i.4.5.1 REQUIREMENT #1 – THE DEBT MUST BE ISSUED BY A QUALIFIED ISSUER
The Tax Code and related regulations permit tax exempt debt to be issued only by a state or political subdivisions of the state. In limited cases where the recipients of the subsidy are broader than state or local governments, such as an exempt private activity (e.g., a non profit hospital), the Tax Code nonetheless generally requires the debt to be issued by a state or local government. A state or local government includes states, territories, the District of Columbia, and any “political subdivision” thereof. A political subdivision is any public agency that can independently exercise one or more of the three substantial sovereign powers (taxing power, police power, and eminent domain). Many public agencies are clearly political subdivisions (e.g., cities, counties, and school and other districts) because they clearly possess the requisite sovereign powers, but others (e.g., joint powers authorities) require a detailed analysis.
Tax exempt bonds may also be issued “on behalf of” a state or local government by entities that are themselves not political subdivisions. For example, constituted authorities formed by a state, such as the California Educational Facilities Authority, qualify as “on behalf of” issuers. In addition, “on behalf of” entities include non profits that are formed and controlled by a state or local government. Thus, obligations issued by a non profit corporation formed under the general non profit corporation law for the purpose of stimulating industrial development within a political subdivision of a state are also considered issued “on behalf of” the political subdivision, provided they meet certain requirements.