A Power Contract

A Power Contract

September 01, 2012 | By Keith Martin in Washington, DC

A power contract ruling is withdrawn.

The Internal Revenue Service notified the taxpayer that it is withdrawing a private ruling it issued earlier this year that said a company buying an operating wind farm did not have to allocate part of the purchase price to a long-term power contract that came with the project. The power contract required the electricity sold under it come from the particular wind farm. The ruling analogized the situation to where someone buys a building in which tenants have leased office space. Part of the purchase price does not have to be allocated to the leases. Instead, the building comes subject to the leases; the leases are a burden on ownership. The purchase price is treated as a cost of the building.

An IRS branch chief said last April shortly after the PPA ruling was made public: “We have a saying [at the IRS] that you know you issued a bad ruling if 70 people ask you for a copy the next day.”

Before the ruling, most companies would have allocated value to the power contract to the extent it is “in the money,” meaning the contact entitles the holder to a higher electricity price than he can fetch currently in the market.

Keith Martin