CCC) to cover advances paid to its patrons and other costs. The patrons included the advances in income. The cooperative is deemed to have sold the crop to the CCC and may deduct, the advances as costs of products sold. Rev. Rul. 81-80

ISSUE

Under the circumstances described below, may the taxpayer deduct the total amount of the advances paid to its patrons in 1979 as costs of products

sold?

FACTS

The taxpayer, a farmers' cooperative within the meaning of section 1381(a) of the Internal Revenue Code, markets tobacco for its patrons. The tobacco is subject to the price support program of the Commodity Credit Corporation (CCC). Under this program, the CCC makes price support loans to tobacco growers through loans to cooperative organizations. In 1979, the taxpayer entered into a price support loan agreement with the CCC prior to its marketing season.

The loan agreement required the CCC to make price support loans to the taxpayer equal to the sum of the amount the taxpayer is required to pay as price support advances to its

patrons and the cost of transporting, processing, handling and storing its patrons' tobacco. The loans are obtained from a bank that is a fiscal agent for the CCC, are open-ended in amount, mature upon demand, and are without recourse. The taxpayer is required to give to the CCC the negotiable warehouse receipts for its patrons' tobacco as collateral for the loans. The taxpayer must remit to the CCC in repayment of the loans, all sale proceeds (less unreimbursed expenses) when the sale proceeds are received by the taxpayer. Upon maturity and nonpayment of the loans, the CCC may sell the tobacco held as collateral. If the sales proceeds exceed the loan balance, there is an “overplus" that is paid to the taxpayer. If the sales proceeds are less than the balance of the loans, any loan balance remaining after the application of the sales proceeds is forgiven.

Prior to its 1979 marketing season the taxpayer entered into a contract with an auction warehouse to allow the use of the warehouse's facilities for purposes of delivering and storing its patrons' tobacco. The warehouse is required to pay on behalf of the taxpayer an advance to the patrons whose tobacco is subject to the price support program. The advance paid is based on a schedule that is part of the contract. At the close of each business day, the warehouse bills the taxpayer for the advances paid on behalf of the taxpayer and the warehouse charges incurred for handling the patrons' tobacco. When the taxpayer receives this bill from the warehouse, the taxpayer obtains a loan from the CCC to cover the amount billed. The negotiable warehouse receipts for the tobacco are given to the CCC as collateral for the loan.

The taxpayer entered into a marketing agreement with each of its patrons pursuant to which the taxpayer agreed to remit to the patron the excess of the proceeds from the sale of the tobacco over certain enumerated costs and repayment of the loan granted by

CCC. The patrons that elected to participate in the price support program had to bring their tobacco to a designated auction warehouse. The patrons received from the auction warehouse an advance paid on behalf of the taxpayer for the delivered tobacco. The patrons were required to include the advance in income in the year it was received.

In 1979, the taxpayer used the open pool method of accounting for the marketing of the tobacco it received from its patrons whereby sales are ordinarily accounted for as each portion of the tobacco is sold. All of the tobacco in this pool was subject to the CCC's price support program. Throughout the year, the taxpayer obtained loans from the CCC to cover the advances paid to its patrons and the warehouse charges. The patrons included the advances in income.

For its 1979 taxable year, the taxpayer elected under section 77 of the Code to treat the amount of the loans it received from the CCC as income. The taxpayer deducted the total amount of the advances and the ware

of the products sold in the same year they are considered to be income to the patrons. However, Rev. Rul. 6967, 1969-1 C.B. 142, modifies Rev. Rul. 67-333 to the extent the latter ruling implies that the total amount of the advances may be deducted in the year of payment even though a portion of the products acquired from the patrons may be on hand at the end of the cooperative's taxable year. When none of the patrons' products remain on hand at the end of the taxable year, the cooperative may deduct the total amount of the advances paid to its patrons during the taxable year as costs of the products sold.

In the present situation, the taxpayer received price support loans from the CCC for all of the tobacco that its patrons delivered in 1979 and elected under section 77 of the Code to include the proceeds of the loans in income in 1979. The taxpayer used the proceeds of the loans to reimburse

the auction warehouse in 1979 for the

advances paid on its behalf and for the warehouse charges incurred for handling its patrons' tobacco. The

sold.

LAW AND ANALYSIS

Section 77 of the Code states that amounts received as loans from the CCC shall, at the election of the taxpayer, be considered as income and shall be included in gross income for the taxable year in which received.

Rev. Rul. 57-358, 1957-2 C.B. 42, provides that when a cooperative makes an election under section 77 of the Code, the cooperative is deemed to have sold the crop to the CCC when the cooperative receives the price support loans from the CCC.

Rev. Rul. 67-333, 1967-2 C.B. 299, provides that advances made by a cooperative to its patrons for products delivered to the cooperative are deductions of the cooperative as costs

1979 in their income.

Rev. Rul. 57-358 states that when a cooperative makes an election under section 77 of the Code to include the proceeds of CCC loans into income, the cooperative is deemed to have sold to the CCC at the time it receives the loan proceeds. Therefore, in 1979, the taxpayer is deemed to have sold to the CCC all of the tobacco that it received from its patrons. Thus, this tobacco is not included in the taxpayer's inventory of unmarketed commodities on hand at the end of the taxpayer's taxable year.

HOLDING

The taxpayer may deduct the total amount of the advances paid to its patrons in 1979 as costs of the products sold.

Part III.-Items Specifically Excluded From Gross Income

Section 101.-Certain Death Benefits

26 CFR 1.101-2: Employees' death benefits.

Whether the employee death benefit exclusion provided by section 101 (b) of the Code is applicable to a joint and survivor annuity benefit where the employee, retired on total and permanent disability, died prior to age 65. See Rev. Rul. 81-121, page 43.

Section 103.-Interest on Certain Governmental Obligations

26 CFR 1.103-8: Interest on bonds to finance certain exempt facilities. (Also Section 61; 1.61-7.)

Industrial development bonds; authorized before but issued after the date of acquisition. The industrial development bonds issued by a city within one year after the exempt facility is acquired by the nonexempt person may qualify as obligations described in section 103 (b)(4) of the Code when official action evidencing an intent to issue the bonds was taken before the date of acquisition. The date of acquisition is the date title and possession are obtained rather than the date the purchase contract is executed.

Rev. Rul. 81-167

ISSUE

Do industrial development bonds qualify as obligations issued to finance exempt facilities described in section 103(b) (4) of the Internal Revenue Code so that interest on the bonds is excludable from gross income under section 103 (a) (1), under the circumstances described below?

FACTS

Corporation X, which is not an exempt person within the meaning of section 103(b) (3) of the Code, executed a purchase contract on January

2, 1980, with an unrelated seller, to purchase land and buildings that qualify as exempt facilities under section 103(b)(4). The contract provided for specific performance, and not merely for the seller to retain the deposit as liquidated damages. The contract further provided that performance by X was not contingent upon obtaining financing for the property. The contract contains typical seller's warranties. X deposited 7 percent of the purchase price in escrow to be applied against the purchase price at closing. X used its own funds for the deposit. Prior to closing, interest income on the escrow deposit inured to the benefit of X and the risk of loss to the property was borne by the seller. The contract provided for a closing

date of May 1, 1980.

X sought municipal financing for the exempt facilities from city M, in which the facilities are located. On March 3, 1980, the governing body of M adopted a resolution expressing its intent to issue industrial development bonds for the purpose of financing X's acquisition of the facilities.

X obtained interim financing, paid the balance due on the contract, and received title to and possession of the facilities on the scheduled closing date of May 1, 1980. X placed the facilities in service immediately upon obtaining possession. M issued its bonds on May 15, 1980, and loaned X the bond proceeds in exchange for a mortgage on the facilities. X immediately used the bond proceeds to retire the interim financing and to reimburse itself for the deposit. An insubstantial portion of the bond proceeds (10 percent or less) was used by X as working capital. M's bonds are not arbitrage bonds within the meaning of section 103 (c) (2) of the Code.

LAW AND ANALYSIS

Section 103 (a) (1) of the Code provides that gross income does not include interest on the obligations of a

state or the political subdivision of a state.

Section 103(b) (1) of the Code provides that, except as otherwise provided in section 103(b), any industrial development bond shall be treated as an obligation that is not an obligation described in section 103(a) (1).

Section 103(b) (4) of the Code provides that section 103(b)(1) shall not apply to industrial development bonds if substantially all of the bond proceeds are to be used to provide certain exempt facilities.

The "substantially all" test in section. 103(b)(4) of the Code will be satisfied if 90 percent or more of the proceeds of an issue of governmental obligations are used to provide an exempt facility. Section 1.103-8(a) (1) (i) of the Income Tax Regulations. Section 1.103-8(a) (5) (iv) of the regulations provides that if the original use of a facility commences prior to the date of issue of the obligations issued to provide the facility, the facility will be one that is described in section 103 (b) (4) of the Code if no nonexempt person or a related person—(a) who was a substantial user of the facility at any time during the 5-year period preceding the date of issue of the obligations, and (b) who receives, directly or indirectly, proceeds of the issue of obligations in question in an amount equal to 5 percent or more of the face amount of the issue (in payment for the nonexempt person's interest in the facility) will be a substantial user of the facility at any time during the 5-year period following the date of issue.

Section 1.103-8 (a) (5) (v) of the regulations provides that a facility shall not be treated as one not described in subdivision (iv) by reason of the use of the facility by the substantial user prior to the date of issue of the state or local obligations issued to provide the facility, provided that a bond resolution or other similar official action was taken by the issuer with respect to the obligations prior to the

commencement of the construction, reconstruction, or acquisition of the facility and the obligations are issued within 1 year after the facility was first placed in service or was acquired (whichever occurs last). The provisions of subdivision (v) do not apply with respect to an acquisition if any substantial user or a related person after the date of acquisition was a substantial user before the date the bond resolution or similar official action by the issuer was adopted.

The general purpose of section 1.103-8(a)(5) of the regulations is to prevent the proceeds of an issue of obligations described in section 103 (a) (1) of the Code from being used to refinance a facility. Such refinancing would result in providing the owner or user of the facility with working capital rather than providing the facility as required by section 103(b)(4).

In Rev. Rul. 69-93, 1969-1 C.B. 139, taxpayer A entered into an agreement with taxpayer B in October 1967 for the conveyance of real estate on March 1, 1969. A payment of a nominal amount was made by B when the contract was signed. The balance of the purchase price was paid at the date of conveyance (March 1, 1968) when B took possession of the property. A had legal title, the right of possession, and the right to rents and profits from the property during the period between October 1967 and March 1, 1968. Rev. Rul. 69-93 holds that A did not realize gain or loss in October 1967 since on that date there was a mere execution of the contract to sell real estate in the future. The sale of the property occurred on March 1, 1968, when the deed passed and possession and the burdens and benefits of ownership were transferred to the buyer. The payment made prior to the sale was in the nature of a deposit on the purchase price of the property and was to be taken into account for determining gain or loss in the year of sale.

In this case X executed a contract to purchase land and buildings on January 2, 1980, and closed the transaction

on May 1, 1980. X acquired the property on May 1, 1980, the date title and possession were obtained. See Rev. Rul. 69-93. Because M indicated its

intent to issue the bonds by adoption of a resolution before X acquired the facilities and because the bonds were issued within one year after the facilities were acquired by X, the requirements of section 1.103-8 (a) (5) of the regulations have been satisfied. Therefore, substantially all (90 percent or more) of the bond proceeds were used for the qualifying purpose of providing exempt facilities.

HOLDING

The industrial development bonds issued by M qualify as obligations issued to finance exempt facilities described in section 103(b) (4) of the Code, under the circumstances described above. Therefore, the interest on the bonds is excludable from the gross income of the bondholders under the provisions of section 103(a)(1).

26 CFR 1.103-8: Interest on bonds to finance certain exempt facilities. T.D. 7737

TITLE

26.-INTERNAL REVENUE. CHAPTER I, SUBCHAPTER A, PART 1.-INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Industrial development bonds; definition of airport

AGENCY: Internal Revenue Service, Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to industrial development bonds. The regulations provide rules to be used in determining whether property constitutes an airport and thus whether that property may be financed with tax-exempt industrial development bonds. This may affect purchasers and govern

mental issuers of tax-exempt bonds and businesses located at or near airports.

DATE: The regulations generally apply to bonds sold after 5:00 p.m.

EST on December 29, 1978.

FOR FURTHER INFORMATION CONTACT: John P. MacMaster of the Legislation and Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention CC:LR:T) (202-566-3294).

SUPPLEMENTARY
INFORMATION:

BACKGROUND

On January 5, 1979, the Federal Register published proposed amendments to the Income Tax Regulations (26 CFR Part 1) under section 103 of the Internal Revenue Code of 1954. These amendments were proposed to clarify the regulations. A public hearing on the proposed amendments was held on May 1, 1979. After considering the comments, those amendments are adopted as revised by this Treasury decision.

IN GENERAL

Section 103(a)(1) provides that gross income does not include interest on obligations of a State or local government. However, section 103(b) provides that the exclusion of section. 103 (a) (1) does not apply to interest on an industrial development bond unless the bond proceeds are used to provide airports or are used for other purposes designated in section 103(b) (4), (5), (6), or (7).

Amendments to the regulations under section 103(b)(4) were proposed in order to indicate more clearly what kinds of property may be financed with tax-exempt industrial development bonds as constituting part of an airport. The amendments both would amplify the definition of air

port and would provide additional guidance in determining what kinds of facilities are functionally related and subordinate thereto. This Treasury decision adopts those amendments with several changes.

The basic definition of "airport" is adopted as proposed with one minor change. The final rules provide that airport facilities need only be located in close proximity to where aircraft take off and land. Thus, for example, land-based navigation aids may qualify under this provision even though not located at the take-off and landing area.

The proposed rules relating to facilities functionally related and subordinate to an airport also are revised. Under the proposed rules, a facility would not qualify as functionally related and subordinate if it is not needed for public convenience and necessity at the airport or if it need not be located at or adjacent to the airport to serve its purpose. However, the proposed requirement that a facility be needed for "public convenience and necessity" apparently created a potential for interpretative problems. Several commentators expressed confusion as to how it would differ from the "public use" requirement which is generally applicable to facilities (including airports and related facilities) financed under section 103(b) (4), with tax-exempt industrial development bonds. This phrase was originally intended merely to refine the "public use" requirement as it applies to facilities related to airports. In light of its limited objective and the potential for confusion, however, it has been deleted. Of course, airport facilities continue to be subject to the general "public use" requirement.

For similar reasons, the other, previously mentioned proposed requirement, that such facilities be of a type that needs to be located at the airport, is also modified. As proposed, this rule. would have injected a subjective element into determining whether facili