REC Expansion: Round II

Fresh off a successful ruling from the Internal Revenue Service, propane industry officials are stepping up the fight against rural electric cooperatives.

The IRS last summer revoked RECs’ tax exemption on propane sales, which propane industry leaders have fervently complained provided an unfair price advantage.

In Revenue Ruling 2002-54, the IRS reversed previous rulings and declared that the sale of propane does not qualify as a “like organization” activity under section 501 (c)(12) of its code. The ruling means RECs may not sell propane on a tax-exempt basis. It also mandates that sales of propane be counted as taxable income because it cannot contribute to “member income.”

In a second ruling, the IRS clarified that income from any for-profit subsidiary – such as propane – counts as “non-member income,” whether sales are made to REC members or nonmembers. For tax-exempt status, RECs must get 85 percent of their income from their members.

The issue of the RECs’ tax-exempt propane sales was aggressively fought by the National Propane Gas Association, which formed a presidential task force called the Coalition for Fair Competition in Rural Markets to lobby for change. The group was spawned by the 1999 revelation that the IRS had expressed in four letters the opinion that the propane sales were totally exempt.

The coalition has lobbied that the 501 (c)(12) section does not allow organizations to extend beyond public utility-type businesses that were the intended beneficiaries of the exemption.

“We need to bring the full benefit of these rulings to fruition. The rulings themselves are great, but until that gets fully applied and we start seeing a benefit from it, it doesn’t fully satisfy what we’re looking for,” says Patrick Chesterman, executive vice president and chief operating officer for Ferrellgas and coalition chairman.

Chesterman

“Now we must commit ourselves so that these rulings don’t turn into the next 55-mile-per-hour speed limit: Everyone knows they exist, but there is no enforcement,” adds NPGA President and CEO Rick Roldan.

Since the IRS ruling, the coalition has been revamped into a full-blown task force under the overall leadership and guidance of the NPGA. That change reflects a logical progression now that the campaign battle lines are more clearly drawn, according to Roldan.

“When we started, nobody really knew what approach should be taken. We debated fighting it through court action, at the state level, or on Capitol Hill. Nobody had the definite solution. The coalition came at the right time to focus on those issues and develop a strategy,” he says.

“Now that the IRS has made its ruling, we have a defined path. Consequently, we thought it made sense to have a fully coordinated effort of NPGA and the other members of coalition. We’re more streamlined and focused, and we thought we could achieve more efficiency from a budget standpoint as well.”

Chesterman says participation by the other coalition members won’t diminish as the battle pushes forward.

“One of the moves that helped us tremendously was the ability to get other key groups or associations outside the propane industry to support us on this issue. The National Federation of Independent Businesses and the Chamber of Commerce joined in, and that gave tremendous credibility to what we were arguing. We’re going to continue to foster those relationships to keep them on our side as we go through this whole process.”

The coalition’s battle plan for 2003 centers around pressing to have the entire issue moved beyond the arena of isolated IRS revenue rulings to the more comprehensive venue of U.S. Treasury Department regulations.

Cliff Massa, an attorney with the coalition’s Washington D.C. law firm of Patton Boggs, says the regulations are the closest thing to law that can be written by the agency. Such a move would be significant, he says, because courts tend to give more deference to regulations than to individual IRS rulings.

Roldan

The propane industry – as well as other groups already involved in the battle – is expected to be highly involved in forming the regulations. The public rule-making process is open to any group, entity or company, similar to the way U.S. Department of Transportation rules are added, deleted or amended, Massa says.

Each year, the IRS puts out a business plan that lists the projects it plans to address and their priorities. Coalition officials expect the Treasury Department regulations issue to make that list, which comes out this summer.

“When that’s done, we know they are committed to it and we can push them to get started on it,” Massa says.

After posting notice and soliciting public comments, the Treasury Department will propose its changes. A formal process that includes public hearings will follow before a final ruling is issued. Massa says the process can take anywhere from six months to several years.

Meanwhile, the coalition needs to sustain the issue among the marketers who have supported the cause so far. About $2 million has been spent on the REC fight since the coalition was formed in 2001; roughly half of that came from NPGA contributions. Additional dollars have been provided by state associations and individual marketers.

“I’d be willing to conjecture that majority of our members understand that RECs pose more than a credible challenge. They understand that the strength and sheer force that RECS have grown over the last 75 years is not the kind of thing you can unwrap overnight,” Roldan says.

“We went in with understanding that this would be a multi-year fight. Even though you don’t have RECs selling propane in your backyard, there still is a major potential for the floodgates to open to all 750 of them overnight. I think our members understand the nature of that fight.

He says the challenge remains to keep the issue before Congress and NPGA members. The National Rural Electric Cooperative Association most likely will become more aggressive going forward, possibly seeking ways to change the IRS rulings.

“These are tremendous victories, but we run the risk of not finishing. I’m a little fearful that our members might interpret this as we’ve already won, so let’s clear the field,” Roldan says.

Chesterman says he is looking for state propane associations to continue the fight at a raised level. The coalition will continue to call on state members to hold meetings and send out correspondence, since most every state has some plan on dealing with RECs based on the particulars of their state laws.

His group also must figure out how to address information put out by the National Rural Electric Cooperative Association telling its members that last year’s IRS rulings mean that the tax-exempt status of an REC selling propane is not jeopardized.

“What they told their members in their newsletter was pure creative writing. It appear that this is the only formal commentary that’s been made. If that’s true, the RECs who are already in the propane business or are contemplating getting in don’t begin to understand what has happened,” says Massa.

“If REC members haven’t received any other message, they don’t understand that the IRS has reversed itself. If their own organization isn’t going to tell them, somebody needs to because they are setting themselves up for more unpleasant news.”

Chesterman says the coalition is considering direct contact with all RECs currently selling propane business to give them the unvarnished truth about the IRS ruling. It is trying to get an accurate list of those already in the propane business.