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Dec 1992

Excluding utility rebates from gross income. (Federal Taxation)

by Etheredge, Sid

    Abstract- There has been no clear guidelines on the tax treatment of rebates offered by utilities ever since a National Energy Conservation Act of 1978 provision addressing the issue expired on Jun 30, 1989. Before its expiration, the provision considered utility rebates nontaxable so that taxpayers would be encouraged to buy energy-efficient appliances. The absence of a replacement rule has left taxpayers uncertain whether ulitity rebates are considered part of the recipient's gross income and should be treated accordingly. Recent rulings by the IRS has not made matters any clearer. Revenue Ruling 91-36, for instance, did address the issue of utility rebates' taxability, but the analysis contained in this ruling is so limited that its ramifications remain ambiguous. Rev Rul 76-96 can apply to the rebates but only if they meet certain requirements.

Certain utility rebate programs contain unusual features. Under a "load control" program, a utility generally installs devices that permit it to reduce the amount of energy furnished to participating customers during peak demand periods. Another program is "load management," whereby participating customers acquire, at their own expense, certain energy- efficient appliances and certain products such as insulation and storm windows. These energy efficient appliances and products may be obtained from the utility or from an unrelated third party.

The National Energy Conservation Act of 1978 encouraged taxpayers to purchase energy-saving appliances by excluding the receipt of utility rebates from gross income. Unfortunately, when this provision expired on June 30, 1989, much uncertainty existed concerning the taxability of most utility rebate programs.

This uncertainty stems from the structure of utility rebate programs, being quite unlike that of other, more traditional, rebate programs. For example, Rev. Ruls. 76-96 and 84-41 provide that an automobile rebate is nontaxable if it is statutorily exempted from tax or is treated as a reduction in the purchase price of the acquired asset.

For the rebate to be classified as a nontaxable purchase price reduction under Rev. Rul. 76-96, the following factors must be evident:

1. The rebate recipient must be able to independently negotiate or renegotiate the purchase price of the acquired asset in an arm's length transaction;

2. The amount of the rebate must be based on the purchase price of the acquired asset;

3. The rebate must be offered by the manufacturer or dealer; and

4. A corresponding basis adjustment must occur.

The typical utility rebate program--whether load control or load management-- does not satisfy all of the above four criteria. Under either program, the utility offering the rebate is usually not the manufacturer or dealer of the product that is the subject of the rebate. In addition, the rebate itself is often calculated based upon the customer's energy savings rather than the purchase price of the product itself. As a result, utility load control and load management programs do not fit neatly within previously established notions of what constitutes a nontaxable rebate.

Cash Rebates to Utility Customers

Against this backdrop, the IRS addressed the taxability of cash rebates received by electric utility customers in PLR 8924002. There an exempt electric cooperative made cash payments to its customers who installed alternative heating equipment. The rebate amount was based upon the amount of reduction in the customers' electrical consumption, not upon the purchase price of the equipment. The electric cooperative was neither a manufacturer nor a dealer of the alternative energy equipment. In giving incentive rebates to its customers, the cooperative reduced its operating costs as well as its need for additional generating capacity.

The IRS ruled that customers purchasing energy-saving appliances under this arrangement must include in their gross income the cash incentives received from the electric utility. In addition, where the cash rebate paid to a customer exceeds $600, the utility would be subject to the information reporting requirements of IRC Sec. 6041. Recently, in Rev. Rul. 91-36, the IRS addressed the issue of noncash incentives received by customers of electric utility companies who participate in energy conservation programs. The rebate incentives involved in this ruling involved load control and load management programs. The IRS ruled that where electric utility customers who install energy-saving devices receive incentive rebates in the form of rate reductions or nonrefundable credits reducing their electric bills, such incentives are nontaxable.

Uncertainty Remains

In analyzing the taxability of utility rebates in light of the above revenue rulings, much uncertainty remains. In part this is due to the nature of Rev. Rul. 91-36 itself. Because this ruling contains little analysis--other than to conclude that the electric utility's incentive rebates represents a nontaxable reduction in the purchase price of electricity--its ramifications are unclear. Whether the rationale underlying this ruling would apply to similar rebates offered by non- electric utilities is debatable. At a Senate hearing, Michael Graetz of the Treasury Department opposed legislation that, if enacted into law, would have excluded from gross income cash incentive rebates or incentive rebates received by gas or water utility customers. Under the Treasury approach, Rev. Rul. 91-36 can be interpreted as a limited act of administrative grace.

The expiration of certain provisions of the National Energy Conservation Act of 1978--coupled with the broad sweep of IRC Sec. 61--present formidable obstacles when attempting to treat the receipt of most utility incentive rebates as tax-exempt. Rev. Rul. 91-36 classifies both the electric utility's load control and load management non-cash incentive rebate programs as nontaxable purchase price reductions. Given the reluctance of the Treasury Department to create further statutory exemptions from gross income, Rev. Rul. 91-36 gives a welcome--but limited--measure of relief to certain electric utility customers who install energy-saving devices.

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