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Authority’s tax-exempt status unanswered Alaska Natural Gas Development Authority could have problems in winning full tax-exemption status from IRS Larry Persily Petroleum News Government Affairs Editor
The Alaska Natural Gas Development Authority heard from its legal adviser that there remain key unanswered questions in its effort to achieve federal tax-exempt status for a state-owned North Slope gas line.
The issues in need of further research are whether any or all of several business structures could jeopardize the authority’s quest for tax-exempt status: taking in private partners, or putting the state in the business of buying and selling the gas at a profit, or the fact that most of the gas would be shipped out of Alaska.
If all of the gas was used in state — much like a municipally owned utility serves its community — it appears clear the state gas authority would meet the public-purpose standard of the Internal Revenue Code for an exemption from federal corporate income taxes, said Leonard Herzog, assistant attorney general at the Alaska Department of Law Oil and Gas Section.
But, Herzog told the gas authority board March 15, most of the flow from any North Slope gas project would head out of state, which could be a problem in the authority’s hope to achieve a full tax-exemption for any earnings on the project. State contracts with law firm “Morrison & Foerster still needs to look at that issue,” he said of the legal review under way by the law firm’s Washington, D.C., office. The gas authority has set aside $30,000 for the Department of Law to pay Morrison & Foerster for a review of the authority’s tax status.
The authority has been counting on an exemption from federal corporate income taxes as a significant cost-savings under its proposed development plan for a state-owned natural gas pipeline. A private developer of the project could face billions of dollars of federal taxes over the life of the project.
In addition to researching whether the ultimate destination of the gas would be a problem, Herzog explained to the gas authority that Morrison & Foerster also will research the possible tax-status effect of any private investment in the project and the state’s potential role in the commodity business.
“They say we can’t buy gas and sell the product and transport the product and still be tax exempt?” asked Andy Warwick, board chairman. The authority has looked at getting into the commodity business itself or perhaps limiting its role to simply providing a pipeline for North Slope producers or other companies to ship gas.
The law firm has not finished its work on that question, Herzog said at the board meeting held in Kenai. Remaining tax questions are the hard ones “I know we are looking at doing some activities that have to be at the boundary of our tax status,” said Harold Heinze, chief executive officer of the gas authority. “The next part of the tax questions are a lot tougher.”
The authority will need to show it meets the public-purpose test in order to win a favorable tax-exempt ruling from the IRS, and also will need to show that none of its income flows through to private investors, Herzog said.
Morrison & Foerster has recommended the gas authority seek legislation to clarify several points in its enabling statutes, separate from the unanswered questions on the law firm’s work agenda. Those include clear statements that the authority “serves a wholly public purpose” and, as a political subdivision of the state, has eminent domain powers such as might be needed to obtain pipeline right of way, Herzog said.
“It doesn’t change anything, just clarifies it,” he said.
Going beyond clarifying the authority’s status to take private property, if needed, for pipeline right of way, board member John Kelsey said he would like to know whether the authority could use its eminent domain powers to condemn North Slope natural gas reserves if the producers decline to sell their gas for a state-owned pipeline.
But adding that controversial issue to the discussion could delay the legislation needed for the technical amendments to the authority’s statutes, Warwick said. Authority needs legislative help The authority discussed the need to find a legislator to introduce the technical amendments and push for their passage in the final seven weeks of the legislative session.
However, the authority probably would not be delayed if it had to wait until the 2005 legislative session to win approval, said Steve Porter, deputy commissioner at the Department of Revenue.
After passage of the technical changes, and getting answers to the tougher tax-status questions, the authority would submit a formal request to the IRS for a tax status ruling, Heinze said.
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