2015 IRS Business Plan
An IRS business plan showing what guidance the US tax agency plans to issue by next June lists several items of interest to the project finance community.
The plan was released in late August.
The Internal Revenue Service said it hopes to issue “regulations on prepaid forward contracts.” This could affect the pattern in which income must be reported under prepaid power purchase agreements.
In January 2008, the agency issued a revenue ruling analyzing the tax treatment for a forward contract to buy euros. The holder paid $100 on January 1, 2007, at a time when $100 was worth €75, for a contract requiring delivery of €75 plus a return three years later on January 1, 2010. The forward contract paid the holder the dollar equivalent of €75 plus a compound stated rate of return, with conversion into dollars occurring at the exchange rate on January 1, 2010. The IRS said the instrument was in substance a euro-denominated loan by the holder to the issuer. The IRS said in a separate notice the same day that it is studying the tax treatment of prepaid forward contracts, and it asked for comments on a list of questions, including whether the seller under a prepaid forward contract that is in fact a forward sale, rather than a loan, should be required to accrue income during the term of the forward contract and, if so, how the amount of income each year should be calculated.
The IRS said in the new business plan that it will issue “guidance on the energy credit under section 48.” Jaime Park, chief of the IRS branch that handles energy credits, said the guidance will address performance and quality standards for small wind turbines.
The IRS said it will issue “guidance under section 7704(d)(1)(E) regarding qualifying income for publicly traded partnerships.” This is a place-holder for guidance about master limited partnerships or MLPs. (See the March 2006 NewsWire survey article about MLPs.)
The IRS has had a hold since February 2014 on private letter rulings about whether some businesses can be organized as MLPs. There is a great deal of interest in the market about whether paper and packaging companies can put part of their businesses in MLPs, thus avoiding a corporate-level tax on earnings from the businesses. The hold does not appear to have affected rulings in this area.
An “integrally related” or “hamburger stand” issue is holding up some other rulings. The boom in US oil and gas production has led to a string of private letter ruling requests about whether companies that provide services to oil and gas producers can organize as MLPs. The key to qualifying as an MLP is to have at least 90% of the gross income the MLP earns each year be from passive sources — like interest and dividends — or from “exploration, development, mining or production, processing, refining or transportation . . . or the marketing of any mineral or natural resource.” A company engaged directly oil or gas production qualifies.
Does a company providing services to an oil or gas producer qualify? For example, would a hamburger stand set up next to a gas field to feed workers involved in gas production qualify? The IRS has been issuing private rulings that allow income from some such services to be treated as good income for an MLP. It put a hold on further rulings while it figures out where to draw the line.
Curt Wilson, the IRS associate chief counsel with responsibility for the area, said at an oil and gas conference in New York in early November that the IRS has some “tentative ideas about where we are headed” on a standard that would allow the agency to lift the IRS rulings freeze. “The next step for us to do is to put that on paper and then circulate that paper and get buy-in from all the people who have a say in this.” He said he would like to reopen the rulings window once there is internal agreement on concepts without waiting for formal guidance. He said rulings are still being issued as long as they do not raise the integrally related issue.
The IRS also hopes to issue guidance on whether property held simultaneously for sale and lease can be depreciated. Equipment that a company holds for sale is considered inventory. The company cannot normally place such property in service or depreciate it. Equipment that a leasing company holds out for lease is in service and can be depreciated.
The agency hopes to issue “regulations under section 267 regarding the application of § 1.267(b)-1(b) to partners and partnerships.” Many renewable energy projects are owned by partnerships. The partnerships usually show tax losses due to depreciation for the first several years. US tax rules prevent the partnership from claiming net losses if electricity from the project is sold to a related party. A taxpayer cannot sell to an affiliate and claim a loss on the sale. As a consequence, most tax equity partnership documents make the partners covenant that they will not be related to the offtaker for the electricity. Denial of loss deductions when there are related-party sales occurs mainly through IRS regulations under section 707(b) of the US tax code. Any new regulations that the IRS issues under section 267 to deal with losses in a partnership setting will be read with interest by tax counsel for any possible application to renewable energy deals.
Finally, the agency hopes to issue regulations to address how gain should be reported in sales where part of the purchase price is contingent on
— contributed by Keith Martin in Washington