Government developers

Government developers

December 01, 2017 | By Keith Martin in Washington, DC

A government corporation formed to act as developer of a gas pipeline or LNG project will not be subject to federal income taxes, the IRS said.

A state formed the corporation and charged it with developing one of two projects in order to promote greater use of gas produced in the state. One option is to build a gas pipeline to transport gas produced in the state. The other is to build a gas liquefaction terminal to turn gas into LNG. The corporation is authorized to pursue both projects, but plans only to build one.

Any profits from the projects will belong to the state.

The IRS said in a private letter ruling issued to the corporation that it will treat the corporation as a “political subdivision” or extension of the state. Therefore, it is not subject to federal income taxes. The ruling is Private Letter Ruling 201741010. The IRS made it public in October.

The corporation has eminent domain power to take property for public use.

It has a seven-person board of directors. Five of the directors are members of the public who are appointed by the governor and confirmed by the state legislature. The other two are heads of state agencies. The corporation submits an annual budget that is folded into the state budget the governor submits each year to the legislature. Upon dissolution, all of the corporation’s assets would pass to the state.

There is no definition in the US tax code of “political subdivision” of a state. However, to be a political subdivision, the corporation must have been set up for a traditional governmental purpose. The IRS said the aim of maximizing the value of gas produced in the state for the benefit of state residents is a governmental purpose. The corporation planned either to buy gas from gas producers in the state or to enter into tolling agreements with them. As long as these contracts have arm’s-length terms, the IRS said, any private benefits that gas producers get from the projects is merely incidental to the larger public purpose being served by having the corporation develop the projects.