Reflective roof increment qualified as solar energy property

Plain-English summary

A company planned to install bifacial solar panels that generate electricity from light striking both sides of each panel. It also planned a highly reflective roof surface that would direct additional sunlight to the underside of the panels and improve their output. The IRS ruled that the reflective roof, when installed with the solar system, was equipment and material that directly used solar energy to generate electricity. Only the roof cost above the cost of a locally permitted non-reflective replacement roof qualified as energy property under section 48. The IRS did not decide whether the company otherwise qualified for the investment credit.

Ruling snapshot

• Question: Did the added cost of a reflective roof supporting bifacial solar panels qualify as solar energy property?
• Outcome: Approved, limited to the incremental cost above a compliant non-reflective roof
• Key authorities: IRC § 48; Treas. Reg. § 1.48-9

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201523014 [Third Party Communication:
Release Date: 6/5/2015 Date of Communication: Month DD, YYYY]
Index Number: 48.00-00
Person To Contact:
--------------------------- ------------------------, ID No. 0219694
------------------------------ Telephone Number:
----------------------- ----------------------
------------------------------------ Refer Reply To:

                                                            PLR-140237-14
                                                            Date: Feb 26, 2015

Legend

Taxpayer = ------------------------------
------------------------
Developer = -------------------------------
State = ---------------------
A = ----
B = -----
C = ----
Product = ----------------------------------

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

   This letter is in response to your ruling request, submitted by your authorized

representative, concerning the application of section 48 of the Internal Revenue Code
(the “Code”) to the facts described below.

FACTS

   The facts are represented by Taxpayer to be as follows: Taxpayer is a privately-

held limited liability company organized in State. Taxpayer uses a calendar taxable
year accounting period and the cash method of accounting for maintaining its
accounting books and records and filing its federal income tax return.

   In order to control its electricity costs, Taxpayer is considering the purchase of an

A kilowatt (kW) solar photovoltaic generation system manufactured by Developer. The
system consists of B panels of photovoltaic cells, electrical wiring, associated inverters
and control equipment, and mounting hardware to allow the panels to be positioned
above the surface of the roof of Taxpayer’s building in State (“the System”).
PLR-140237-14 2

    The System relies upon highly efficient silicon cells that convert to energy the

light that strikes both the front and the back of the bifacial panels. As a result of the
System’s bifacial panels, the System is able to generate electrical energy using not only
sunlight that directly strikes the panels, but also sunlight that is reflected from the
surface on which the panels are installed and other scattered light from ground and
ambient sources. Developer’s solar panels can produce approximately 30 percent more
energy than traditional monofacial panels when installed in an optimal configuration
over a highly-reflective surface. Additionally Developer’s panel design can
accommodate framed or frameless panels and has a panel backside that can be
covered by a transparent backsheet or glass. In addition to permitting sunlight to shine
through the module, the space between the cells in each Developer module has also
been designed to lower the operating temperature of each module, thereby increasing
the operating efficiency of Developer’s panels.

    Currently, the most effective reflective surfaces available for rooftop installations

of Developer’s photovoltaic generation systems are special-purpose impermeable
membranes that are affixed to the roof of a building. These reflective membranes are
manufactured by a number of suppliers, but not by Developer. The reflectivity of these
special-purpose membranes is generally established through certifications by industry-
rating institutions, such as the Cool Roof Rating Council (“CRRC”) or the ENERGY
STAR rating program administered by the Department of Energy and the Environmental
Protection Agency. CRRC, in particular, publishes radiative data on roof surfaces. The
reflectivity of a surface to sunlight is measured as the “albedo” of the surface, with a
perfectly reflective surface having an albedo of 100 percent and a perfectly non-
reflective surface having an albedo of 0 percent. Developer recommends that its panels
be installed over CRRC- or ENERGY STAR-compliant (i.e., high-albedo) roof
membranes that have an albedo of at least 74 percent in order to capture energy
efficiencies provided by the bifacial design of its panels.

    Thus, in connection with the installation of the System, Taxpayer anticipates

installing a highly reflective impermeable Product thermoplastic polyolefin layer (“TPO”),
custom TPO flashings, a high-density cover board, and polyisocyanurate (polyISO)
support using the necessary anchors, fasteners, and bonding adhesive (together, the
“Reflective Roof”). The newly-installed Reflective Roof is estimated to have a reflectivity
factor, or albedo, of 84 percent. The components of the Reflective Roof other than the
TPO membrane improve the long-term reflectivity of the Reflective Roof Surface by
minimizing the extent to which the TPO membrane is wrinkled, torn, bent, curled, or
otherwise damaged and limiting the accumulation of water, dirt, and organic matter on
the roof. Additionally, the polyISO support that forms part of the Reflective Roof weighs
approximately C percent less than the insulation currently used in Taxpayer’s roof,
thereby allowing Developer to incorporate more panels into and increase the energy
output of the System without violating State roofing standards. Taxpayer has received
estimates from Developer indicating that, if the Reflective Roof is installed, a significant
PLR-140237-14 3

amount of electrical energy will be generated using sunlight reflected from the roof of
Taxpayer’s manufacturing facilities.

   The System will cover 100 percent of the feasible space of the roof on which

Developer’s panels will be installed, taking into account local building code restrictions,
cost efficiency, and the existing features of the roof such as fans, parapets, vents, and
smokestacks. The Reflective Roof does not include the portions of the existing roof that
will not be replaced, which are the roof deck, any structural support for the roof deck,
and any features of the roof not directly related to establishing, improving, and
maintaining the reflectivity of the membrane.

RULING REQUESTED

    The Reflective Roof, when installed in connection with the System, constitutes

energy property under section 48 of the Code to the extent that the cost of the
Reflective Roof Surface exceeds the cost of reroofing Taxpayer’s building with a non-
reflective roof that is allowed by local law.

LAW AND ANALYSIS

  Section 48(a)(3)(A)(i) of the Code provides that energy property includes any

equipment which uses solar energy to generate electricity, to heat or cool (or provide
hot water for use in) a structure, or to provide solar process heat, excepting property
used to generate energy for the purposes of heating a swimming pool.

   Treas. Reg. § 1.48-9(a)(2) provides that in order to qualify as “energy property”

under section 48 of the Code, property must be depreciable property with an estimated
useful life when placed in service of at least three years and constructed after certain
dates.

  Treas. Reg. § 1.48-9(d)(1) provides as follows:

         (d) Solar energy property—(1) In general.                Energy
         property includes solar energy property. The term ‘solar
         energy property’ includes equipment and materials (and
         parts related to the functioning of such equipment) that use
         solar energy directly to (i) generate electricity, (ii) heat or
         cool a building or structure, or (iii) provide hot water for use
         within a building or structure. Generally, those functions are
         accomplished through the use of equipment such as
         collectors (to absorb sunlight and create hot liquids or air),
         storage tanks (to store hot liquids), rockbeds (to store hot
         air), thermostats (to activate pumps or fans which circulate
         the hot liquids or air), and heat exchangers (to utilize hot
         liquids or air to create hot air or water). Property that uses,

PLR-140237-14 4

         as an energy source, fuel or energy derived indirectly from
         solar energy, such as ocean thermal energy, fossil fuel, or
         wood, is not considered solar energy property.

    Treas. Reg. § 1.48-9(d)(2) specifically excludes “passive solar systems” from

qualification as energy property. A passive solar system is defined as a “system [that] is
based on the use of conductive, convective, or radiant energy transfer.”

   Treas. Reg. § 1.48-9(d)(3) provides, in part, that solar energy property includes

equipment that uses solar energy to generate electricity, and includes storage devices,
power conditioning equipment, transfer equipment, and parts related to the functioning
of those items. Such property, however, does not include any equipment that transmits
or uses the electricity generated.

   Treas. Reg. § 1.48-9(k) provides, in part, that the term “incremental cost” means

the excess of the total cost of equipment over the amount that would have been
expended for the equipment if the equipment were not used for qualifying purposes.
Only the incremental cost of the types of property described in Treas. Reg. § 1.48-
9(c)(6)(i) (alternative energy property that constitutes modification equipment), Treas.
Reg. § 1.48-9(c)(8) (pollution control property), Treas. Reg. § 1.48-9(f) (specially
defined energy property), and Treas. Reg. § 1.48-9(g)(7) (recycling property that
replaces and increases existing recycling capacity) constitutes energy property.

    The System generates electricity from sunlight. Because of the bifacial design of

the photovoltaic cells, half of the aggregate generating surface of the panels is oriented
toward the underside of each panel. The design of the panels allows sunlight to shine
through the clear spaces of the module and reflect back upon the underside of the
panels from the surface on which the panels are installed. Thus, the panels generate
electricity using sunlight reflected from the surface on which the panels rest.
PLR-140237-14 5

    When installed upon a highly reflective surface such as the Reflective Roof, the

System generates significant amounts of electricity from reflected sunlight. Because the
Reflective Roof enables the generation of significant amounts of electricity from
reflected sunlight, the Reflective Roof constitutes equipment that uses solar energy to
generate electricity when installed in connection with the System. The Reflective Roof
also satisfies, when installed in connection with the System, the definition of energy
property under Treas. Reg. §§ 1.48-9(d)(1) and 1.48-9(d)(3) because the Reflective
Roof is part of the equipment and materials that use solar energy to directly generate
electricity.

   Accordingly, we conclude that the Reflective Roof, when installed in connection

with the System, constitutes energy property under section 48 of the Code to the extent
that the cost of the Reflective Roof exceeds the cost of reroofing Taxpayer’s building
with a non-reflective roof that is allowed by local law.

    Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed whether Taxpayer
qualifies for the investment credit under section 46 of the Code or whether the energy
property otherwise qualifies under section 48 of the Code.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

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

the Code provides that it may not be used or cited as precedent. We are sending a
copy of this letter ruling to the Industry Director.

                                  Sincerely,



                                  Peter C. Friedman
                                  Senior Technician Reviewer, Branch 6
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)