In Private Letter Ruling 201214007 issued on April 6, 2012, the IRS ruled that where a taxpayer purchased wind energy facilities accompanied by facility-specific power purchase agreements ("PPAs"), no portion of the purchase price need be allocated to the PPAs as a separate asset. Instead, the consideration attributable to the PPAs could be capitalized into the tax basis of the facilities themselves. The result is favorable for acquirers of renewable energy facilities seeking to take advantage of accelerated MACRS depreciation deductions and the investment tax credit ("ITC") because it increases the tax basis amount eligible for the ITC and accelerated depreciation. The ruling also may be helpful for applicants who have been considering whether PPAs must be attributed separate basis under the Treasury Section 1603 cash grant program.
In the ruling, an electric utility acquired several operating wind energy facilities from an unrelated partnership. The wind facilities consisted of various items of tangible property, including land, wind turbines, towers, pads, transformers, on-site power collection systems, monitoring and meteorological equipment, and site improvements. Prior to the purchase, a number of the wind facilities had entered into individual PPAs, pursuant to which each facility's owner was prohibited from fulfilling the PPA by selling output from any generation source other than the specified wind facility. In addition, the PPA could not be transferred and remain valid without transfer of the accompanying wind energy facility.
Since the PPAs were facility-specific and not separately transferable, the IRS determined that the agreements should not be treated as assets separate from the wind energy facilities subject to the agreements, but instead should be treated as part of the wind energy facilities. Based on this conclusion, the value of a PPA would be part of the depreciable basis of the wind energy facility subject to that agreement.
Although the ruling cannot be used or cited as precedent and is applicable only to the specific facts presented, the conclusion reached in the ruling has favorable implications for acquirers of renewable energy facilities seeking to take advantage of MACRS and the ITC if those facilities are accompanied by facility-specific PPAs. Including the value of the PPAs in the basis of the facility increases the amount that can be depreciated over an accelerated five-year period under MACRS. In addition, increasing the tax basis of the energy facilities increases the value of the 30% tax credit available under the ITC.
The ruling may also support a position that the PPA should be taken into account in determining Treasury Section 1603 cash grants for applicants that have commenced construction by December 31, 2011, but not yet placed the facility into service. The potential benefit would apply in the case of grants to purchasers and lessees of facilities in inverted lease structures. Developers of wind energy facilities may also be able to benefit with respect to costs incurred in negotiating and entering into a PPA. With respect to cash grants, although the Treasury had previously implied that PPAs with significant value are generally separate property not treated as part of a taxpayer's basis, it is possible that the Treasury might modify this position in light of the IRS ruling.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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