[author: John A. Eliason]
On December 7, 2012, the IRS made public its revocation of Private Letter Ruling 201214007 on the basis that the ruling was "not in accord with the current views of the Service."
The Original Ruling
PLR 201214007 concerned the allocation of purchase price where a taxpayer acquired wind energy facilities together with facility-specific power purchase agreements (PPAs). In that ruling, the taxpayer represented the following:
Each PPA required the producer of the electricity generated by the related wind energy facility to sell, and the buyer to purchase all, or a specified cap amount, of the output of that specific facility for a specified price for a specified term of years
Under the terms of each PPA, there were no circumstances under which the producer can produce or obtain capacity, energy, or environmental attributes required to fulfill its obligations under the PPA from sources other than the specific wind energy facility designated in the PPA
If a facility-specific PPA was transferred to another party without a transfer of the related wind energy facility to that same party, the transferee would have no means of satisfying its obligations under the PPA
Based on the taxpayer's representations, the IRS concluded that the specific-facility PPA should not be treated as an asset separate from its related wind energy facility.
Revoking the PLR
PLR 201249013 revokes the prior letter ruling in its entirety. As stated by the IRS, "after reconsideration, we have concluded that the portion of the purchase price paid by Taxpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities." Of benefit to the taxpayer that received the prior ruling — and only that taxpayer — the revocation is not retroactive.
Private letter rulings are only binding on the IRS and the requesting taxpayer. However, they provide valuable insight as to what the IRS's position may be on a particular issue.
PLR 201214007 was helpful insight, as the letter ruling did not distinguish between above-market and below-market PPAs. In other words, if the terms of a PPA required it to be satisfied with output from the related facility, then the letter ruling suggested that the analysis could stop there; that is, no purchase price allocation needed to be made to the PPA. This treatment results in a higher facility basis for purposes of determining the amount of ITC credit, depreciation deductions, and, if applicable, Section 1603 cash grant amount.
The revocation of the prior ruling does not signify that the IRS will begin to randomly allocate purchase price to PPAs. Rather, we expect the IRS to follow its prior guidance on the issue, which was released back in 2000. In a lengthy technical advice memorandum (TAM 200049009), the IRS concluded that the value of a PPA is attributable to the excess of the power purchase price set forth in the PPA over the market price. In the case of alternative energy assets, appraisers should be comfortable making an "apples to apples" determination: The "market price" on which the PPA will be evaluated should be the power price for comparable assets and not the energy market as a whole.