A district cooling system, including underground pipes, can be depreciated over seven years, the IRS said.

A power company bought another company that owns a district cooling system in a large city. The system includes three plants for chilling water, a closed-loop system of underground pipes that run the water underneath a baseball stadium and downtown buildings and then back to the chillers to be re-chilled, and heat exchangers at each customer’s location to pull the cold temperature out of the water.

Equipment used to supply steam or water to customers must be depreciated over 20 years. Assets belonging to pipeline companies that transport gas, oil or other products to customers by pipeline are depreciated over 15 years. The IRS said the district cooling company is not in either business because it is not delivering steam or water to customers; the water is retained for use in the chillers.

The IRS also considered whether the underground pipes are part of the buildings to which they are connected. Buildings and similar “structural improvements” are depreciated over 39 years. However, it decided the pipes are equipment rather than buildings, even though the US Tax Court said in 1981 that a district cooling system that served a single apartment building was a structural component of the building. The Tax Court said the fact that the apartment building and the cooling system were owned by different taxpayers did not prevent it from being a structural
improvement. The IRS said this case is different because the cooling system serves multiple customers and none of the customers has a right to take ownership of the pipes after a default.

The ruling is Private Letter Ruling 201131010. The IRS made it public in August.

Keith Martin