IRS reverses tax ruling on wind PPAs

Tuesday, December 11, 2012

The U.S. Internal Revenue Service has reversed its previous position on how it will treat power purchase agreements from wind energy facilities. 

Earlier this year, IRS issued a private letter ruling addressing a tax issue arising when a taxpayer purchases wind energy facilities operating under facility-specific power purchase agreements.  Under Section 167 of the Internal Revenue Code, which establishes how depreciation works under tax law, the computation of an adjusted basis for an asset is essential to calculating tax values and liabilities.  What happens when a taxpayer purchases a wind project that operates under one or more PPAs?  Should the purchase price affect the basis of the facilities, or should part of the purchase price be allocated to the PPAs?

In January 2012, in Private Letter Ruling 201214007, the IRS concluded that the purchase price should be included in the adjusted basis of the facilities, rather than allocating any portion of it to the PPAs.  Last week, the IRS issued Private Letter Ruling 201249013, which revokes its previous private letter ruling.  According to the new ruling, "the Service has determined that Private Letter Ruling 201214007 is not in accord with the current views of the Service."  Rather, the IRS now holds that the portion of the purchase price paid by the taxpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities.

While private letter rulings are directed to the specific taxpayers involved and may have limited precedential value, the ruling indicates a shift in the IRS's thinking about the tax treatment of transactions involving operating renewable energy generation projects.

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