Contract buyouts made cheaper

Contract buyouts made cheaper

November 01, 1998 | By Keith Martin in Washington, DC

The IRS told a utility in a private ruling recently that the utility can deduct part of the amount it paid a “qualifying facility” to buy back two power contracts and take title to the generating equipment. The IRS let the utility deduct the amount the parties allocated to the contract buyback as opposed to the power plant. The more quickly a utility can deduct buyout payments, the less expensive the buyout will seem after taxes are taken into account.

In a related development, the IRS national office told an agent to give in on the issue whether the proceeds from sale of a QF contract to a utility produced long-term capital gain for the QF. The agent was arguing for ordinary income. The national office said he had a “colorable argument,” but there were litigating hazards and it advised giving in, at least on a portion of the gain. The advice is in a 1992 “field service advice” that was just made public.

Keith Martin