United States: IRS Revokes Letter Ruling On Valuation Of Acquired Power Purchase Agreements

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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