A municipal utility can own part of a power plant through a partnership with a private developer and issue tax-exempt bonds to buy its interest in the partnership, the IRS said.

The bond proceeds will not be considered put partly to “private business use.”

The IRS made the statement in a private letter ruling that it made public in late July. The ruling is Private Letter Ruling 201630011.

IRS regulations make clear that a municipality can issue tax-exempt debt to finance its share of a power plant in which it owns an undivided interest as a tenant in common. A power plant is owned this way if the parties elect out of partnership treatment for the entity that owns the project and each takes its share of the electricity in kind.

The new ruling addresses a case where the entity remains a partnership. The IRS said that works, too.

Anyone issuing tax-exempt bonds must be careful not to allow more than 10% “private business use” of the assets or the tax exemption on the bonds will be lost. The reason the ruling was issued is the municipality must have felt it was not clear whether a power plant owned in partnership with a private party is put partly to private business use. The IRS also has rules for permissible terms in any contract that a private party has to manage the project to ensure that the arrangement does not slip into private business use.

The ruling involves a municipal authority that runs the electric, water and wastewater systems for a city. It issued bonds to acquire an interest in a power plant that was otherwise privately owned by a partnership.

Each partner, including the municipality, has a capital account — or claim on the project assets if the partnership were to unravel — equal to the fair market value of its interest in the project. The partnership allocates income and loss to the partners in a fixed ratio that is the same as their ownership percentages. The ownership percentages are the share of capacity belonging to each partner divided by total capacity.