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The Internal Revenue Service (IRS) has officially withdrawn proposed regulations on the definition of a political subdivision. This is a very positive development as APGA had opposed this proposed regulation. Last year, the IRS proposed a new definition of a political subdivision. The current political subdivision test requires that an entity possess at least one of the three “sovereign powers” – the power of eminent domain, the power to tax, or the power to regulate. The proposed regulation would have added 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 proposed tests were a governmental or public purpose test and a governmental control test. This issue has been very important to APGA members given that an entity that is not a political subdivision cannot issue tax-exempt bonds and many public 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.

In August, APGA filed comments in response to an IRS notice identifying eight specific regulations that could be terminated under an executive order issued by President Trump in April, urging the withdrawal of this proposed regulation. Last May, APGA filed comments with the IRS in response to the proposed rule and also testified at a June, 2016 public hearing on the issue. In its comments, APGA communicated that while some APGA members have all three of the sovereign powers (taxation, eminent domain, and police) and therefore meet the governmental control test, others do not and this proposed rule would denymany public 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 that APGA filed are available on the APGA 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.