PLR 1046013: solar and smart-grid property provided by a utility is excluded from customer income

Plain-English summary

The IRS ruled that a regulated utility's pilot program could provide smart-grid equipment, solar photovoltaic systems, and battery storage to residential customers without causing the value of that property to be included in the customers' gross income. The program tested technologies intended to reduce electricity use or improve energy-demand management in owner-occupied homes. The IRS concluded that the property qualified as energy conservation measures under section 136 and that the value was excluded as a subsidy provided by a public utility. Because the value was not gross income to the customers, the utility and its subsidiary were not required to report it on Forms 1096 or 1099 under section 6041. The ruling was limited to the submitted facts and representations.

Ruling snapshot

• Question: Is property provided to residential customers through a utility smart-grid pilot program excluded from income and exempt from information reporting?
• Outcome: Approved
• Key authorities: IRC §§ 61, 136, and 6041; Treas. Reg. §§ 1.6041-1(a)(1)(i), 1.6041-1(a)(2), and 1.6041-1(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201046013
Release Date: 11/19/2010
Index Numbers: 61.00.00-00, 6041.03-00,
136.00-00
Person To Contact:
----------------, ID No. -------------
-------------------------- Telephone Number:
-------------------- ---------------------
------------------------ Refer Reply To:
CC:ITA:BR05 – PLR-118603-10
In Re: Date:
-------------------------- August 10, 2010
-----------------------

     Attn: -------------------------------------------
     --------------------------


     LEGEND-:

                 A          = ----------------------------------------------------------
                 B          = ---------------------------------------------
     States C and D         = ---------------------------------
         M Program          = ------------------------------------------------------------

Dear -------------

    This letter responds to your authorized representative’s letter and submissions of

April 28, 2010, and other correspondence and submissions, in which he requested on
your (the Taxpayer’s) behalf rulings regarding the proper federal tax treatment under
sections 61, 136, and 6041 of the Internal Revenue Code (the Code) of the value of
property and materials provided to your customers who implement and test a certain
“smart grid’s” effectiveness in energy conservation, as more fully described below.
Specifically, you requested rulings that the value of the subject property and materials
(1) is not includable in the gross incomes of the recipients by reason of the exclusion
provided under section 136 of the Code, and therefore (2) is not subject to information
reporting to such recipients under section 6041 of the Code. We are pleased to
address your concerns.
PLR-118603-10 2

FACTS

    You, A, are a publicly traded utility holding company, distributing electricity and

gas over a multistate area. In your own estimation, you distribute electricity to over 5
million customers in States C and D. Your wholly-owned subsidiary, B, a regulated
electric public utility, distributes electricity in State C. You, through B, plan to install
“smart grid” technology in a sampling of your customer’s homes, as a test of how
effective such technology is as an energy conservation measure within the existing
distribution system (“The “M” Program”).

    The M Program, a pilot program, is an attempt by you to implement a smart grid

solar photovoltaic (PV) system for your customers (together, the PV systems and
related property when combined with the “traditional electricity distribution grid,” form
what is called a “smart grid”). The basic plan is to take a sampling of qualified
participants and divide them into 4 groups. The first group will be the control group.
They will have fixed rate electricity pricing and receive information from monthly
electricity bills only. The second group will receive an Advanced Metering Infrastructure
(“AMI”) meter. The AMI meter will give hourly electricity pricing and will provide web-
based electricity consumption and pricing information. The third group will receive an
AMI meter and a PV system. The PV system will allow the home to use electricity that it
produces, not through the traditional electricity distribution grid. The forth group will
have the AMI meter, the PV system, and a battery back-up energy storage for critical
load panel. The panel will allow the home to produce energy with the PV system and
store it for use at other times. The PV system and related property provided to
customers will be owned wholly by them, and may give rise to increased value to
customer’s homes.

   You have requested a ruling that the solar PV systems and related property

provided by B, a regulated electric utility wholly owned by you, to its customers under
the M Program, constitute energy conservation measures under section 136 of the
Code and thus, the value of the property is not includable in the gross incomes of B’s
customers. You also request a ruling that the value of the PV systems and related
property provided by B to its customers is not subject to information reporting under
section 6041 of the Code.

LAW & ANALYSIS

Gross Income Defined

   Section 61 of the Code provides generally that, except as otherwise provided by

law, gross income includes all income from whatever source derived. The concept of
gross income encompasses accessions to wealth, clearly realized, over which
PLR-118603-10 3

taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co., 348 U.S.
426 (1955); 1955-1 C.B. 207.

    Relevant to the inquiry at hand, section 136 of the Code provides 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 under section 25D) for an expenditure to the extent of the amount
excluded as a subsidy under section 136(a) with respect to the expenditure.

    Section 136(c) provides that, for this purpose, the term “energy conservation

measure” means any installation or modification primarily designed (1) to reduce
consumption of electricity or natural gas, or (2) to improve the management of energy
demand, with respect to a dwelling unit (as defined in section 280A(f)(1), describing,
generally, a house, apartment, condominium, mobile home, boat, or similar property,
and all structures or other property appurtenant to such dwelling unit). A “public utility”
is described in section 136(c)(2)(B). The legislative history of the section clarifies that
the subsidy need not be provided directly by the public utility to the customer, and that
the exclusion applies to the customer to whom a subsidy may be indirectly provided by
the utility.

    The PV systems and related property at issue will be attached to dwelling units

and owned by your customers. The M Program targets participants who are residential
customers residing in owner occupied single family dwelling units. You will be testing 3
technologies. First is the Advanced Metering Infrastructure (“AMI”). This will allow
consumers to determine when to use energy by providing them with a real-time pricing
function to encourage off peak usage. (Peak is the time in the day when energy is in
highest demand, thus most expensive.) Next are the PV systems. These systems are
designed to produce energy from sunlight. This energy will be directly useable by the
customer, thus lessening the need to use power from the traditional electricity
distribution grid. Third is a storage system. This will store the energy produced by the
PV system allowing for use at a time electricity would be more expensive if taken from
the traditional electricity distribution grid.

   The PV systems and related property you plan to install in your customers’

residences under the M Program constitute energy conservation measures within the
meaning of section 136(c) of the Code, since they are primarily designed to reduce
consumption or improve the management of energy demands with respect to dwelling
units.

  We conclude that the value of the PV systems and related property you and B

provide your customers will be excluded from your customers’ gross incomes under
PLR-118603-10 4

section 136(a) as subsidies provided by a public utility for energy conservation
measures.

Information Reporting Requirements

    Section 6041 of the Code provides that all persons engaged in a trade or

business and making payment in the course of such trade or business to another
person, of rent, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable gains, profits, and income (other than
payments to which section 6042(a)(1), 6044(a)(1), 6047(e)[d], 6049(a), or 6050N(a)
applies, and other than payments with respect to which a statement is required under
the authority of section 6042(a)(2), 6044(a)(2), or 6045), of $600 or more in any taxable
year, or, in the case of such payments made by the United States, the officers or
employees of the United States having information as to such payments and required to
make such returns in regard thereto by the regulations hereinafter provided for, shall
render a true and accurate return to the Secretary, under such regulations and in such
form and manner and to such extent as may be prescribed by the Secretary, setting
forth the amount of such gains, profits, and income, and the name and address of the
recipient of such payment.

    Section 1.6041-1(a)(1)(i) of the Treasury Regulations (regulations) provides that,

except as otherwise provided in sections 1.6041-3 (payments for which no return of
information is required under section 6041) and 1.6041-4 (foreign-related items and
other exceptions), every person engaged in a trade or business shall make an
information return for each calendar year with respect to payments it makes during the
calendar year in the course of its trade or business to another person of fixed or
determinable income described in paragraph (a)(1)(i)(A) (salaries, wages, commissions,
fees, and other forms of compensation for services rendered aggregating $600 or more)
or (B) (interest (including original issue discount), rents, royalties, annuities, pensions,
and other gains, profits, and income aggregating $600 or more) of this section.

   Section 1.6041-1(a)(2) of the regulations provides, in pertinent part, that the

return required by subparagraph (1) of this paragraph shall be made on Forms 1096
and 1099.

    Section 1.6041-1(b) of the regulations provides, in pertinent part, that the term

“all persons engaged in a trade or business”, as used in section 6041(a), includes not
only those so engaged for gain or profit, but also organizations the activities of which
are not for the purpose of gain or profit. Thus, the term includes the organizations
referred to in sections 401(a), 501(c), 501(d), and 521 and in paragraph (i) of this
section.
PLR-118603-10 5

   The word “income” as used in section 6041 is not defined by statute or

regulation; however, its appearance in the phrase “fixed or determinable gains, profits,
and income” indicates that what is referred to is “gross income,” and not the gross
amount paid. Thus, section 6041 requires you to report only those payments in excess
of $600 includible in a recipient’s gross income.

  In this case, the PV systems and related property you and B provide to

residential customers to promote energy efficiency and the use of renewable energy
resources is not gross income to the customers under section 61. As a result, you do
not have to report the payments under section 6041.

CONCLUSIONS

   Based on the facts and information submitted and the representations made, the

following rulings are issued respecting the PV systems and related property provided by
you and B to residential customers under the M Program:

   (1) the value of the PV systems and related property provided under the M
  program is not income to the recipients under section 61 of the Code, but
  constitute “energy conservation subsidies” excluded from gross income under
  section 136; and

   (2) neither you nor B is required to report the value of such PV systems and
  related property on Forms 1096 or 1099.

    Final regulations pertaining to one or more of the issues addressed in this ruling

have not yet been adopted. Therefore, this ruling may be modified or revoked by
adoption of final regulations, to the extent the regulations are inconsistent with any
conclusions in this ruling. See section 11.04 of Rev. Proc. 2010-1, 2010-1 I.R.B. 1.
However, when the criteria in section 11.06 of Rev. Proc. 2010-1 are satisfied, a ruling
is not revoked or modified retroactively, except in rare or unusual circumstances.

   This letter ruling is based on facts and representations provided by the Taxpayer

and its authorized representatives, and is limited to the matters specifically addressed.
No opinion is expressed as to the tax treatment of the transactions considered herein
under the provisions of any other sections of the Code or regulations which may be
applicable thereto, or the tax treatment of any conditions existing at the time of, or
effects resulting from, such transactions which are not specifically addressed herein.
PLR-118603-10 6

  Because it could help resolve federal tax issues, a copy of this letter should be

maintained with the Taxpayer’s permanent records.

   Pursuant to a power of attorney on file with this office, copies of this letter ruling

are being sent to your authorized representatives.

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

of the Internal Revenue Code provides that it may not be used or cited as precedent.

                                                     Sincerely yours,

                                                    /s/ William A. Jackson
                                                    _________________________
                                                    William A. Jackson
                                                    Chief, Branch 5
                                                    Associate Chief Counsel
                                                    (Income Tax & Accounting)

Enclosures:
Copy of this letter
Copy for section 6110 purposes