Read today’s release: PLR 201249013 [PDF 41 KB]
In PLR 201214007 [PDF 52 KB] (publicly released April 6, 2012), the IRS concluded that when the taxpayer acquired wind energy facilities subject to facility-specific power purchase agreements (PPAs), no portion of the purchase price is to be allocated to the PPAs, and the portion of the purchase price of the wind facilities that was attributable to the PPAs is to be included in the depreciable basis of the property.
In reaching its conclusion, the letter ruling relies on section 167(c)(2), dealing with the depreciable basis of property acquired pursuant to a lease. Under those rules:
- No portion of the adjusted basis is allocated to the leasehold interest, and
- The entire adjusted basis is taken into account in determining the depreciation deduction (if any) with the respect to the property subject to the lease.
Relying on these rules, but with little additional analysis, the private letter ruling concludes that facility specific PPAs are not to be treated as an asset separate from the wind energy facility subject to the PPA.
Implications of the letter ruling, and its revocation
The conclusion reached in PLR 201214007 had potential implications on the incentives available to renewable energy projects.
For instance, if the value of the PPAs is treated as part of the depreciable basis of renewable energy property, then the cost attributable to the PPA may be recovered over a much shorter period than if it was considered an asset separate from the renewable energy property. Renewable energy property is generally five-year MACRS property, while PPAs are normally amortized over 15 years on a straight-line basis under section 197.
The conclusion reached in PLR 201214007 also had the potential to increase a renewable energy facility’s tax basis for purposes of the section 48 investment tax credit as well as the cash grant in lieu of tax credits program established under section 1603 of the American Recovery and Reinvestment Act (Pub. L. No. 111-5)
In the revocation letter (released today), the IRS stated that since issuing PLR 201214007, it has determined that the ruling is “not in accord with the current views of the Service.”
The revocation letter further states that “the portion of the purchase price paid by Taxpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities.”
For more information, contact a tax professional with KPMG’s Washington National Tax practice: