PLR 1035003: IRS allowed a solar credit without reducing it for REC proceeds

Plain-English summary

The IRS considered a homeowner who bought and installed a residential solar electric system and sold associated renewable energy credits to a public utility. The IRS ruled that the utility’s payment was consideration for the renewable energy credits, not a subsidy for the solar system under § 136. The payment therefore had to be included in gross income under § 61, but the homeowner did not have to reduce the system’s qualifying expenditures by the payment. The homeowner could claim the § 25D credit based on the full qualifying expenditure, subject to the ruling’s stated facts and limitations.

Ruling snapshot

• Question: Does a public utility’s payment for renewable energy credits reduce the homeowner’s § 25D solar energy credit?
• Outcome: Approved
• Key authorities: IRC §§ 25D, 61, 136, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201035003 Third Party Communication: None
Release Date: 9/3/2010 Date of Communication: Not Applicable
Index Number: 25D.00-00, 136.00-00, 61.00-
00 Person To Contact:
-----------------------, ID No. -----------
----------------------- Telephone Number:
---------------------------- --------------------
---------------------------------------------- Refer Reply To:
CC:PSI:B06
In Re: ---------------------------------------------------- PLR-102696-10
------------------------------------------------------------ Date: May 19, 2010

LEGEND:

     Taxpayer       =           -----------------------
     State          =           ----------
     Program        =           -----------------------------------------------------
     Public Utility =           -------------------------------------------
     $a             =           -------------
     b              =           ---
     $c             =           ---------
     $d             =           -------------
     Year           =           -------
     X              =           --------------------------------

Dear -----------------:

  This responds to a letter dated -----------------------, submitted by your authorized

representative, requesting rulings under § 25D, § 136(a), and § 61(a) of the Internal
Revenue Code (“Code”) related to the purchase of a residential solar electric system.

     The facts represented are as follows:

   Taxpayer is a resident of State. Taxpayer uses the cash method of accounting

and is a calendar year taxpayer. Taxpayer contracted with X to purchase and install a
residential alternative renewable energy system at Taxpayer’s residence.

PLR-102696-10 2

     Under the State Program, retail public electric utility companies (“Utilities” or

“Utility”) such as Public Utility are required to generate an increasing portion of their
retail electricity sales from renewable sources (“Annual Renewable Energy
Requirement”). A portion of the Annual Renewable Energy Requirement must be met
with Renewable Energy Credits (“RECs”), which are derived from distributed residential
and non-residential applications. RECs are tradable commodities that represent proof
that one kilowatt-hour (“kWh”) of electricity is generated from a renewable energy
source. RECs expire once a Utility uses the RECs to satisfy the Annual Renewable
Energy Requirement. Utilities may transfer or purchase RECs from third parties to meet
the requirements imposed by the Program.

   Most Utilities have established renewable energy incentive programs to satisfy

the requirements of the Program. The incentive programs typically offer residential
customers, who install renewable energy resources, the opportunity to sell RECs
associated with their renewable installations back to the Utility for an up-front incentive
payment based on an amount of residential solar generating capacity.

    In Year, Taxpayer purchased a grid-tied solar electric power system (“Residential

Solar System”) from X for $a that allows Taxpayer to convert sunlight into utility grade
electricity. The Residential Solar System will generate electricity for Taxpayer’s
residence. Taxpayer is a participant in Public Utility’s renewable energy incentive
program whereby Taxpayer has agreed to transfer title and ownership of any
“environmental credits, benefits, emissions reductions, offsets and allowances”
associated with each kWh of electricity produced by Taxpayer’s Residential Solar
System to Public Utility for a b year term in exchange for a one-time payment of $c
(“REC Payment”). Public Utility is not purchasing the Residential Solar System from
Taxpayer but is purchasing the RECs associated with that system.

   Taxpayer does not expect to reduce the amount of expenditure made for the

Residential Solar System by the REC Payment; Taxpayer plans to calculate the tax
credit on the full purchase price. Thus, Taxpayer expects to report on Taxpayer’s
federal income tax return for Year an income tax credit of $d pursuant to § 25D(a)(1).

   Accordingly, you requested the following rulings:

   1. Taxpayer will be able to obtain an income tax credit pursuant to § 25D for

Year in the amount $d (30% of $a) with no reduction for the receipt of the REC
payment;

   2. The REC payment shall not be treated as a subsidy provided (directly or

indirectly) by a public utility to a customer for the purchase or installation of any energy
conservation measure as described in § 136(a); and

  3. The Taxpayer shall be required to treat the REC payment as gross income

pursuant to § 61(a).

                                 Law & Analysis

    Section 25D(a)(1) of the Code allows an individual a credit against the tax

imposed for the taxable year in an amount equal to 30 percent of the qualified solar
electric property expenditures made by the taxpayer during such year.

  Section 25D(d)(2) defines the term “qualified solar electric property expenditure”

as an expenditure for property which uses solar energy to generate electricity for use in
a dwelling unit located in the United States and used as a residence by the taxpayer.

   Section 25D(e)(1) allows the expenditures for labor costs properly allocable to

the onsite preparation, assembly, or original installation of the qualified solar electric
property and for piping or wiring to interconnect such property to the dwelling unit to be
taken into account for purposes of § 25D.

   Under § 25D(e)(8)(A), generally, for purposes of determining the tax year when

the credit is allowed, an expenditure with respect to an item shall be treated as made
when the original installation of the item is completed. Under § 25D(e)(8)(B), in the
case of an expenditure in connection with the construction or reconstruction of a
structure, such expenditure shall be treated as made when the original use of the
constructed or reconstructed structure by the taxpayer begins.

   Section 61(a) provides, that, except as otherwise provided by law, gross income

means all income from whatever source derived, including gains derived from dealings
in property (§ 61(a)(3)). Under § 61, Congress intends to tax all gains or undeniable
accessions to wealth, clearly realized, over which taxpayers have complete dominion.
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).

     Section 136 provides an exception to this general rule, stating that gross income

does not include the value of any subsidy provided (directly or indirectly) by a public
utility to a customer for the purchase or installation of any energy conservation
measure. Section 136(b) provides, in relevant part, that a taxpayer may not take a tax
credit (such as the credit under § 25D) for an expenditure to the extent of the amount
excluded as a subsidy under § 136(a) with respect to the expenditure.

     In the current situation, Taxpayer sold all of the environmental attributes

associated with the RECs to Public Utility in exchange for a payment. As such, Public
Utility’s payment to Taxpayer is neither a rebate nor purchase-price adjustment, since
Public Utility has no reasonable nexus to the cost or sale of the subject property from
the vendor, X. Also, the payment is not a “subsidy” intended to facilitate the acquisition
of property deemed advantageous to the payor, though Public Utility may make such

PLR-102696-10 4

payments in other contexts. Rather, Taxpayer represents that the transaction between
the parties is effectively a sale or exchange of property and property rights. Public
Utility will in fact make no payment to Taxpayer absent the transfer of Taxpayer’s
valuable property interests (namely, the RECs associated with the Residential Solar
System purchased by Taxpayer from X), and the parties specifically state that the
subject payment is to be made in consideration of the transfer of such property
interests.

     Based solely on the information submitted and representations made, we

conclude that the proceeds from this sales transaction are not within the purview of
§ 136. Consequently, Taxpayer must include gain from the sale of the RECs to Public
Utility in Taxpayer’s gross income under § 61(a). Further, Taxpayer is not required
under § 136(b) to reduce the basis in the Residential Solar System. Taxpayer
represents that the Residential Solar System generates electricity for Taxpayer’s
residence located in the United States. Thus, Taxpayer may take a credit for 30 % of
the expenditures for qualified solar electric property, and Taxpayer does not have to
reduce the expenditure by the amount of the REC Payment.

   The rulings contained in this letter are based upon information and

representations submitted by Taxpayer and accompanied by a penalty of perjury
statement executed by Taxpayer. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination. Except as specifically set forth above, we express no opinion concerning
the federal income tax consequences of the facts or transactions described above
under any other provision of the Code. Specifically, we express no opinion on whether
the amounts allocated to the qualified expenditures are correct and thus we express no
opinion on the accuracy of the tax credit amount.

   This ruling is directed only to the taxpayer who requested it. Under § 6110(k)(3)

of the Code, a letter ruling may not be used or cited as precedent.

  In accordance with a power of attorney on file in this office, we are sending a

copy of this letter ruling to your authorized representatives.

                                     Sincerely,

                                     Jaime C. Park
                                     Senior Technician Reviewer, Branch 6
                                     Office of Associate Chief Counsel
                                     (Passthroughs and Special Industries)

Enclosures (2):
Copy
Copy for § 6110 purposes