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IRS Considers Certain Tax Credit Issues Relating to a Wind Turbine Project of a Subsidiary of a Rural Electric Cooperative
The IRS recently issued a letter ruling that addresses certain issues with respect to a the clean renewable energy tax credit for a wind energy project owned and operated by a subsidiary of a rural electric cooperative. PLR 200845008, dated August 1, 2008, and released November 7, 2008.
For an electronic version of the letter ruling:
PLR 200845008
Summary
A regional consumer-owned rural electric power cooperative plans to establish a subsidiary to construct, own and operate wind turbine facilities to generate wind energy for profit. The cooperative filed a request for a letter ruling from the IRS to address four topics.
1. First, whether the subsidiary’s wind turbine facilities will be “qualified energy resources” and “qualified facilities” for purposes of the clean renewable energy tax credit under available under section 45.
As noted by the IRS, the subsidiary will construct, own and operate the wind turbines that will comprise the total project, and these facilities will be placed in service before January 1, 2009. As such, The IRS concluded that the subsidiary’s wind turbine facilities will be “qualified energy resources” and “qualified facilities” within the meaning of sections 45(a)(2)(A)(i) and 45(d)(1).
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2. Whether the sale of output from the subsidiary’s wind facilities to the cooperative and ultimately to persons unaffiliated with either the subsidiary or the cooperative will satisfy the requirement of section 45(a)(2)(B)—i.e., that the output of a qualifying facility be sold to an “unrelated person.”
The IRS explained that the cooperative and the Subsidiary are members of an affiliated group of corporations and will be filing a consolidated tax return. Further, although the subsidiary will be selling electricity to the cooperative (i.e., parent), the cooperative ultimately will sell the electricity to third parties unrelated to either the subsidiary or the parent/cooperative. Accordingly, the IRS concluded that the sale of electricity from the subsidiary’s wind facilities to the cooperative and ultimately to persons unaffiliated with either will satisfy the requirement of section 45(a)(2)(B).
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3. Whether loans made to the subsidiary in connection with its wind generation facilities will not be considered: (1) grants provided for use in connection with its construction or operation of the wind generation facilities, (2) subsidized energy financing provided (directly or indirectly) under a program in connection with financing the subsidiary’s wind generation facilities, or (3) any other credit within the meaning of section 45(b)(3)(A)(iv).
As the IRS noted, the cooperative represented that it will obtain a certification providing that the rate of interest available to the subsidiary in connection with the wind project is comparable to the rate which the subsidiary could obtain in the private market with a government agency loan guarantee. In view of these special circumstances, the IRS concluded that the cooperative and the subsidiary will not receive a subsidy, and the borrowed funds are not subsidized energy financing as defined in section 45(b)(3)(A)(iii). The IRS found that in considering the loan, there is no reduction in the amount of the tax credit determined under section 45(a) available to the subsidiary based on the application of section 45(b)(3).
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4. Lastly, whether the cooperative’s sale of power generated by the subsidiary, pursuant to contracts executed before January 1, 1987, will not be disqualified by application of the limitation provided under section 45(e)(7)(A).
The IRS noted that the cooperative entered into certain wholesale power contracts with its Class A members during the years 1962-1965 and that each of these contracts was in full force and effect today. These contracts provided that the Class A members would purchase and the cooperative would sell and deliver, all of the electric power needed by these members to serve their own member systems (to the extent that those needs exceed a certain level of power and energy otherwise available to those members).
The cooperative represented that the prices paid by the Class A members under the pre-1987 contracts will not exceed the avoided costs. Therefore, for sales of electricity to Class A members, none of the electricity sold to them meets the conditions described in section 45(e)(7)(B)(ii). Further, all of the electricity sold to the Class A members meets the conditions described in section 45(e)(7)(B)(iii)(I).
Because the existing contracts for sales to the Class A members provide for sales at a price that does not exceed avoided costs, the cooperative is not required to enter into an amended contract in order to satisfy the exception contained in section 45(e)(7)(B). Therefore, the IRS concluded that the sales of electricity generated by the subsidiary to the Class A members under contracts executed by the cooperative before January 1, 1987, will not be disqualified from the tax credit under section 45 because of the application of section 45(e)(7)(A).
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For more information, contact KPMG’s National Director of Cooperative Tax Services:
Teree Castanias, in Sacramento, (916) 554-1146,
tcastanias@kpmg.com
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