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Renewable Energy Alert: IRS Rules on Placed-in-Service Date of Wind Farm


3/19/2013

Synopsis:
 
On March 15, 2013, the IRS released Private Letter Ruling 201311003, which ruled that a wind farm project may be deemed placed in service in the year in which each wind turbine generator in the project has either been commissioned or is scheduled to be commissioned, even if a transmission line in the project has not been completed by then.
 
Note that this pronouncement is in the form of a private letter ruling which, by definition, is specific to the taxpayer requesting the ruling and cannot be used or cited as precedent. Nonetheless, it provides some insight and guidance on how the IRS views such transactions.
 
Suggested Action:
 
Contact a CohnReznick tax professional to determine how this ruling may affect your project.
 
Issue:
 
The specific facts of this ruling provide that the taxpayer owns a wind farm through two tiers of subsidiaries, with a limited liability company (LLC) directly owning the project.  By the end of the Year 1:
 
  • Physical construction will have been completed on all wind turbine generators;
  • All of the wind turbine generators will have been individually commissioned and accepted;
  • A final commissioning certificate will have been issued for the project as a whole;
  • The LLC directly owning the project will have all the permits and licenses needed to operate;
  • Each wind turbine generator will be synchronized to the power grid; and
  • Legal title and control over the project will have been conveyed to the LLC by the wind turbine generator supplier and the balance-of-plant construction contractor.
 
Before the end of Year 1, each and every wind turbine generator of the project is scheduled to be in commercial operation and generating electricity on a commercial basis.
 
However, because the interconnection between the project and the transmission line will not be completed by the end of Year 1, the LLC has arranged to interconnect to the power grid through a temporary arrangement that would allow the electricity produced by the project to be transmitted through a temporary intertie. The LLC will rotate the project’s wind turbine generators across the temporary intertie so that each is operating a reasonably consistent number of hours. The temporary intertie will remain in place for an indefinite period until the transmission line is fully constructed, which is expected to be during the following year (Year 2).  
 
How Is the Placed in Service Date Determined?
 
In determining whether the project will be precluded from being placed in service in Year 1 if the transmission line is not completed by then, the IRS reviewed the five (5) common factors to be considered in determining placed in service dates for power plants.  These factors include:
 
  • Approval of required licenses and permits;
  • Passage of control of the facility to taxpayer;
  • Completion of critical tests;
  • Commencement of daily or regular operations; and
  • Synchronization into a power grid for generating electricity to produce income.
 
In light of the five factors above, the taxpayer represented that all necessary permits and licenses with respect to the wind turbine generators will have been obtained, each of the wind turbine generators will have been synchronized to the power grid for its function of generating electricity for production of income, the critical tests for the various components of the wind turbine generators will have been completed, the wind turbine generators will have been placed in the control of the LLC by the wind turbine generator supplier and the contractor, and the taxpayer expects to have sold a non-de minimis amount of electricity generated by the project and each of the wind turbine generators.
  
Based on the facts and taxpayer representations, the IRS concluded that the project will not be precluded from being placed in service in Year 1 if the transmission line is not completed by then, as long as the project is able to deliver a specific percentage of its capacity to market in Year 1 through a temporary intertie and it rotates turbines across the temporary intertie so that each is operating on a regular basis.
 
Though it is not exactly clear from the private letter ruling how much of the project’s capacity needs to be delivered to market, it would appear reasonable to infer that at least some of the production must be delivered to be deemed placed in service.
 
Contact:
 
For more information, please visit CohnReznick’s Renewable Energy webpage and contact Timothy Kemper, Partner and Renewable Energy Industry Practice Co-National Director, at 404-847-7786 or Anton Cohen, Partner and Renewable Energy Industry Practice Co-National Director, at 301-280-1822.
 

 

 

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.
 
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
 
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