Converted biomass facility qualifies as five-year property

Plain-English summary

A taxpayer converted a former coal-fired generating plant to burn biomass and restructured its ownership to satisfy federal energy rules for a qualifying small power production facility. FERC's Office of General Counsel concluded that the facility met the ownership and other requirements that applied on September 1, 1986. The taxpayer also represented that the facility was biomass property described in former section 48(l)(15). On those premises, the IRS ruled that the facility qualified as five-year property under section 168(e)(3)(B)(vi)(II). The ruling did not decide the facility's tax ownership, depreciable interest, or whether it actually met the biomass-property requirement.

Ruling snapshot

• Question: Whether the converted biomass generating facility qualified as five-year property
• Outcome: Approved, subject to the represented biomass status and FERC qualification
• Key authorities: I.R.C. §§ 48(l)(15), 168(e)(3)(B)(vi)(II); Federal Power Act § 3(17)(C)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201539024                                             Third Party Communication: None
Release Date: 9/25/2015                                       Date of Communication: Not Applicable
Index Number: 168.20-01
                                                              Person To Contact:
-------------------------------------------------------       ------------------, ID No. ------------------
-------------------------------                               Telephone Number:
-------------------------                                     ----------------------
 -------------------------------------                        Refer Reply To:
                                                              CC:ITA:7
                                                              PLR-146801-14
                                                              Date:
                                                              June 23, 2015

Re: Request for Private Letter Ruling Regarding the Application of Section
168(e)(3)(B)(vi)(II) of the Internal Revenue Code

Taxpayer       =   --------------------------------------------------------------
A              =   ---------------------------------------------------------
B              =   -------------------------------
C              =   -------------
D              =   ----
E              =   -------------------------------------------------------------
F              =   ---------------------------
G              =   -------
H              =   -------
I              =   -------
J              =   -------
K              =   ----------
L              =   ----------------------------------------------
M              =   --------------
N              =   ---------------------------
O              =   --------------
P              =   -----------------------------
Q              =   -------
R              =   -------------------------
S              =   ---------------------------

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

       This letter responds to a letter dated December 23, 2014, submitted on behalf of
Taxpayer requesting a letter ruling regarding the application of § 168(e)(3)(B)(vi)(II) of
the Internal Revenue Code (“Code”) to a specific electric generation facility (“Facility”)
that has converted from burning coal to burning biomass as fuel.

FACTS
PLR-146801-14                                  2


       Taxpayer represents that the facts are as follows:

       Taxpayer is incorporated under the laws of C. Taxpayer is a wholly owned
subsidiary of A, which is also a C corporation. Taxpayer is included in a consolidated
federal income tax return of which A is the common parent. The consolidated group
also includes B, a regulated electric public utility. Taxpayer uses an overall accrual
method of accounting and reports income on a calendar year-end basis.

        Taxpayer provides private utility-type services to customers in D states.
Taxpayer focuses on developing, acquiring, building, owning, and operating projects for
energy-intensive customers in E businesses. Among Taxpayer’s business lines is the
provision of biomass-generated electricity to utilities to help them meet local renewable
portfolio standards. The rates Taxpayer charges for the provision of this electricity is
negotiated with the counterparty and is not established by a governmental commission
or agency based on Taxpayer’s costs of producing the electricity.

        The Facility is an electric generating plant located in F. The Facility was first
placed in service in G as a coal-fired electric generation plant. It ceased operations in
H. Taxpayer purchased the Facility in I (the year after H) with plans to convert it to
using biomass (specifically, wood waste) as its fuel. This conversion was completed
and the Facility was placed in service in J. The Facility has a capacity of approximately
K and sells all of its output pursuant to a long-term power purchase agreement to L, a M
electric utility company.

       The Facility is owned by N, a O limited liability company. All of the membership
interests in N were, prior to the ownership restructuring described below, owned by P, a
limited liability company. At that time, N was a disregarded entity for tax purposes. All
of the membership interests in P were, and still are, owned by Taxpayer. P was, and
remains, a disregarded entity for tax purposes. Thus, up until the ownership
restructuring described below, Taxpayer was deemed to own the Facility for tax
purposes.

         Pursuant to the Federal Energy Regulatory Commission (“FERC”) regulations
under § 3(17)(C) of the Federal Power Act (16 U.S.C. 796(17)(C)) (“FPA”) as in effect
on September 1, 1986, status as a qualifying small power production facility (“QSPPF”)
was unavailable to any facility more than fifty percent of which was owned by an electric
utility or any affiliate of an electric utility. Because B was an affiliate of N’s and because
N owned all of the Facility, under the FERC’s regulations, an electric utility was deemed
to own one hundred percent of the Facility. The Facility could not, therefore, qualify as
a QSPPF under § 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect on
September 1, 1986, before the ownership restructuring described below.
PLR-146801-14                                3

       In Q (the year before the Facility was placed in service in J), the ownership of N
was restructured. The purpose of the restructuring was solely to enable the Facility to
qualify as a QSPPF under § 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect on
September 1, 1986. The transaction had no purpose other than such qualification.

       The ownership restructuring took the form of a transfer by P of part of its
ownership in N to R, an unrelated entity that was not an electric utility. Specifically, P
transferred a percentage necessary to reduce its ownership in N to a level below the
threshold established by FERC for QSPPF qualification under § 3(17)(C) of the FPA (16
U.S.C. 796(17)(C)), as in effect on September 1, 1986, (i.e., equal to or less than fifty
percent). The restructuring was designed to be effective under FERC rules, concepts,
and precedents. It was not designed to effect a transfer of ownership under the
applicable tax rules, concepts and precedents. In fact, Taxpayer believes that, applying
the general tax principles applicable to determining ownership of an asset, P did not
transfer any of its interest in N for tax purposes. Thus, for tax purposes, N remains a
disregarded entity wholly owned by P after the ownership restructuring of N described in
this paragraph. Further, Taxpayer represents that, for federal income tax purposes, it is
deemed to own the Facility after such ownership restructuring.

        Taxpayer requested and received an opinion letter dated S, from the FERC’s
Office of the General Counsel addressing the question of whether N meets the
requirements to be a QSPPF within the meaning of § 3(17)(C) of the FPA (16 U.S.C.
796(17)(C)), as in effect on September 1, 1986. The opinion letter recites in detail the
facts provided by Taxpayer, including the ownership restructuring of N. The opinion
letter further concludes that, after the ownership restructuring of N: (1) the Facility
satisfies the ownership requirements that were in effect on September 1, 1986, to be a
QSPPF; (2) the Facility satisfies the other requirements to be a QSPPF, which are the
same requirements now as were in effect on September 1, 1986; and (3) N meets the
requirements to be a QSPPF within the meaning of § 3(17)(C) of the FPA (16 U.S.C.
796(17)(C)), as in effect on September 1, 1986.

       Taxpayer represents that the Facility is property described in § 48(l)(15) of the
Code (as in effect on the day before the enactment of the Revenue Reconciliation Act of
1990).

RULING REQUESTED

       Taxpayer requests a ruling that since the FERC’s Office of the General Counsel
has concluded that the Facility meets the qualifications to be a QSPPF within the
meaning of § 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect on September 1,
1986 (including ownership status ascertained under the FERC, not tax, rules and
concepts), so long as the Facility is property described in paragraph (15) of § 48(l) of
the Code (as in effect on the day before the enactment of the Revenue Reconciliation
PLR-146801-14                                 4

Act of 1990), the Facility qualifies as 5-year property under § 168(e)(3)(B)(vi)(II) of the
Code.

LAW AND ANALYSIS

      Section 168(e)(3)(B)(vi)(II) of the Code provides that 5-year property includes
any property which is described in § 48(l)(15) of the Code (as in effect on the day before
the enactment of the Revenue Reconciliation Act of 1990) and is a QSPPF within the
meaning of § 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect on September 1,
1986.

       Section 48(l)(15) of the Code (as in effect on the day before the enactment of the
Revenue Reconciliation Act of 1990) defines biomass property. Taxpayer represents
that the Facility is property described in § 48(l)(15) of the Code (as in effect on the day
before the enactment of the Revenue Reconciliation Act of 1990). Therefore, the only
issue is whether the Facility is a QSPPF within the meaning of § 3(17)(C) of the FPA
(16 U.S.C. 796(17)(C)), as in effect on September 1, 1986.

        Section 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect on September 1,
1986, included, among other things, a requirement that a QSPPF had to be “owned by a
person not primarily engaged in the generation or sale of electric power (other than
electric power solely from cogeneration facilities or small power production facilities).”
That requirement, which was commonly known as the ownership requirement for
QSPPF status, was repealed by the Energy Policy Act of 2005.

       However, to qualify as 5-year property under § 168(e) of the Code,
§ 168(e)(3)(B)(vi)(II) of the Code clearly states that, among other things, the facility must
be a QSPPF within the meaning of § 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in
effect on September 1, 1986. Accordingly, the facility must meet, among other things,
the ownership requirement of § 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect
on September 1, 1986.

        An opinion letter dated S, from the FERC’s Office of the General Counsel
addressing the question of whether N, after its ownership restructuring, meets the
requirements to be a QSPPF within the meaning of § 3(17)(C) of the FPA (16 U.S.C.
796(17)(C)), as in effect on September 1, 1986, concludes that N meets the
requirements to be a QSPPF within the meaning of § 3(17)(C) of the FPA (16 U.S.C.
796(17)(C)), as in effect on September 1, 1986. While the opinion letter states that N
instead of the Facility meets the requirements to be a QSPPF within the meaning of §
3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect on September 1, 1986, when
read in its entirety, the FERC Office of the General Counsel was referring to the Facility.
Immediately before that statement, the FERC Office of the General Counsel concludes
that, after the ownership restructuring of N, the Facility: (1) satisfies the ownership
requirements that were in effect on September 1, 1986, to be a QSPPF; and (2)
PLR-146801-14                                 5

satisfies the other requirements to be a QSPPF, which are the same requirements now
as were in effect on September 1, 1986. Accordingly, for purposes of §
168(e)(3)(B)(vi)(II) of the Code, we will follow FERC’s conclusion that the Facility after
the ownership restructuring of N meets the requirements to be a QSPPF within the
meaning of § 3(17)(C) of the FPA (16 U.S.C. 796(17)(C)), as in effect on September 1,
1986.


CONCLUSION

        Based solely on Taxpayer’s representations and on the above-mentioned opinion
letter dated S, from the FERC’s Office of the General Counsel, we conclude that:

       Since the FERC’s Office of the General Counsel has concluded that the Facility
meets the requirements to be a QSPPF within the meaning of § 3(17)(C) of the FPA (16
U.S.C. 796(17)(C)), as in effect on September 1, 1986 (including ownership status
ascertained under the FERC, not tax, rules and concepts), so long as the Facility is
property described in paragraph (15) of § 48(l) of the Code (as in effect on the day
before the enactment of the Revenue Reconciliation Act of 1990), the Facility qualifies
as 5-year property under § 168(e)(3)(B)(vi)(II) of the Code.

        Except as specifically set forth above, no opinion is expressed or implied
concerning the federal income tax consequences of the facts described above under
any other provisions of the Code (including other subsections of § 168 of the Code).
Specifically, no opinion is expressed or implied on: (i) what entity is the owner of, or has
the depreciable interest in, the Facility for federal income tax purposes; (ii) whether the
Facility is property described in § 48(l)(15) of the Code (as in effect on the day before
the enactment of the Revenue Reconciliation Act of 1990); (iii) whether N is wholly
owned by P for federal income tax purposes after the ownership restructuring of N
previously described in this letter ruling; and (iv) the tax consequences under § 168 if
the Facility does not meet the ownership requirement in § 3(17)(C) of the FPA (16
U.S.C. 796(17)(C)), as in effect on September 1, 1986, during J and subsequent taxable
years.

      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 Industry Director, Large Business & International Division (LB&I).
PLR-146801-14                                6


      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.


                                                 Sincerely,

                                                 Kathleen Reed

                                                 Kathleen Reed
                                                 Branch Chief, Branch 7
                                                 Office of Associate Chief Counsel
                                                 (Income Tax and Accounting)


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