Temporary grid link preserves solar placed-in-service status

Plain-English summary

A renewable-energy developer expected two solar projects to be complete and operating during the relevant year, but the utility might not finish one project's permanent grid connection on time. The developer proposed temporarily routing that project's power through the other project's interconnection facilities while rotating circuits at both projects. The IRS ruled that the temporary arrangement and reduced output would not by themselves prevent either project from being placed in service if both operated regularly as represented. The ruling was conditioned on both projects otherwise satisfying the standard placed-in-service factors before January 1, 2017, and did not determine their actual placed-in-service dates.

Ruling snapshot

• Question: Would a temporary shared grid connection and rotating circuit use prevent either solar project from being placed in service during the year?
• Outcome: Approved, subject to regular operation, the represented circuit rotation, and satisfaction of the other placed-in-service factors.
• Key authorities: IRC §§ 38, 46, 48, 167, and 168; Treas. Reg. §§ 1.46-3, 1.48-9, and 1.167(a)-11; Rev. Rul. 76-256

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201611011                                              Third Party Communication: None
Release Date: 3/11/2016                                        Date of Communication: Not Applicable
Index Number: 48.00-00
                                                               Person To Contact:
----------------------                                         -------------------------, ID No. -----------------
-----------------------                                        -----------------------------------------------------
---------------------                                          Telephone Number:
----------------------------------------------                 ---------------------
----------------------------------------                       Refer Reply To:
                                                               CC:PSI:B06
                                                               PLR-124984-15
                                                               Date:
                                                               December 10, 2015
Re: Request for Private Letter Ruling under Sections 38, 46, 48, 167, and 168

LEGEND
Taxpayer                   =        -----------------------------------------------
Sub 1                      =        --------------------------------------------------------------------
Sub 2                      =        ---------------------------------------------------------------
Member                     =        -----------------------------------------------------------
Holdco                     =        ---------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Project Company A =                 ------------------------------------------------------------
Project Company B =                 ------------------------------------------------------------
State                      =        -------------
Location                   =        ------------------------
Project A                  =        -------------
Project B                  =        -------------
Utility                    =        ---------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
a                          =        ------
b                          =        ------
c                          =        --------
d                          =        ------
e                          =        ------
f                          =        ------
g                          =        ---
h                          =        -----
i                          =        ---
Year                       =        -------
Date 1                     =        ----------------------
Date 2                     =        ---------------------------
Date 3                     =        --------------------------

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

PLR-124984-15                                   2

This letter responds to a letter dated July 21, 2015, and supplemental
correspondence, submitted by Taxpayer requesting a private letter ruling that certain
circumstances will not prevent the Projects from being placed in service in Year for
purposes of sections 38, 46, 48, 167, and 168 of the Internal Revenue Code.

                                            FACTS

Taxpayer represents that the facts relating to its request are as follows:

Taxpayer, a State corporation, is a developer and seller of renewable energy
solutions, an owner and operator of clean power generation assets, and a developer,
manufacturer, and seller of components used in the renewable energy industry.
Taxpayer is developing and owns several solar photovoltaic (PV) power generation
facilities, directly and indirectly through subsidiaries.

Taxpayer wholly owns Sub 1, a State corporation. Sub 1 wholly owns Sub 2, a
State corporation. Taxpayer, Sub 1 and Sub 2 are members of an affiliated group of
corporations that files its tax returns on a consolidated basis with Taxpayer filing as the
common parent. Taxpayer uses the accrual method of accounting and its taxable year
is the calendar year.

Sub 2 wholly owns Member, a State limited liability company, which is
disregarded for Federal tax purposes. Member wholly owns Holdco, a State limited
liability company, which is disregarded for Federal tax purposes. Holdco wholly owns
Project Company A and Project Company B, which are State limited liability companies
that are disregarded for Federal tax purposes. It is expected that before the end of
Year, a membership interest in Holdco will be sold to an investor, resulting in Holdco
being classified as a partnership for federal income tax purposes after such transfer.

Project Company A is developing and owns a a megawatt nameplate capacity
solar PV power generation facility sited near Location known as Project A. Project
Company B is developing and owns a b megawatt nameplate capacity solar PV power
generation facility also sited near Location known as Project B (“Project A” and “Project
B” referred to collectively as “the Projects”).

The main components of Project A include (i) two solar panel PV circuits, each of
which is comprised of direct current PV solar panel blocks (consisting of solar panel
modules mounted on a single-axis tracking system), c megawatt alternating current
inverter stations, and a medium voltage step-up pad mount transformer (each a “Project
A Circuit”); and (ii) the electrical gathering and transmission facilities, including electrical
substations. One Project A Circuit has a d megawatt nameplate capacity and the other
Project A Circuit has a e megawatt nameplate capacity.

PLR-124984-15                                   3

The main components of Project B include (i) two solar panel PV circuits, each of
which is comprised of direct current PV solar panel blocks (consisting of solar panel
modules mounted on a single-axis tracking system), c megawatt alternating current
inverter stations, and a medium voltage step-up pad mount transformer (each a “Project
B Circuit”); and (ii) the electrical gathering and transmission facilities, including electrical
substations. One Project B Circuit has a e megawatt nameplate capacity and the other
Project B Circuit has a f megawatt nameplate capacity.

It is expected that before the end of Year, physical construction will be completed
on each Project, all of the components will have been commissioned and accepted, a
final commissioning certificate will have been issued for each Project as a whole, each
Project Company will have all the permits and licenses needed to operate the applicable
Project, both Projects will be synchronized to the power grid (grid), and legal title and
control over each Project will be conveyed to the applicable Project Company, and the
Projects will be transmitting energy on a regular and routine basis.

The electricity generated by Project A will be connected to the grid over
interconnection facilities (the “Project A Interconnection Facilities”) connected to
transmission facilities owned by Utility. The electricity generated by Project B will be
connected to the grid over interconnection facilities (the “Project B Interconnection
Facilities”) connected to transmission facilities owned by Utility. Utility is solely
responsible for the construction of both the Project A Interconnection Facilities and the
Project B Interconnection Facilities.

The Project A Interconnection Facilities are scheduled to be completed by Utility
by Date 1 and Taxpayer expects that this schedule will be met. The Project B
Interconnection Facilities are scheduled to be completed by Utility by Date 2 but
Taxpayer is concerned that this schedule will not be met. In such circumstances,
Taxpayer will arrange to connect Project B to the grid through a temporary line
connecting Project B to the Project A Interconnection Facilities (the “T-Line”).

The T-Line arrangement will allow for up to d megawatts of electrical power from
Project B to be transmitted to the Project A Interconnection Facilities. Under the T-Line
arrangement, up to g megawatts of combined electrical power from Project A and
Project B could be transmitted to the grid through the Project A Interconnection
Facilities. Production at the two Projects will have to be coordinated to ensure that the
combined limit of g megawatts from the Projects is observed. The T-Line will remain in
place for an indefinite period until after the Project B Interconnection Facilities are
completed.

Prior to initiating the T-Line arrangement, it is expected that Project A will operate
at h% capacity (on both Project A Circuits) for at least one week. In the T-Line
arrangement, Project Company A will rotate the use of the two Project A Circuits
periodically over approximately one week periods, such that each Project A Circuit will

PLR-124984-15                                4

alternately be available to transmit up to h% of such Project A Circuit’s capacity. Project
Company A will rotate the Project A Circuits across the T-Line so that each Project A
Circuit is operating a reasonably consistent number of hours overall. This will allow
Project B to transmit up to either e or f megawatts, depending on which Project B Circuit
is operating, to the Project A Interconnection Facilities over the T-Line. Project
Company B will rotate the use of the two Project B Circuits periodically over
approximately one week periods, such that each Project B Circuit will alternately be
available to transmit up to h% of such Project B Circuit’s capacity. Project B Company
will rotate the Project B Circuits across the T-Line so that each Project B Circuit is
operating a reasonably consistent number of hours overall.

                                 RULING REQUESTED

Taxpayer requests the following rulings:

1) Project B will not be precluded from being in placed service in Year for federal
   income tax purposes of sections 38, 46, 48, 167, and 168, even if the permanent
   Project B Interconnection Facilities are not completed in Year, as long as Project
   Company B rotates Project B Circuit usage across the T-Line so that each Project B
   Circuit, and thus Project B is operating on a regular basis during Year.

2) Project A will not be precluded from being considered placed in service in Year for
   federal income tax purposes of sections 38, 46, 48, 167, and 168, even as a result of
   the T-Line arrangement, as long as Project A will operate at h% capacity (on both
   Project A Circuits) for at least one week prior to initiating the T-Line arrangement,
   and as long as Project Company A rotates Project A Circuit usage across the T-Line
   so that each Project A Circuit, and thus Project A is operating on a regular basis.

                                  LAW AND ANALYSIS

Section 48(a) of the Code provides for an energy credit equal to 30 percent of the
cost basis of qualifying energy property placed in service before January 1, 2017.

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

Section 1.48-9(a)(2) of the Income Tax Regulations provides that in order to
qualify as “energy property” under § 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.

Section 1.48-9(d)(1) of the regulations provides as follows:

PLR-124984-15                                  5

(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, 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.

Section 1.48-9(d)(3) of the regulations 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.

Section 167(a) provides a depreciation deduction for the exhaustion, wear and
tear, and obsolescence of property used in a trade or business or held for the
production of income. The depreciation deduction provided by § 167 for tangible
property placed in service after 1986 generally is determined under § 168. This section
prescribes two methods for determining depreciation allowances. One method is the
general depreciation system in § 168(a) and the other method is the alternative
depreciation system in § 168(g). Under either depreciation system, the depreciation
deduction is computed by using a prescribed depreciation method, recovery period, and
convention.

For purposes of the general depreciation system, the depreciation method,
recovery period, and convention are determined by the property’s classification under
§ 168(e). Section 168(e)(3)(B)(vi) provides that 5-year property includes any property
(modifying the language of § 48(a)(3)(A)(i)) which is equipment which uses solar or wind
energy to generate electricity.

Section 1.167(a)-11(e)(1)(i) of the Income Tax Regulations provides, in part, that
property is first placed in service when first placed in a condition or state of readiness
and availability for a specifically designed function. It further provides that the
provisions of § 1.46-3(d)(1)(ii) and (d)(2) generally apply for purposes of determining the
date on which property is placed in service.

In general, property is placed in service in the taxable year the property is placed
in a condition or state of readiness and availability for a specifically designed function.
See §§ 1.46-3(d)(1)(ii) and 1.167(a)-11(e)(1)(i). Placed in service is construed as

PLR-124984-15                                6

having the same meaning for purposes of the investment tax credit under § 46 and
depreciation under § 167. Section 1.46-3(d)(2) provides examples of when property is
in a condition of readiness and availability. One of those examples is equipment that is
acquired for a specifically assigned function and is operational but undergoing tests to
eliminate any defects. See also Rev. Rul. 79-40, 1979-1 C.B. 13, where machinery and
equipment were placed in service in the year critical tests (with appropriate materials)
and operational tests were completed. Another example in § 1.46-3(d)(2) involved
operational farm equipment acquired and placed in service in a taxable year even
though it was not practical to use such equipment for its specifically designed function in
the taxpayer’s business of farming until the following year.

Several Tax Court cases have addressed placed in service questions in the
context of electric power plants. In Olgethorpe Power Corp. v. Commissioner, T.C.
Memo. 1990-505, and Consumers Power Co. v. Commissioner, 89 T.C. 710 (1987),
facilities can be deemed placed in service upon sustained power generation near rated
capacity. However, if the facility operates on a regular basis but does not produce the
projected output, it may still be considered placed in service. Sealy Power, Ltd v.
Commissioner, 46 F.3d 382 (5th Cir. 1995), nonacq. 1995-2 C.B. 2. In the Action on
Decision for Sealy Power, the Service stated that at a minimum, the property would
have to have been in a state of readiness sufficient to produce electricity on a sustained
and reliable basis in commercial quantities. AOD 1995-010. Finally, in Rev. Rul. 84-85,
1984-1 C.B. 10, a solid waste facility that was experiencing operational problems such
that it was unable to operate at its rated capacity was nonetheless considered to have
been placed in service since it was being operated on a regular basis and saleable
steam was being produced. However, if a facility is merely operating on a test basis, it
is not placed in service until it is available for service on a regular basis. Consumers
Power v. Commissioner, 89 T.C. at 724.

The above-referenced cases and revenue rulings provide that the following are
common factors to be considered in determining placed in service dates for power
plants:

(1) approval of required licenses and permits;
(2) passage of control of the facility to taxpayer;
(3) completion of critical tests;
(4) commencement of daily or regular operations; and,
(5) synchronization into a power grid for generating electricity to produce income.

See generally, Rev. Rul. 76-256, 1976-2 C.B. 46, and Rev. Rul. 76-428, 1976-2 C.B.

47. These factors are not exclusive – they are used as guideposts to determine
whether, looking at the totality of the facts and circumstances, a facility has been placed
in service.

PLR-124984-15                                 7

The focus in determining a placed in service date is on ascertaining from the
relevant facts and circumstances the date the unit begins supplying product in such a
manner that it is routinely available and is consistent with the unit’s design. It is
necessary to examine relevant factors occurring both before and after the claimed
placed in service date so that the date can be verified. However, a facility does not
have to achieve full design output to be placed in service as long as it is in the process
of ramping up its production levels. Subject to exceptions that are beyond the
taxpayer’s control, the Service has generally required actual operational use as a
prerequisite for an asset to be deemed placed in service. See, e.g., SMC Corp. v.
United States, 675 F.2d 113 (6th Cir. 1982).

To be qualified energy property for purposes of the § 48 energy credit the facility
must be placed in service before January 1, 2017. Similarly, the period for tax
depreciation of 5-year property begins when the depreciable solar equipment is placed
in service. For purposes of the § 48 energy credit, a facility is placed in service when it
would be placed in service for depreciation purposes. Thus, the project is placed in
service when it is placed in a condition or state of readiness and availability for a
specifically assigned function, that is, to produce and deliver electricity generated from
solar energy.

Based on the facts provided and applying those facts to the factors delineated in
Rev. Rul. 76-256, the Taxpayer represents that, as of Date 3:

(1) all necessary permits and licenses with respect to each Project will have been
obtained;
(2) both Projects will have been synchronized to the power grid for its function of
generating electricity for production of income;
(3) the critical tests for the various components of each Project will have been
completed;
(4) the Projects will have been placed in the control of Taxpayer; and
(5) Taxpayer expects to have produced and sold more than a de minimis amount
of electricity generated by each Project.

Taxpayer represents that both Projects are scheduled to be in commercial
operation and generating electricity on a commercial basis during Year. The T-Line
arrangement will result in Project A being able to deliver a nameplate capacity of either
d or e megawatts, depending on which Project A Circuit is operating and Project B
being able to deliver up to either e or f megawatts, depending on which Project B Circuit
is operating, to market.

Daily operation at full rated capacity is not necessary to establish that the
Projects are placed in service. As long as the Projects are ready and available for use
and producing commercial output on a regular basis, operating at full rated capacity is
not necessary to establish that the Projects are placed in service. See Sealy Power,

PLR-124984-15                                8

supra. The curtailment of Project A’s and Project B’s output due to temporary capacity
limitations of Project B’s transmission system does not affect adversely the regular use
of, the availability for use and the production of commercial output by the Projects.

                                     CONCLUSIONS

Accordingly, based solely on the representations submitted by Taxpayer and the
applicable law discussion above, we conclude that Project A will not be precluded from
being in placed service in Year for purposes of sections 38, 46, 48, 167, and 168 if the
permanent interconnection facilities connecting Project B to the grid are not completed
until after Year if Project B is connected to the grid during Year via a T-Line to the
permanent interconnection facilities of Project A, so long as Project A will operate at h%
capacity (on both Project A Circuits) for at least one week prior to initiating the T-Line
arrangement, and as long as Project Company A rotates Project A Circuit usage across
the T-Line so that each Project A Circuit, and thus Project A is operating on a regular
basis. Similarly, we conclude that Project B will not be precluded from being in placed
service in Year for purposes of sections 38, 46, 48, 167, and 168 if the permanent
interconnection facilities connecting Project B to the grid are not completed until after
Year if Project B is connected to the grid during Year via a T-Line to the permanent
interconnection facilities of Project A, so long as Project Company B rotates Project B
Circuit usage across the T-Line so that each Project B Circuit, and thus Project B is
operating on a regular basis during Year.

The above ruling is expressly conditioned upon Taxpayer otherwise meeting the
placed in service factors of Rev. Rul. 76-256 for Project A and Project B before January
1, 2017, and upon the operation of Project A and Project B in accordance with
Taxpayer’s representations.

Except as specifically set forth above, we express no opinion concerning the
federal tax consequences of the facts described above under any other provisions of
the Code. Specifically, no opinion is expressed or implied as to the entity classification
of Taxpayer, Sub 1, Sub 2, Member, Holdco, Project Company A or Project Company
B, or on when Project A and Project B are actually placed in service by Taxpayer.

In accordance with the Power of Attorney on file with this office, we are sending a
copy of this letter to your authorized representative. A copy of this ruling must be
attached to any income tax return to which it is relevant. Alternatively, taxpayers filing
their returns electronically may satisfy this requirement by attaching a statement to their
return that provides the date and control number of the letter ruling.

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This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides 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 Associate Chief Counsel
                                            (Passthroughs and Special Industries)


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