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Copyright (c) 1992 Georgia Law Review Association
Georgia Law Review

ARTICLE: Excluding the Income of State and Local Governments: The Need For Congressional Action

WINTER, 1992

26 Ga. L. Rev. 421


Ellen P. Aprill *


State and local governments engage in a wide array of income-producing activities. They operate liquor stores, insurance companies, waste disposal services, transportation companies, investment funds, parking lots, lotteries, and utilities. Moreover, they can conduct all these activities free of federal income taxation. This Article urges Congress to reconsider the scope and basis for excluding such income from federal taxation.

State and local governments seldom turn to the hoary constitutional doctrine of intergovernmental tax immunity in order to achieve this exclusion. 1 Instead, they usually rely on one of two statutory bases for exclusion. If the activity is conducted as an integral part of a state or political subdivision, the Internal Revenue Service (IRS) excludes the income under a doctrine of implied statutory immunity. 2 According to the IRS, a different basis for exclusion applies if the income-producing activity is conducted through an entity separate from the state or political subdivision. In such cases, the IRS looks to section 115 of the Internal Revenue Code, which states that gross income "does not include income derived from any public utility or the exercise of any essential governmental function and accruing to a State or any political subdivision thereof." 3 The IRS has interpreted section 115 broadly -- more broadly than its legislative history appears to warrant and far more broadly than have the courts. Its rulings regarding income-producing activities of state and local governments are confusing and inconsistent, although generally quick to grant exclusion.

Some rulings, including ...
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