Offshore wind farm is functionally used within the United States

Plain-English summary

A partnership planned an offshore wind farm located more than three but less than twelve nautical miles from a state's coast. The turbines, offshore platform, undersea cables, land-based control room, and onshore substation formed an integrated system, and all electricity would be sold to two in-state utilities for domestic use. Drawing on revenue rulings about submarine cables, the IRS applied a functional-use test rather than looking only at where each component was physically located. Because the project depended on its U.S. land facilities and served only U.S. consumers, the IRS ruled that it was not used predominantly outside the United States under section 168(g)(1)(A). The IRS therefore did not need to decide whether U.S. territorial waters extend twelve nautical miles for this depreciation rule.

Ruling snapshot

• Question: Would the offshore wind project be treated as property used predominantly outside the United States for depreciation purposes?
• Outcome: Approved, the project would not be treated as predominantly used abroad
• Key authorities: IRC §§ 168(g)(1)(A), 168(g)(4), and 7701(a)(9); Rev. Rul. 69-2; Rev. Rul. 73-77

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201510038 Third Party Communication: None
Release Date: 3/6/2015 Date of Communication: Not Applicable
Index Number: 168.25-00
Person To Contact:
------------------------------------------------------- -----------------------, ID No. ----------------
------------------------------------- Telephone Number:
--------------------------------- --------------------
------------------------ Refer Reply To:
CC:ITA:7
PLR-129239-14
Date:
October 31, 2014

Re: Request for Private Letter Ruling under § 168(g)(1)(A)

Legend

Taxpayer = -------------------------------------

Project = ------------------------

Country = ----------

State1 = --------------------

State2 = ------------

City = --------------

Utility1 = -----------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------

Utility2 = ----------

Location = ----------------------

A = --------------------

B = -----------------------

C = ----------------------------------

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D = ----------------------------------

E = -----

F = -----

G = -----

H = ----

I = ---

J = --------------

K = ----------

L = ----------

M = ---

N = -----

O = --

P = ---

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

   This letter responds to a letter dated July 31, 2014, and supplemental

correspondence, submitted by Taxpayer, requesting a letter ruling on whether an
offshore wind farm known as the Project is not used predominantly outside the United
States within the meaning of § 168(g)(1)(A) of the Internal Revenue Code.

                                           FACTS

    Taxpayer represents that the facts are as follows:

     Taxpayer is a State1 limited liability company that is a partnership for federal

income tax purposes. Taxpayer’s current partners are A and B. However, at financial
closing, two new partners (affiliates of large public companies) are expected to make
capital contributions to Taxpayer in exchange for partnership interests, and the two
existing partners are expected to contribute their interests to an upper-tier State2 limited
liability company called C, leaving three partners in total. A, B, and C are affiliated with

PLR-129239-14 3

D, a State1 corporation that is in the business of developing primarily renewable energy
facilities, including the Project.

   Taxpayer will own the Project. The Project is a wind farm that will be built off the

coast of State1, in an area of water called Location. The Project is designed to have a
capacity of E megawatts and to consist of F turbines. The Project will be built in two
phases or “seasons.” The first season (season A) will consist of G H-megawatt
turbines. All of the electricity from season A will be sold to the Utility1 and Utility2, two
State1 utilities, under long-term power contracts. Another I turbines will be added in a
later construction season (season B) if another power contract can be secured.

   The wind turbines are expected to be spread over an area roughly the size of J.

Each turbine will sit atop a K heavy duty mast or tower that will be embedded in the
ocean floor. Undersea gathering lines will bring the electricity from each turbine to a L
centrally-located electrical service platform from which the electricity will move to shore
through two larger undersea and upland cables to a project substation in City, State1,
where the electricity will be fed into the electrical grid.

   The electricity will exit each turbine at M kV and then be stepped up to N kV by

means of three step-up transformers on the electrical service platform. There will be no
further step up in voltage before it reaches the grid.

   The turbines and electrical service platform of the Project will be O to P miles off

the State1 coast, which is more than 3 nautical miles but less than 12 nautical miles off
the coast.

    All of the turbines will be controlled from a control room on land in State1. The

control room will have computers and large screens with pictorial renderings of each
turbine, turbine collector system, subsea and upland cables, step-up transformers,
circuit breakers and surge arrestors, performance data for each turbine and related
equipment, and real-time data on weather conditions and overall wind farm
performance. The wind farm is controlled by a SCADA system: sophisticated software
that collects performance and conditions data from the individual turbines and the
electrical service platform that are then converted into specific instructions back to
individual turbines to adjust the pitch of the blades to react to shifts in wind direction and
speed to control and optimize output. The SCADA system will also protect the turbines
from operating out of their design parameters and effect shut down during emergencies
and scheduled maintenance. The control room will also house a marine surveillance
and security system used for monitoring marine traffic, maintenance activities and
overall security of the wind farm, and ensuring compliance with U.S. Coast Guard
requirements.

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   Taxpayer will sell all of its electricity to two State1 utilities: Utility1 and Utility2.

There is no contract to resell the power to Country. Sales of U.S. electricity into Country
require an export license. Neither Utility1 nor Utility2 holds such a license.

    The Project is an integrated whole: none of the turbines can be placed in service

without the undersea cables, control room, and the project substation to deliver the
electricity to market.

    The season B turbines could be owned by Taxpayer if the equity investors and

lenders are willing to fund the additional cost. Alternatively, the season B turbines could
be owned by a separate company that would enter into a “shared facilities agreement”
with Taxpayer essentially to buy an undivided interest in the electrical service platform,
undersea and upland cables, project substation, control room, and other common
infrastructure so that the season B electricity can be moved to shore. The effect would
be to reimburse the season A owners for the cost of the share of the common
infrastructure that would be used by season B turbines.

  The season B turbines, which will be tethered to shore in the same manner as

the season A turbines, will be useless without the ability to get their electricity to shore.
These turbines cannot be used by the Project without the step-up transformers,
undersea and upland cables, SCADA system, and other infrastructure required to
operate the turbines and bring the electricity to shore.

                               RULING REQUESTED

   Taxpayer requests the Internal Revenue Service issue the following ruling:

The Project will not be considered used predominantly outside the United States within
the meaning of § 168(g)(1)(A).

                                LAW AND ANALYSIS

   Section 168(g)(1)(A) provides that any tangible property used predominantly

outside the United States during the taxable year must be depreciated under the
alternative depreciation system of § 168(g).

    Section 168(g)(4) lists exceptions to § 168(g)(1)(A) for certain property used

outside the United States. While none of the enumerated exceptions apply to the facts
of this private letter ruling request, the background of § 168(g)(4) provides insight in
determining whether property is used predominantly outside the United States. The
rules in § 168(g)(4) are derived from former § 48(a)(2)(B). Prior to 1990, § 168(g)(4)
provided, in relevant part, that for purposes of § 168(g), rules similar to the rules under
§ 48(a)(2) (including the exceptions contained in § 48(a)(2)(B)) shall apply in
determining whether property is used predominantly outside the United States. Section

PLR-129239-14 5

11813 of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-158 (the “Act”)
repealed § 48(a)(2) as “deadwood” and amended § 168(g)(4) by moving the
enumerated exceptions under former § 48(a)(2)(B) to § 168(g)(4). The repeal of the
“deadwood” provisions and the amendment to § 168(g)(4) by § 11813 of the Act were
not intended to be substantive changes in the tax law. H.R. Rep. No. 101-894, 101st
Cong., 2d Sess. (Oct. 17, 1990). Accordingly, guidance issued under former § 48(a)(2)
provides insight in determining whether property is used predominantly outside the
United States for purposes of § 168(g)(1)(A).

   Former section 48(a)(2) provided that property used predominantly outside the

United States is not eligible for the investment credit. Section 1.48-1(g)(1) of the
Income Tax Regulations provides that the determination of whether property is used
predominantly outside the United States (as defined in § 7701(a)(9)) during the taxable
year is made by comparing the period in such year during which the property is
physically located outside of the United States with the period during which the property
is physically located within the United States. If the property is physically located
outside the United States during more than 50 percent of the taxable year, such
property shall be considered used predominantly outside the United States during that
year. See also § 1.168-2(g)(5)(i) of the proposed regulations, which provides the rules
under former § 168(f)(2), the predecessor to §§ 168(g)(1)(A) and 168(g)(4).

  Section 7701(a)(9) provides that the term “United States” when used in a

geographical sense includes only the States and the District of Columbia.

   Rev. Rul. 69-2, 1969-1 C.B. 25, states that submarine cables that are used in

connection with the provision of telephone and other communication services in Hawaii
are functionally used at the terminals of the system even though such cables lie on the
ocean floor in international waters. Because all of the terminals of this submarine cable
system are physically located in California and Hawaii, Rev. Rul. 69-2 holds that the
submarine cables are used solely within the United States for purposes of former
§ 48(a)(2).

   Rev. Rul. 73-77, 1973-1 C.B. 34, states that transoceanic cables extending from

terminal facilities located in the United States to terminal facilities located in foreign
countries were functionally used in the United States for purposes of former § 48(a)(2).
These cables were used for the transmission of messages between the terminals in the
United States and the terminals in the foreign countries. Because 50 percent of the
terminal facilities were physically located in the United States, Rev. Rul. 73-77
concluded that at least 50 percent of the functional use of the submarine cables was in
the United States and, thus, the cables are not used predominantly outside the United
States for purposes of former § 48(a)(2).

   In light of the legislative history of § 168(g)(1)(A) and (g)(4), we believe that the

“functional use” test in Rev. Rul. 73-77 applies for purposes of § 168(g)(1)(A).

PLR-129239-14 6

    In this case, Taxpayer represents that the Project is an integrated whole. The

turbines cannot be used without the offshore gathering lines, undersea and upland
cables, and offshore electrical service platform, as well as the project control room and
substation on land. These components of the Project are necessary for the Project to
operate and move its electricity to market. As a result, each component of the Project
will be functionally dependent on the other components. Further, the part of the Project
located off the coast of State1 will be physically connected with the substation located
on the land in State1. Accordingly, the Project for purposes of the situs of its use under
§ 168(g)(1)(A) should be viewed as one integrated system.

   Taxpayer also represents that the electricity generated by the Project will be sold

to U.S. consumers. Based on that representation and because the Project will have no
control room and substation located in a foreign country, the sole functional use of the
Project is the generation, transmission, and distribution of electricity for domestic use in
the United States. Therefore, under the functional use test of Rev. Rul. 73-77,
Taxpayer’s Project is not used predominantly outside the United States for purposes of
§ 168(g)(1)(A).

     Because the functional use test of Rev. Rul. 73-77 applies in this case, it is not

necessary for us to consider Taxpayer’s alternative argument that United States
territorial waters extend 12 nautical miles for purposes of § 168(g)(1)(A).

                                   CONCLUSION

    Based solely on Taxpayer’s representations and the relevant law and analysis

set forth above, we conclude that the Project will not be considered used predominantly
outside the United States within the meaning of § 168(g)(1)(A).

   Except as specifically set forth above, no opinion is expressed or implied

concerning the tax consequences of the facts described above under any other
provisions of the Code (including other subsections of § 168).

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

provides that it may not be used or cited as precedent.

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  In accordance with the power of attorney, we are sending a copy of this letter to

Taxpayer’s authorized representative. We are also sending a copy of this letter to the
appropriate operating division director.

                                            Sincerely,

                                            Kathleen Reed

                                            KATHLEEN REED
                                            Chief, Branch 7
                                            Office of Associate Chief Counsel
                                            (Income Tax and Accounting)

Enclosures (2):
copy of this letter
copy for section 6110 purposes