United States: IRS Rules That No Part Of Cost For Wind Facilities Is Allocated To Power Purchase Agreements

The IRS has ruled in PLR 2012-14-007 that no portion of amounts paid by an electric company to acquire wind energy facilities subject to facility-specific power purchase agreements will be allocated to the agreements and that the purchase price of the facilities that can be attributed to the agreements will be used in determining the adjusted basis of the facilities.

The facts of the private letter ruling provide that the taxpayer, through a chain of disregarded entities, acquired all of the membership interest in an unrelated holding company (Target). Target's assets consisted of all of the membership interests in a number of disregarded entities, each of which owned and operated one or more wind energy facilities. Each wind energy facility 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 such as roadways and fencing.

Prior to acquisition, Target, through its disregarded entities, had entered into separate power purchase agreements (PPAs), pursuant to which Target committed to sell some or all of the output of its wind facilities to a counterparty in accordance with the terms and conditions of the PPA. Under all of the PPAs, Target (and the taxpayer upon the acquisition) could satisfy its obligations under the PPAs only with the power produced at the specific wind energy facility designated in the PPA.

The IRS ruled that the specific-facility PPA should not be treated as an asset separate from the wind energy facility subject to such PPA. Accordingly, where the taxpayer acquired a wind energy facility subject to a facility-specific PPA at issue, the portion of the purchase price of the wind energy facility that can be attributed to that facility-specific PPA is taken into account as part of the basis of the wind energy facility for depreciation purposes.

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