The IRS has issued a private letter ruling (PLR 201249013)
revoking a ruling issued earlier this year related to the cost of
facility-specific power purchase agreements (PPAs).
In the original ruling (PLR 201214007), the IRS concluded that a
taxpayer acquiring wind energy facilities subject to
facility-specific PPAs could not allocate any portion of the
purchase price to the PPAs. Instead, the IRS concluded that any
purchase price attributed to the PPAs should be included in the
basis of the related energy property.
Section 167(a) provides that there should be allowed as a
depreciation deduction a reasonable allowance for the exhaustion,
wear and tear, and obsolescence of property used in the trade or
business, or in the production of income. In addition, Section
167(c)(2), provides that if property is acquired subject to a
lease, 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) related
to the property subject to the lease. In the original ruling, the
IRS applied Section 167(c)(2) to the PPAs because the taxpayer
represented that the PPAs were facility specific and could not be
fulfilled from other sources. Based on the taxpayer's
representations, the IRS applied Section 167(c)(2) and concluded
that no portion of the purchase price should be allocated to the
PPAs. Instead, the purchase price of the wind energy facility that
is attributed to the PPAs should be included in the adjusted basis
of the wind energy facility.
After issuing the original ruling, the IRS determined that PLR
201214007 is inconsistent with its current views. After
reconsideration, the IRS has reached the opposite conclusion,
ruling that the portion of the purchase price paid by the taxpayer
that is attributable to the PPAs should be allocated to the PPAs
and not to the wind energy facilities.
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