On June 6, Dave Schryver, APGA’s Executive Vice President, will testify at an Internal Revenue Service (IRS) public hearing addressing the definition of a “Political Subdivision.” The IRS has released proposed regulations 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 is 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 power of eminent domain, the power to tax, or the power 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 he 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.
On May 23, APGA filed comments with the IRS in response to the proposed regulation. In its comments, APGA expressed opposition to the proposed rule and urges the IRS to withdraw it. The comments also communicated that, “APGA members depend on access to tax-exempt funding for the construction of necessary infrastructure to ensure their ability to continue to provide safe and reliable natural gas service in their communities and to acquire long-term gas supplies at reasonable and competitive prices for the benefit of the consumers they serve.” The comments further state that while some APGA members have all three of the sovereign powers and therefore meet the governmental control test, others do not and this proposed rule deny would many public natural gas systems and joint action agencies the ability to issue tax-exempt bonds despite those entities meeting every reasonable standard of providing a public benefit under powers expressly granted by the people of the states through their elected representatives.
A copy of the comments filed with the IRS is available on the APGA website. In addition, once it is finalized, a copy of the testimony APGA will provide at the hearing will also be available on the website. 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.