Street Lights

Street Lights

September 15, 2010

Street lights can be depreciated over seven years, the US Tax Court said in late July.

The decision is important because US tax rules classify equipment for depreciation purposes according to the industry or activity in which it is primarily used.

The court let two utilities in this case — PP&L and Entergy — treat street lights as a separate business and depreciate equipment used in that business more rapidly than the other equipment each uses in its main utility business.

PP&L, an electric utility in eastern Pennsylvania, had been depreciating the street lights it owns over 20 years by putting them in depreciation class 48.14, just like the rest of its power lines, poles and other electric distribution and transmission equipment. PP&L filed a form with the IRS in 1997 to let the tax agency know it was changing the depreciation to seven years. It claimed an additional $20 million in depreciation both in 1997 and as an adjustment to the depreciation it claimed in prior years.

The IRS said no. It argued that the street lights were part of PP&L’s business of providing electricity to customers.

The US Tax Court disagreed. It said this was a separate business of lighting streets and, since the IRS had not set up a separate class in its depreciation tables for that business, the utility was free to depreciate the street lights over seven years. Assets for which the IRS has not established a separate industry class are depreciated over seven years.

The case is PPL Corp. v. Commissioner. The Tax Court released its decision in the case on July 28. It reached the same decision in a separate case involving Entergy called Entergy Corporation v. Commissioner.

Both utilities are also arguing with the IRS about their ability to credit windfall profits taxes they had to pay in the United Kingdom in the late 1990’s against their tax bills in the United States. Both bought electric utilities in Britain in the 1990’s. Both unexpectedly had to pay a large windfall profits tax after the government imposed such a tax soon after they bought the utilities. The Tax Court said the taxes were creditable as the NewsWire went to press.

Keith Martin