Special Purpose Districts

Definition

A special purpose district is a unit of local government created under state law to provide one or a few services, such as water, sewer, fire protection, drainage, schools or ports, often with its own power to tax, levy assessments or charge fees. For federal tax-exempt bond interest, Treasury treats such a district as a political subdivision only if it is a municipal corporation or has been delegated part of a state or local government's sovereign power.^[2][1]

Federal law

Formed under state law. No Act of Congress creates it; the federal laws below apply to it as described.

1. Tax Reform Act of 1986, Pub. L. 99-514, § 1301, 100 Stat. 2602. Excludes from gross income interest on bonds of a state or political subdivision (26 U.S.C. § 103); applies to districts that qualify as political subdivisions, does not create them. Official text: govinfo.gov, U.S. Government Publishing Office.

Federal regulations

Rules issued by federal agencies under the laws above.

2. Interest upon obligations of a State, territory, etc. (definition of political subdivision), 26 CFR 1.103-1 (Internal Revenue Service, Department of the Treasury). Defines political subdivision by the sovereign-power test and says special assessment districts may or may not qualify. Official text: govinfo.gov, U.S. Government Publishing Office.