Internal Revenue Bulletin: 2012-11
March 12, 2012
Table of Contents
This notice provides guidance in a question-and-answer format on tax-related issues involving cash payments for specified energy property in lieu of tax credits under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (ARRTA), Division B of Pub. L. No. 111-5, 123 Stat. 115 (2009) (Section 1603) as amended by Section 707 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312. The Department of the Treasury established an email address (1603Questions@do.treas.gov) for Section 1603 questions, to which taxpayers and their representatives submitted some of the questions contained in this notice. The Internal Revenue Service received additional questions by telephone and facsimile. Any guidance, documents, interpretations, or approvals issued by Treasury relating to the Section 1603 program are not precedent for the federal income tax treatment of specified energy property under sections 45 and 48 of the Internal Revenue Code.
Section 1603 of ARRTA directs the Secretary of the Treasury (Treasury) to provide cash payments (Section 1603 payments) to eligible persons who place in service specified energy property and apply for such payments. The purpose of Section 1603 is to reimburse eligible applicants for a portion of the expense of such property. Treasury issued a Guidance Document (Program Guidance) to establish procedures for applying for payments under the Section 1603 program and to clarify the eligibility requirements under the program. Additionally, Treasury provides guidance on the Section 1603 program website in the form of two documents with frequently asked questions and answers: Frequently Asked Questions (FAQ1) and Frequently Asked Questions Regarding the Beginning of Construction. Each of these documents is available at http://www.treasury.gov/recovery/1603.shtml.
Treasury will make Section 1603 payments to qualified applicants in an amount generally equal to 10 percent or 30 percent of the basis of the specified energy property, depending on the type of property. Eligibility for a Section 1603 payment generally requires applicants to place the property in service during 2009, 2010, or 2011. Property placed in service after 2011 may qualify for a Section 1603 payment if construction began on the property during 2009, 2010, or 2011 and the applicant places the property in service by the date on which the related tax credit expires (the credit termination date). The Program Guidance describes these dates and percentages more fully.
Treasury will review applications submitted through the Treasury website and make payments within 60 days from the later of the date of the filing of the complete application or the date the applicant places the property in service. Taxpayers who receive payments for property under Section 1603 of ARRTA may not claim the renewable electricity production tax credit under section 45 of the Code (PTC) or the energy investment tax credit under section 48 of the Code (ITC) with respect to the same property for the taxable year of the payment or subsequent years. In addition, taxpayers must recapture any ITC previously allowed with respect to progress expenditures for the property.
Eligible property under the program includes only property used in a trade or business or held for the production of income. Nonbusiness energy property described in section 25C of the Code and residential energy efficient property described in section 25D of the Code do not qualify for payments under this program but may qualify for tax credits under those provisions.
Q-1: What are the federal income tax consequences to a taxpayer who receives a Section 1603 payment? How does the receipt of a Section 1603 payment affect the basis of specified energy property?
A-1: A Section 1603 payment is not includible in a taxpayer’s gross income, and the taxpayer’s basis in the specified energy property is reduced by 50 percent of the payment. Section 48(d)(3) of the Code. All project costs that are properly capitalized for purposes of determining the depreciation deduction are included in the cost basis of specified energy property. See Q&A #5, below, for tax consequences to a lessee who receives a Section 1603 payment.
Q-2. What are the federal income tax consequences to a taxpayer who receives a Section 1603 payment and a Department of Energy loan guarantee or an energy conservation subsidy from a public utility?
A-2: Receipt of an incentive in addition to a Section 1603 payment may reduce the eligible basis used in calculating the Section 1603 payment. (See FAQ1, Eligible Basis.) Receipt of a Department of Energy loan guarantee does not reduce the basis of specified energy property. Under section 136 of the Code, an energy conservation subsidy provided by a public utility to a customer for the purchase or installation of any energy conservation measure is excluded from income and reduces the basis of specified energy property by the amount of the exclusion.
Q-3: If a partnership that is eligible to receive a Section 1603 payment has as a partner a corporation that is a tax-exempt controlled entity (within the meaning of section 168(h)(6)(F)), does section 168(h)(6) apply for purposes of determining the partnership’s depreciation deductions?
A-3: Section 168(h)(6) applies to any partnership that owns property and has a tax-exempt entity or a tax-exempt controlled entity as a partner even if the partnership is eligible for a Section 1603 payment. For purposes of section 168(h)(6), if 50 percent or more of the value of a corporation is owned by one or more tax-exempt entities, the corporation is a tax-exempt controlled entity and is treated as a tax-exempt entity. Section 168(h)(6) provides that, subject to certain exceptions, if a partnership has a tax-exempt entity partner (including a tax-exempt controlled entity) and any allocation to that tax-exempt entity partner is not a qualified allocation, then an amount equal to the tax-exempt entity’s proportionate share of such property (generally, the highest allocation of any item of income or gain to the tax-exempt entity) is treated as tax-exempt use property. See sections 168(h)(6)(B) and (C) for the rules concerning qualified allocations and the proportionate share to be treated as tax-exempt use property. The percentage of the property that is tax-exempt use property is depreciated using the longer Alternative Depreciation System (ADS) recovery periods, rather than the generally shorter periods under the Modified Accelerated Cost Recovery System (MACRS).
Certain tax-exempt entities described in Section 1603(g) of ARRTA may not receive a Section 1603 payment. Likewise, a partnership that has such tax-exempt entities as partners may not receive a Section 1603 payment unless these tax-exempt entities own their interests indirectly through taxable corporations. (See FAQ1, Applicant Eligibility.) The tax-exempt entities described in Section 1603(g) include, generally, the tax-exempt entities described in section 168(h), but Section 1603 does not require a tax-exempt controlled entity to be treated as a tax-exempt entity for purposes of determining eligibility for a Section 1603 payment.
Q-4: Under the Section 1603 program, the owner of multiple units of property that are located at the same site and that will be operated as a larger unit may elect to treat the units (and any property, such as a computer control system, that serves some or all such units) as a single unit of property for purposes of determining the beginning of construction and the date the property is placed in service. How will such a grouping election affect depreciation determinations for federal income tax purposes?
A-4: A taxpayer’s grouping of the units for purposes of Section 1603 of ARRTA will not affect the determination of the unit of property for depreciation or the date that property is placed in service for purposes of calculating the depreciation deduction.
Q-5: If a project is sold and leased back more than three months after the seller/lessee originally placed the project in service, the seller/lessee is entitled to the Section 1603 payment. Must the seller/lessee report income equal to 50 percent of the amount of the Section 1603 payment ratably over the five-year recapture period?
A-5: In some cases, a lessor and lessee may elect to pass through the Section 1603 payment to the lessee. In such cases, the lessor does not reduce basis by 50 percent of the amount of the Section 1603 payment and the lessee must agree to include in gross income ratably over the five-year recapture period an amount equal to 50 percent of the amount of the Section 1603 payment. See Section VI of the Program Guidance. In this case, however, the sale-leaseback rules (also in Section VI of the Program Guidance) apply. Under those rules, the purchaser/lessor is not eligible for the Section 1603 payment and may not elect to pass through the Section 1603 payment to the seller/lessee because the project was sold and leased back more than three months after the project was placed in service. Instead, the seller/lessee is the person placing the property in service for purposes of Section 1603 and receives the Section 1603 payment. The seller/lessee reduces the basis of the project by 50 percent of the amount of the Section 1603 payment before determining gain or loss on the sale of the project to the purchaser/lessor. The seller/lessee is not required to report income equal to 50 percent of the amount of the Section 1603 payment ratably over the five-year recapture period.
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