[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.103-16]

[Page 409-411]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.103-16  Obligations of certain volunteer fire departments.

    (a) General rule. An obligation of a volunteer fire department 
issued after December 31, 1980, shall be treated as an obligation of a 
political subdivision of a State for purposes of section 103(a)(1) if--
    (1) The volunteer fire department is a qualified volunteer fire 
department within the meaning of paragraph (b) of this section, and
    (2) Substantially all of the proceeds of the issue of which the 
obligation is a part are to be used for the acquisition, construction, 
reconstruction, or improvement of a fire house or fire truck used or to 
be used by the qualified volunteer fire department.

An obligation of a volunteer fire department shall not be treated as an 
obligation of a political subdivision of a State for purposes of section 
103(a)(1) unless both conditions set forth in this paragraph (a) are 
satisfied. Thus, for example, if an obligation is issued by an ambulance 
and rescue squad that is a qualified volunteer fire department as 
required by paragraph (a)(1) of this section, but substantially all of 
the proceeds of the issue of which the obligation is a part are to be 
used for the furnishing of emergency medical services, rather than for 
the purposes specified in paragraph (a)(2) of this section, the 
obligation shall not be treated as an obligation of a political 
subdivision of a State for purposes of section 103(a)(1).

    (b) Definition of qualified volunteer fire department. For purposes 
of this section, the term ``qualified volunteer fire department'' means 
an organization--
    (1) That is organized and operated to provide firefighting services 
or emergency medical services in an area within the jurisdiction of a 
political subdivision, and
    (2) That is required to furnish firefighting services by written 
agreement with the political subdivision, and
    (3) That serves persons in an area within the jurisdiction of the 
political subdivision that is not provided with any other firefighting 
services.

The requirement of paragraph (b)(2) of this section that a qualified 
volunteer fire department be required to furnish firefighting services 
by written agreement with the political subdivision may be satisfied by 
an ordinance or statute of the political subdivision that

[[Page 410]]

establishes, regulates, or funds the volunteer fire department. A 
volunteer fire department does not fail to satisfy the requirement of 
pargraph (b)(3) of this section by furnishing or receiving firefighting 
services on an emergency basis, or by cooperative agreement with other 
fire departments, to or from areas outside of the area that the 
volunteer fire department is organized and operated to serve. The fact 
that tax revenues of a political subdivision served by a volunteer fire 
department contribute toward the support of the volunteer fire 
department in the form of salary, purchase of equipment, or other 
defrayment of expenses will not prevent the volunteer fire department 
from being a ``qualified volunteer fire department'' within the meaning 
of this paragraph (b). Moreover, an obligation of a volunteer fire 
department receiving such support may qualify as an obligation of a 
political subdivision within the meaning of section 103(a)(1) 
independently of section 103(i) and this section if the requirements of 
section 103(a)(1) are satisfied. See Sec. 1.103-1(b) for rules relating 
to qualification under section 103(a)(1).
    (c) ``Substantially all'' test. Substantially all of the proceeds of 
an issue are used for the purposes specified in paragraph (a)(2) of this 
section if 90 percent or more of the proceeds are so used. Thus, for 
example, if more than 10 percent of the proceeds of an obligation issued 
by a qualified volunteer fire department are used for the purchase of an 
ambulance or for rescue equipment not to be used in providing fire 
fighting services, interest on the obligation is not exempt from tax 
under section 103(i) and this section. In computing this percentage--
    (1) Costs are allocated between providing a firehouse or firetruck 
and other uses of the proceeds on a pro rata basis; and
    (2) The rules set forth in Sec. 1.103-8(a)(1)(i), relating to 
amounts allocable to exempt and nonexempt uses and amounts chargeable to 
capital account, apply.
    (d) Refunding issues. An obligation which is part of an issue issued 
by a qualified volunteer fire department after December 31, 1980, part 
or all of the proceeds of which issue are used directly or indirectly to 
pay principal, interest, call premium, or reasonable incidental costs of 
refunding a prior issue qualifies as an obligation of a political 
subdivision under section 103(i) and this section only if--
    (1) The prior issue was issued by a qualified volunteer fire 
department;
    (2) Substantially all of the proceeds of the prior issue were used 
for the purposes described in paragraph (a)(2) of this section;
    (3) The prior issue was issued after December 31, 1980; and
    (4) The refunding issue is issued not more than 180 days before the 
date on which the last obligation of the prior issue is discharged 
(within the meaning of Sec. 1.103-13)(b)(11)).
    (e) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example (1). The County M Volunteer Fire and Rescue Association 
provides firefighting, ambulance, and emergency medical services in 
County M. The board of county commissioners of County M contracts with 
the County M Volunteer Fire and Rescue Association for these services, 
and County M is not served by any other firefighting association. On 
August 1, 1981, the Association issues an obligation for funds to 
purchase a new fire truck, a new ambulance, and rescue equipment not to 
be used for fighting fires. Funds to be used for the purchase of the 
ambulance and rescue equipment constitute more than 10 percent of the 
proceeds of the obligation. Thus, substantially all of the proceeds of 
the obligations are not used for one of the purposes described in 
paragraph (a)(2) of this section. Although the County M Volunteer Fire 
and Rescue Association is a qualified volunteer fire department under 
paragraph (b) of this section because it provides firefighting and 
emergency medical services in an area within County M which is not 
provided with any other firefighting services and is required to provide 
these services by written agreement with County M, the August 1, 1981, 
obligation of County M Volunteer Fire and Rescue Association will not be 
treated as an obligation of a political subdivision of a State under 
section 103(i) and paragraph (a) of this section because substantially 
all of the proceeds of the obligation are not to be used for a purpose 
described in section 103(i)(l)(B) and paragraph (a)(2) of this section. 
Accordingly, interest on the August 1, 1981, obligation of County M 
Volunteer Fire and Rescue Association is not exempt from gross income 
under section 103(a)(1).

[[Page 411]]

    Example (2). County N Volunteer Fire Department provides 
firefighting services in County N by contract with the county, which is 
not served by any other firefighting association. On June 15, 1982, 
County N Volunteer Fire Department issues its obligation for funds to 
construct an addition to its firehouse to house a rescue squad, the 
rescue squad's vehicle, and rescue equipment not to be used in 
firefighting. Although the County N Volunteer Fire Department is a 
qualified volunteer fire department under paragraph (b) of this section, 
interest on its June 15, 1982, obligation will not be exempt from tax 
under section 103(i) and this section because the proceeds of this 
obligation will not be used for the purposes described in paragraph (a) 
of this section.
    Example (3). The County O Volunteer Fire and Rescue Association 
provides firefighting, ambulance, and emergency medical services in 
County O. The board of county commissioners of County O contracts with 
the County O Volunteer Fire and Rescue Association for these services, 
and County O is not served by any other firefighting association. On 
September 1, 1983, the Association issues its obligations for funds to 
construct a new building to house its firefighting, ambulance, and 
rescue functions. Although the ambulance and rescue equipment will 
occupy space in the projected facility, the cost allocable on a pro rata 
basis to providing housing for the ambulance and rescue equipment 
represents less than 10 percent of the proceeds of the obligations. 
Thus, substantially all of the proceeds of the obligations are used for 
one of the purposes described in paragraph (a)(2) of this section. The 
County O Volunteer Fire and Rescue Association is a qualified volunteer 
fire department under paragraph (b) of this section because it provides 
firefighting and emergency medical services in an area within County O 
which is not provided with any other firefighting services and is 
required to provide these services by written agreement with County O. 
The obligations of County O Volunteer Fire and Rescue Association will 
be treated as obligations of a political subdivision of a State under 
section 103(i) and paragraph (a) of this section because the obligations 
are those of a qualified volunteer fire department and because 
substantially all of the proceeds of the obligations are to be used for 
a purpose described in section 103(i)(1)(B) and paragraph (a)(2) of this 
section. Accordingly, interest on the September 1, 1983, issue of 
obligations of County O Volunteer Fire and Rescue Association is exempt 
from gross income under section 103(a)(1).

[T.D. 7901, 48 FR 32981, July 20, 1983]