Section 103(c) (6) (E) of the Code provides, in part, that for purposes of subparagraph (D) (ii), the facilities described in this subparagraph are facilities (i) located in the same incorporated municipality or located in the same county (but not in any incorporated municipality), and (ii) the principal user of which is or will be the same person or two or more related persons.

Section 1.103-10(b) (2) (ii) (e) of the regulations provides, in part, that an expenditure is a section 103 (c) (6) (D) capital expenditure if the capital expenditure is properly chargeable to the capital account of any person or State or local governmental unit (whether or not such person is the principal user of the facility or a related person) determined, for this purpose, without regard to any rule of the Code which permits expenditures properly chargeable to capital account to be treated as current expenses.

Section 103 (c) (6) (F) (iii) of the Code provides that for purposes of section 103 (c) (6) (D) (ii) any capital expenditure required by circumstances which could not be reasonably foreseen on the date of issue or arising out of a mistake of law or fact (but the aggregate amount of expenditures not taken into account under this clause with respect to any issue shall not exceed $1,000,000), shall not be taken into account.

Section 1.103-10(b) (2) (iv) (e) of the regulations provides that a capital expenditure is an excluded expenditure that is not taken into account as a section 103 (c) (6) (D) capital expenditure if it is required by or arises out of circumstances which reasonably could not be foreseen on the date of issue or which arise out of a mistake of law or fact. However, the aggregate dollar amount that may be excluded may not exceed $1,000,000. With respect to expenditures incurred prior to December 11, 1971, the limitation is $250,000.

Since the excess capital expenditures

required due to the landscaping to correct erosion, the change in type of boiler, the change in architectural design and an increase in engineering fees could not reasonably have been foreseen on the date of the issue of the bonds, such expenditures are excluded expenditures within the meaning of section 1.103-10(b) (2) (iv) (e) of the regulations.

However, the excess capital expenditures attributable to the installation of air conditioning and the additional manufacturing equipment do not qualify as excluded expenditures under section 1.103-10(b) (2) (iv) (e) of the regulations since they arose out of circumstances which reasonably could have been foreseen on the date of issue of the bonds.

Accordingly, the exempt small issue limitation of $5,000,000 under section 103 (c) (6) (D) of the Code has not been exceeded in the instant case since the aggregate face amount of the bonds ($4,600,000) and the aggregate amount of section 103 (c) (6) (D) capital expenditures of $350,000 ($250,000 for additional equipment and $100,000 for air conditioning) do not exceed $5,000,000.

under the circumstances described below, interest to be paid or incurred on bonds during a construction period will be a capital expenditure within the meaning of section 103 (c) (6) (D) (ii) of the Internal Revenue Code of 1954 for purposes of determining if the exempt small issue limitation of $5,000,000 has been exceeded.

A political subdivision of a State proposes to issue industrial development bonds, as defined in section 103 (c) (2) of the Code, in an amount not to exceed $5,000,000 to finance the acquisition of land and the construction of a building for use by an industrial corporation that is not an exempt person as defined in section 103(c) (3). The political subdivision will elect to apply the provisions of section 103(c) (6) (D) to the bond issue in order that it will qualify as a $5,000,000 exempt small issue. There will be no prior exempt small issues outstanding at the time the bonds will be issued and no capital expenditures will have been paid or incurred by the political subdivision or by the corporation with respect to the land or building during the three-year period prior to the issuance of the bonds. Under the terms of the agreement between the corporation and the political subdivision, the corporation. will be considered the owner of the land and building for Federal income tax purposes. See Rev. Rul. 68-590, 1968-2 C.B. 66, as amplified by Rev. Rul. 73-134, 1973-1 C.B. 60.

During the period beginning on the date the bonds are issued and ending on the date all construction is completed, the interest on the bonds will be paid by the corporation from sources other than bond proceeds.

The corporation will elect to capitalize the interest paid or incurred during the period of construction under the provisions of section 266 of the Code. However, under the corporation's proposed method of accounting for the interest, less than the total amount of interest paid or in

Section 103 (a) (1) of the 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.

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

Section 103 (c) (6) (A) of the Code provides that section 103 (c) (1) does not apply to a small issue of $1,000,000 or less.

At the election of the issuer, the small issue exemption is available to an issuance of $5,000,000 or less as provided in section 103 (c) (6) (D) of the Code. However, if this election is made, the aggregate face amount of the bond issue will be determined, for purposes of resolving whether the $5,000,000 limit has been exceeded, by taking into account any capital expenditures made with respect to facilities of the type described in section 103(c) (6) (E) and paid or incurred three years before or after the issuance of the bonds in question (and financed otherwise than out of the proceeds of a prior exempt issue already being taken into account).

The facilities described in section 103 (c) (6) (E) of the Code are those in which the principal user is the same person as the principal user of the facilities financed by the bonds in question or a person related thereto, provided that both facilities are located in the same incorporated municipality or county (but not in any incorporated municipality).

Section 1.103-10(b) (2) (ii) (e) of the Income Tax Regulations provides, in part, that an expenditure is a section 103 (c) (6) (D) capital expenditure if the capital expenditure is prop

count of any person or State or local governmental unit (whether or not such person is the principal user of the facility or a related person) determined, for this purpose, without regard to any rule of the Code which permits expenditures properly chargeable to capital account to be treated as current expenses. With respect to obligations issued on or after August 8, 1972, determinations under the preceding sentence shall be made by including any expenditure which may, under any rule or election under the Code, be treated as a capital expenditure (whether or not such expenditure is so treated).

Section 266 of the Code provides

that no deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under the regulations prescribed by the Secretary or his delegate, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as SO chargeable.

Section 1.266-1 (b) (1) (ii) of the regulations provides, in part, that with respect to real property a taxpayer may elect, as provided in section 1.266-1(c), to treat interest on a loan, which is otherwise expressly deductible under the provisions of subtitle A of the Code, as chargeable to capital

account.

Although under the corporation's method of accounting, the corporation will capitalize an amount of interest less than the total amount that could be capitalized under section 266 of the Code, section 1.103-10(b) (2) (ii) (e) of the regulations provides that any expenditure which may, under any rule or election under the Code, be treated as a capital expenditure is a section 103(c) (6) (D) capital expenditure.

Accordingly, the total amount of interest to be paid or incurred on the bonds by the corporation during the

construction period will be a capital expenditure within the meaning of section 103 (c) (6) (D) (ii) of the Code and must be aggregated with the face. amount of the bonds for purposes of determining if the exempt small issue limitation of $5,000,000 has been exceeded.

26 CFR 1.103-10: Exemption for certain small issues of industrial development bonds.

Industrial development bonds; exempt small issue limitation. To determine whether the exempt small issue dollar limitation under section 103(c)(6)(D) of the Code is exceeded with respect to a city's bonds to finance land acquisition and construction of a manufacturing facility in the city for a corporation, there must be included a related corporation's capital expenditures for contiguous land and a manufacturing facility outside the city boundary even though the facilities are not interconnected, use dissimilar processes, produce different products, and have different production employees.

Rev. Rul. 75-193

Advice has been requested whether, under the circumstances described below, certain capital expenditures will be considered for purposes of determining if the exempt small issue limitation of $5,000,000 under section 103 (c) (6) (D) of the Internal Revenue Code of 1954 has been exceeded.

A political subdivision of a State issued industrial development bonds on September 1, 1972, in the amount of $4,000,000 to finance the acquisition of land and the construction of a manufacturing facility for use by X Corporation, a nonexempt person within the meaning of section 103(c) (3) of the Code. The land is located within an incorporated municipality adjacent to the boundary between the municipality and the surrounding

Prior to the issuance of the bonds, the political subdivision made an election to have the bonds treated as an exempt small issue under section 103 (c) (6) (D) of the Code. Neither the political subdivision nor X had made any capital expenditures with respect to the facilities during the three years before the date of the issuance of the bonds.

On August 1, 1973, Y Corporation, a nonexempt person, purchased land located in the county surrounding the municipality but contiguous to the land used by X. Y paid $400,000 for the land and plans to construct a manufacturing plant on the land at an estimated cost of $3,000,000. Although the parcels of land owned by X and Y are contiguous, the Y plant will be located approximately 300 feet from the facility used by X. X and Y are "related persons" within the meaning of section 103 (c) (6) (C) of the Code.

There will be no physical interconnection between the two plants and neither plant will use common facilities. The two plants will perform dissimilar processes and will produce different types of products. The work forces below the top management level will be either employees of X or Y and will work only in their respective plants.

Section 103 (a) (1) of the 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.

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

Section 103 (c) (6) (A) of the Code provides that section 103 (c) (1) shall not apply to any obligation issued as part of an issue the aggregate authorized face amount of which is

of the proceeds of which are to be used (i) for the acquisition, construction, reconstruction, or improvement of land or property of a character subject to the allowance for depreciation, or (ii) to redeem part or all of a prior issue which was issued for purposes described in clause (i) of this clause.

Section 103 (c) (6) (B) of the Code provides that if (i) the proceeds of two or more issues of obligations (whether or not the issuer of each such issue is the same) are or will be used primarily with respect to facilities located in the same incorporated municipality or located in the same county (but not in any incorporated municipality), (ii) the principal user of such facilities is or will be the same person or two or more related persons, and (iii) but for this subparagraph, subparagraph (A) would apply to each such issue, then, for purposes of subparagraph (A), in determining the aggregate face amount of any later issue there shall be taken into account the face amount of obligations issued under all prior such issues and outstanding at the time of such later issue (not including as outstanding any obligation which is to be redeemed from the proceeds of the later issue).

Section 103 (c) (6) (D) of the Code provides that at the election of the issuer, made at such time and in such manner as the Secretary or his delegate shall by regulations prescribe, with respect to any issue this paragraph shall be applied (i) by substituting "$5,000,000" for "$1,000,000" in subparagraph (A), and (ii) in determining the aggregate face amount of such issue, by taking into account not only the amount described in subparagraph (B), but also the aggregate amount of capital expenditures with respect to facilities described in subparagraph (E) paid or incurred during the 6-year period beginning 3 years before the date of such issue and ending 3 years after such date (and financed otherwise than out of the proceeds of outstanding issues to which subparagraph

(A) applied), as if the aggregate amount of such capital expenditures constituted the face amount of a prior outstanding issue described in subparagraph (B).

Section 103 (c) (6) (E) of the Code provides, in part, that for purposes of subparagraph (D) (ii), the facilities described in this subparagraph are facilities (i) located in the same incorporated municipality or located in the same county (but not in any incorporated municipality), and (ii) the principal user of which is or will be the same person or two or more related persons.

Section 1.103-10(b) (2) (ii) (e) of the Income Tax Regulations provides, in part, that with respect to obligations issued on or after August 8, 1972, for purposes of subparagraph (2), capital expenditures made with respect to a contiguous or integrated facility which is located on both sides of a border between two or more political jurisdictions are made with respect to a facility located in all such jurisdictions and, therefore, shall be treated as if they were made in each such political jurisdiction.

The manufacturing facilities constructed in the incorporated municipality for use by X include the land on which such facilities were constructed. The manufacturing facilities to be constructed by Y in the county outside the municipality also include the land acquired as a building site. Thus, since the two parcels of land constitute facilities which are contiguous, the provisions of section 1.103-10(b) (2) (ii) (e) of the regulations will apply to the capital expenditures made by both X and Y with respect to their facilities.

Accordingly, since the face amount of the bond issue is $4,000,000, the $5,000,000 limitation under section 103 (c) (6) (D) of the Code will be exceeded with respect to the bonds issued on September 1, 1972, for the X facilities at any time within a three year period following the issuance of the bonds that the capital expenditures

of X and Y made in the municipality or to facilities in the county which are contiguous to facilities of X exceed $1,000,000.

26 CFR 1.103-10: Exemption for certain small issues of industrial development bonds.

Industrial development bonds; exempt small issue limitation. A corporation's purchase of mobile buildings, to be used as temporary offices during the construction of its new building financed by industrial development bonds intended to qualify as an exempt small issue, must be treated as a capital expenditure within the meaning of section 103(c)(6)(D) of the Code, and no reduction is provided for the subsequent sale of the mobile buildings.

Rev. Rul. 75-208

Advice has been requested whether, under the circumstances described below, the amount of certain "section 103 (c) (6) (D) capital expenditures," as defined in section 1.103-10(b) (2) (ii) of the Income Tax Regulations, may be reduced by the amount of proceeds from the sale of such capital items for purposes of determining if the exempt small issue limitation of $5,000,000 will be exceeded.

A political subdivision of a State proposes to issue industrial development bonds, as defined in section 103 (c) (2) of the Internal Revenue Code of 1954 in an amount not to exceed $5,000,000 to finance the acquisition of land and the construction of a building for use by an industrial corporation that is not an exempt person as defined in section 103 (c) (3). The land and building will be located in an incorporated municipality. The political subdivision will elect to apply the provisions of section 103 (c) (6) (D) to the bond issue in order that it will qualify as a $5,000,000 exempt small issue. There will be no prior exempt small issues outstanding at the time the bonds will be issued, and

no capital expenditures will have been paid or incurred by the political subdivision with respect to the land or building during the three year period prior to the issuance of the bonds.

Within two months after the issu

ance of the bonds, the corporation proposes to purchase mobile buildings and locate them on a portion of the land acquired by the political subdivision. The mobile buildings will be used by the corporation as office facilities until the new building is completed in approximately one and one-half years after the issue date of the bonds. Upon occupying the building, the corporation will sell the mobile buildings to an unrelated person. The corporation will not use bond proceeds to acquire the mobile buildings.

Section 103 (a) (1) of the 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.

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

Section 103 (c) (6) (A) of the Code provides that section 103(c) (1) does not apply to a small issue of $1,000,000 or less. However, the aggregate face amount of the bond issue will be determined, for purposes of resolving whether the $1,000,000 limit has been exceeded, by taking into account the face amount of any prior issues that are exempt under section 103 (c) (6) and that are issued to finance facilities of the type described in section 103(c) (6) (E). The prior bond issue will be taken into account only to the extent still outstanding at the time of the later issuance.

At the election of the issuer, the small issue exemption is available to an issuance of $5,000,000 or less as provided in section 103(c) (6) (D) of

the Code. However, if this election is made, the aggregate face amount of the bond issue will be determined, for purposes of resolving whether the $5,000,000 limit has been exceeded, by taking into account the face amount of prior issues discussed above and any capital expenditures made with respect to facilities of the type described in section 103(c) (6) (E) and paid or incurred three years before or after the issuance of the bonds in question (and financed otherwise than out of the proceeds of a prior exempt issue already being taken into account).

The facilities described in section 103 (c) (6) (E) of the Code are those in which the principal user is the same person as the principal user of the facilities financed by the bonds in question or a person related thereto, provided that both facilities are located in the same incorporated municipality or county (but not in any incorporated municipality).

Section 1.103-10(b) (2) (ii) of the regulations provides, in part, that an expenditure is a section 103(c) (6) (D) capital expenditure if (a) the capital expenditure was financed other than out of the proceeds of the issue in question and prior outstanding exempt small issues, (b) the capital expenditures were paid or incurred during the six-year period that begins three years before the date of issuance of the issue in question and ends three years after such date, (c) the principal user of the facility in connection with which the property resulting from the capital expenditures is used and the principal user of the facility financed by the proceeds of the issue in question is the same person or are two or more related persons, (d) both facilities referred to in (c) were (during the six-year period or a part thereof) located in the same incorporated municipality or in the same county (outside of the incorporated municipalities in such county), and (e) the capital expenditures were

properly chargeable to the capital account of any person or State or local governmental unit (whether or not such person is the principal user of the facility or a related person) determined, for this purpose, without regard to any rule of the Code which permits expenditures properly chargeable to capital account to be treated as current expenses.

The corporation's proposed expenditure for the mobile buildings will be a section 103 (c) (6) (D) capital expenditure as defined in section. 1.103-10(b) (2) (ii) of the regulations. However, neither section 103 (c) (6) (D) (ii) of the Code nor section 1.10310(b)(2)(ii) of the regulations provides for a reduction of the total amount of such section 103(c) (6) (D) capital expenditures by the amount received from the subsequent sale of the capital items.

Accordingly, the full amount of the section 103 (c) (6) (D) capital expenditures for the mobile buildings must be aggregated with the face amount of the bond issue for purposes of determining if the exempt small issue limitation of $5,000,000 will be exceeded.

Section 104.-Compensation for
Injuries or Sickness

26 CFR 1.104-1: Compensation for injuries or sickness.

Estate's gross income; insurance settlement. An amount received by the estate of an employee killed while a passenger in his employer's airplane, under the employer's aircraft liability insurance policy that provided specified payments for injury or death while a passenger of the plane and upon execution of a full release from all claims for damages against the employer, is excludable from the gross income of the estate under section 104 (a)(2) of the Code; Rev. Rul. 58578 superseded.

Rev. Rul. 75-45

Advice has been requested whether an amount received from an insurance company by the executor of the estate of a decedent, under the circumstances described below, is excludable from the gross income of the estate under the provisions of section 104(a)(2) of the Internal Revenue Code of 1954.

The decedent was killed while a passenger in an airplane owned by his corporate employer and the executor of his estate received a certain sum under the terms of an aircraft liability insurance policy held by his employer. The policy provided that the insurer would pay specified sums to persons injured while passengers in the corporation's airplane, or to the persons' beneficiaries or personal representative in the event of death, regardless of whether the insured was legally liable for such injury or death, provided the injured party or his representative executed a full release of all claims for damages against the insured. Such a release would include any claims brought under the wrongful death act of the decedent's State of residence, in which a series of court decisions had established that payments made under the wrongful death act were punitive in nature.

The question is whether the amount received by the executor under these circumstances is excludable from gross income as "damages received * * *

on

account of personal injuries or sickness" under the provisions of section 104(a) (2) of the Code, or whether it is includible in gross income as "punitive damages" under the provisions of section 1.61-14(a) of the Income Tax Regulations.

Section 61 of the Code provides, in part, that, except as otherwise provided in subtitle A, income gross means all income from whatever source derived.

Section 1.61-14(a) of the regulations states, in part, that punitive

damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income.

Section 104 (a) (2) of the Code excludes from gross income the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness.

Section 1.104-1(c) of the regulations provides that the term "damages received (whether by suit or agreement)" means an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution.

Section 104 of the Code is a specific statutory exclusion from gross income within the "except as otherwise provided" clause of section 61(a). Section 104 (a) (2) excludes from gross income "the amount of any damages received (whether by suit or agreement) on account of personal injuries. or sickness" (emphasis added). Therefore, under section 104(a) (2) any damages, whether compensatory or punitive, received on account of personal injuries or sickness are excludable from gross income.

Accordingly, the amount received by the executor from the insurance company in the instant case is excludable from the gross income of the estate under section 104(a)(2) of the Code.

Rev. Rul. 58-578, 1958-2 C.B. 38, holds that where a contract between an insurance company and the owner of an airplane provides for the payment of specified amounts to a person injured in such plane or to such person's beneficiary, or personal representative in the event of death, upon the execution of a release of all claims for damages against the insured, such amounts are damages under section 104(a) (2) of the Code, and, as such, are excludable from the gross income of the recipient. Since that holding is encompassed by the present Revenue