Several Tax Policy Issues

Several Tax Policy Issues

July 09, 2015 | By Keith Martin in Washington, DC

SEVERAL TAX POLICY ISSUES of interest to the infrastructure trade may be in play in the next IRS business plan.

The agency usually releases a list in August of subjects about which it plans to issue guidance over the next year. IRS plan years run from July 1 through June 30.

The Edison Electric Institute, the trade association for the regulated electric utilities, is asking the IRS to commit in the next plan to issue guidance about net metering and “buy all, sell all” arrangements.

In many states, utility customers with solar panels on their roofs can feed any excess electricity into the grid, causing their utility meters to run backwards. Utilities complain that this forces them to buy electricity at retail rates that they could buy in the wholesale market at lower cost. In a “buy all, sell all” arrangement, the customer is treated as if he sold all his output to the local utility and then bought back what he needs, even though the entire output may be used by the customer and there is never any physical delivery of electricity to the utility. The customer pays only his net utility bill to the utility. For example, Austin, Texas and Minnesota are experimenting with assigning a value to electricity that customers sell to the utility. In Austin, the customer sells all of his electricity in form to the local utility for what the local regulators have decided the electricity is worth, taking into account the social benefits of moving to renewable energy as well as costs, and the customer then buys back what he needs at the retail utility rate.

EEI wants the IRS to address whether solar customers engaging in net metering and “buy all, sell all” arrangements should be viewed for tax purposes as selling electricity to the utility so that they would have to report income from such sales. According to the trade association, “There is no specific authority that would render this exchange nontaxable, and other rules and theories for non-recognition are of dubious applicability.” The utilities also want to know whether they have to send customers Form 1099s at year end. Such forms could be required if customers received at least $600 in payments or bill credits that must be reported as taxable income.

EEI also asked the IRS to provide guidance about use of money in qualified funds set up to cover the decommissioning costs of nuclear power plants.

There are approximately 93 nuclear plants operating currently in the United States. They produce 19% of US electricity. Seventeen plants are in various stages of decommissioning.

The utilities are allowed by section 468A of the US tax code to deduct amounts they set aside in qualified funds to cover future decommissioning costs, but there are strict rules for spending from the funds. The utilities were holding more than $50 billion in such funds at the end of 2014.

The IRS position is that only “otherwise deductible” decommissioning costs can be paid out of a fund. EEI says various issues have come up about what this means. For example, nuclear plant operators have been making payments to the US Department of Energy since 1983 for the US government to dispose of their spent nuclear fuel, but disagreements in Congress about where to put the fuel have delayed disposal. The government was supposed to have taken the spent fuel no later than January 31, 1998. Many companies have made claims against the government for their incremental costs. Some have won lawsuits against the government. This raises questions about whether some decom-missioning-related costs are “otherwise deduct-ible” because taxpayers cannot deduct amounts for which they have a reasonable prospect of recovery.

The National Association of Bond Lawyers is asking the IRS to update guidelines it published in 1997 for management contracts. This would affect private contractors who manage schools, roads, hospitals and other public facilities that were financed partly with tax-exempt bonds. States and cities must be careful not to allow more than 10% “private business use” of such facilities in order to retain the tax-exempt status for the bonds. Private management contracts can be considered private use of the facilities. The current rules for such contracts are in Revenue Procedure 97-14.

Keith Martin in Washington