In PLR 202020011, the Internal Revenue Service (IRS) reaffirmed that a wind energy facility owned by a utility affiliate and unrelated investor in a LLC taxable as a partnership was not “public utility property” because the price of the electricity sold was determined on an arm’s-length negotiated price rather than a cost of service/rate of return basis.
The taxpayer also requested a ruling that the losses incurred by the wind energy LLC (presumably largely attributable to bonus depreciation) would not be disallowed pursuant to Internal Revenue Code (IRC) section 707(b). The ruling states that the entire output from the facility was sold to the affiliated utility and that electricity was immediately sold into a wholesale exchange. The utility purchased electricity from the exchange to service its customers’ needs. The rates charged by the utility were equal to its price for the electricity without any markup. Citing Sec. 6.09 of Rev. Proc. 2020-1, the IRS declined to rule on that issue because it continues to examine the possible issuance of formal guidance related thereto.
| Eversheds Sutherland Observation – Undoubtedly, the unwillingness to rule on the I.R.C. section 707(b) issue is appropriate under the policy of the Revenue Procedure assuming that the IRS is continuing to consider guidance regarding this issue. Nevertheless, the fact pattern presented in this ruling should be the easiest one to resolve. In this case, the utility has no economic stake in the electricity purchased as the price it charges to its customers is the same as what it paid for the purchased electricity without any mark up. The utility operates as a mere conduit or procurement agent and derives no benefit from the transaction. Under such circumstances, the electricity generated by the facility should be treated as sold to the utility’s customers and I.R.C section 707(b) should not result in the disallowance of losses from the sale of electricity by the facility in its early years. Hopefully, the IRS will issue this guidance in the near future. |
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