TOLLING AGREEMENTS cannot be used to change how a power plant is depreciated, the IRS said.

A company that owned a combined-cycle gas-fired power plant tried to depreciate it over seven years using the 200% declining-balance method. Power plants that generate electricity primarily for sale using coal or gas in a combined-cycle process must be depreciated over 20 years using 150% declining- balance depreciation. The taxpayer argued on audit that the plant was not producing electricity primarily for sale; rather it earned fees under a tolling agreement with a gas company for converting gas into electricity. The IRS national office rejected the argument. It said the fact that ownership of the plant and the electricity are split into two different entities is irrelevant. The proper depreciation turns on the functional use of the plant. Its use is to generate electricity for sale, even if the taxpayer who owns the plant is not the one selling the electricity.

The IRS position is in a “technical advice memorandum,” or ruling by the national office to settle a dispute between a taxpayer and an IRS field agent. The number is TAM 200638024.The IRS made it public in September.