TURBINES that a power company ordered but no longer needs can sometimes be sold to a municipal utility without complications, the IRS said.

The key word is “sometimes.”

Municipal utilities must be careful when buying equipment not to buy any that has already been “used (or held for use)” by a private company “in connection with” a power plant or other “output facility.” The problem with buying such equipment is the municipal utility may have a hard time using funds borrowed in the tax-exempt bond market to make the purchase. Most municipal utility borrowing is in the tax-exempt bond market. It may be hard to segregate where a municipal utility’s money has come from.

Many power companies ordered more gas turbines in 2000 and 2001 from turbine manufacturers than they now need given the collapse in the merchant power market. These turbines have been put up for sale.

A municipal utility bought two such turbines. The turbines had never been used by the power company, and the IRS described them as “mass produced, off-the-shelf products that were not customized” for use by the power company. The company had never designated them for use at a particular project. The IRS said it reads the law to say that equipment might still be considered to have been “used (or held for use)” by a private company — even though the company never actually used it — if the equipment was manufactured specially for that private company. In other words, custom-built articles are off limits.

In this case, the IRS told the municipal utility that it could buy the turbines because they were not custom-built. It helped that the municipal utility made the purchase before the turbine manufacturer had even started physical assembly of the units at its plant. The ruling is Private Letter Ruling 200336019.

Keith Martin