IRS tax decision good for gasline project

Posted: Tuesday, February 08, 2000

The following editorial appeared in Thursday's Fairbanks Daily News-Miner:

Obtaining tax-exempt status for the Alaska Gasline Port Authority's bonds seemed like a potential Achilles heel for the project a few months ago. With a ruling from the IRS last week, that no longer seems to be a concern. The ruling is a significant step toward making the gas line from Prudhoe Bay to Valdez a reality.

The IRS determined that the gas line authority was ``governmentally controlled.'' Income from bonds issued by such entities are tax exempt, so investors who buy them make a bit more money than they would on taxable bonds. And that in turn means the gas line authority can offer bonds at a lower interest rate and still attract investors. The lower interest rate lessens the cost of the gas, making it more marketable in the world.

The IRS, in its letter, quotes from its tax code. The code says interest on any state or local bond is not taxable income. ``The term 'state or local bond' means an obligation of a state or political subdivision thereof,'' the agency said.

So the agency had to answer the question - could the gas line authority be considered a ``political subdivision.''

The IRS said yes, for the following reasons:

The authority is governed by a board of directors appointed by the Fairbanks North Star Borough, the City of Valdez and the North Slope Borough.

Any net revenues from the project will go to these governments, the state, and other municipalities.

he assets of the authority will be distributed to the governments of Fairbanks, Valdez and the North Slope when it is dissolved.

Finally - and this may come as a surprise to some - the authority has the power of eminent domain, meaning it can pay for and take property and then go to court to defend itself if it has to.

So, as the saying goes, if it quacks like a political subdivision, it must be a political subdivision.

Some might question ``why'' the federal tax code should make income from state and local bonds tax exempt, particularly when the bonds are issued to build projects of this sort. But that's an entirely different question. It's now clear that under the existing tax code, the income is exempt as far as the IRS is concerned.

The IRS ruling might have been expected by many observers, but it was still a critical piece of the financing puzzle for the gas line authority. With the question answered, the authority can pursue the project with greater confidence. That's good news for everyone in Alaska.



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