Utility companies often use rebates to encourage customers to purchase more efficient heating or cooling equipment and other energy-saving devices. The recently enacted Comprehensive National Energy Policy Act of 1992 provides for the exclusion from gross income of certain energy conservation subsidies received by public utility customers. In addition, it clears up much of the uncertainty that existed under prior law concerning the taxability of many utility rebate programs.

Two of the most popular types of utility-rebate programs are known as "load-control" and "load-management" programs. Under a load-control program, a utility installs devices that permit it to reduce the amount of energy furnished to participating customers during peak-demand periods. Under a load-management program, participating customers acquire, at their own expense, certain energy efficient appliances or certain products such as storm windows. These energy efficient appliances and products may be obtained from the utility or from an unrelated third party.

Prior Law

To encourage the purchase of energy-saving appliances, the National Energy Conservation Act of 1978 allowed utility customers to exclude from their gross income the receipt of utility rebates. The expiration of this provision, June 30, 1989, casted a shadow upon the excludibility of rebates received under many utility-rebate programs.

Unlike that of other more traditional rebate programs, load-control and load-management utility-rebate programs do not satisfy all the requirements described in Rev. Ruls. 76-96 and 84-41 concerning non- taxable rebates. For example, one of the requirements of Rev. Rul. 76-96 is that the amount of the rebate must be based upon the purchase price of the acquired asset. However, many utility-rebate programs base the amount of the rebate upon the amount of reduction in the customer's energy consumption.

An example of this type of arrangement in the context of a load management program is contained in PLR 8924002. The IRS ruled that where an exempt electric cooperative made cash payments to its customers who installed alternative heating equipment, such payments were includible in the recipient's gross income.

In Rev. Rul. 91-36, the IRS addressed the issue of non-cash incentives received by customers of electric utility companies who participated in energy-conservation programs. The IRS ruled that non-cash incentives such as rate reductions or non-refundable credits were nontaxable to the electric utility customer.

The Comprehensive National Energy Policy Act of 1992

In October of 1992, the Comprehensive National Energy Policy Act was enacted into law. This act amended the IRC by redesignating IRC Sec. 136 as IRC Sec. 137 and by introducing new IRC Sec. 136 effective for subsidies received after December 31, 1992.

Under the new IRC Sec. 136, the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy-conservation measure is excluded from the customer's gross income. For purpose of new IRC Sec. 136, public utility means any person engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for their own use.

An energy-conservation measure is defined as any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. If the energy conservation measure relates to a dwelling unit, then the entire rebate amount can be excluded from the taxpayer's gross income. For this purpose, a dwelling unit is defined in IRC Sec. 280A(f)(1) as a house, apartment, mobile home, boat, or similar property. As a result, cash rebates received by residential utility consumers who install energy- saving appliances or devices under load-control or load-management programs would appear to be excludible from income under new IRC Sec. 136.

However, to exclude rebates received from an energy-conservation measure relating to property other than a dwelling unit, several limitations exist. The rebates must be due to installations or modifications occurring on or after January 1, 1995. Another limitation is that the percentage of the subsidy excluded from gross income during 1995, 1996, and 1997 (and later years) will be 40%, 50%, and 65%, respectively.

Property other than a dwelling unit also includes specially defined energy property. This term is defined as a recuperator, heat wheel, regenerator, heat exchanger, waste heat boiler, heat pipe, automatic energy control system, turbulator, preheater, combustible gas recovery system, economizer, alumina electrolytic cell modification, chlor-alkali electrolytic cell modification, or any other property of a kind specified by regulation by the Secretary of the Treasury. This property must be installed with an existing industrial or commercial facility and the principal purpose for its installation must be to reduce energy consumption.

Bruce M. Bird, JD, CPA, West Georgia College, Steven M. Platau JD, CPA, University of Tampa, and Warren A. Beatty, PhD, University of South Alabama