The Internal Revenue Service (IRS) has released a proposed regulation that would establish a new definition of the term “political subdivision” for tax-exempt purposes. This regulation is significant as an entity that is not a political subdivision cannot issue tax-exempt bonds and many public natural gas systems have utilized tax-exempt financing for investments in infrastructure as well as for natural gas prepays, which are the long-term purchase of natural gas.
The current political subdivision test requires that an entity possess at least one of the three sovereign powers, which are the powers of eminent domain, to tax, or to regulate. The proposed regulation would add two new tests in the determination of whether an entity is a political subdivision and all three tests (the two new tests and the original one) must be met for an entity to qualify as a political subdivision. The two new tests are a governmental or public purpose test and a governmental control test.
Under the governmental or public purpose test, an entity must be set up for a public purpose and continually operate “in a manner that provides a significant public benefit with no more than an incidental private benefit.” The term “incidental private benefit” is not defined in the regulation. If the IRS makes a determination that the entity provides more than an incidental private benefit, the entity is no longer considered a political subdivision and its bonds become taxable. The second new test is governmental control and under this test control must be exercised either by a state or local governmental unit or by an electorate. In addition, to meet this test, a state or local governmental unit must have all three of the sovereign powers identified above and act either through its governing body or through its duly authorized elected or appointed officials.
Members of the APGA Regulatory Subcommittee and Gas Supply Committee held a conference call to discuss the potential impact of this proposed regulation on April 26. Comments on the regulation are due on May 23 and APGA plans to submit comments. In addition, a public hearing on the regulation, which APGA plans to participate in, has been scheduled for June 6. For questions on this article, please contact Dave Schryver of APGA staff by phone at 202-464-2742 or by email at
dschryver@apga.org.