posted on Thursday, July 21, 2005 8:42 PM
by
Andrea Robinson
IRS Finally Excludes from Taxable Income Funds that an Interconnecting Generator Advances for Transmission Network Upgrades
With the issuance of a recent Revenue Procedure, the Internal Revenue Service has eliminated a long running source of discord in the negotiation of new (or expanded) generator interconnections. The new Revenue Procedure creates a “safe harbor” that exempts from taxable income the payments that a generator, pursuant to FERC open-access rules, advances to an operator or owner of the transmission system to which it proposes to interconnect for needed upgrades to the transmission network. Many transmission utilities treated these advances as taxable income to the utility and would insist that a generator pay the tax on top of the funds it advanced for the network upgrades. Generators generally thought that this was nonsense since FERC requires that funds advanced to the transmission utility be repaid to the generator with interest within a specified period (formerly 5 years and now 20 years); since the complete value advanced is repaid it should not be treated as income of any kind in the hands of the transmission utility, they argued, and repeatedly sought the concurrence of the Service. Finally, the Service provided that concurrence, better late than never.
The new Revenue Procedure extends the safe harbor in two scenarios that are divided by December 20, 2004, the date on which FERC adopted its Order No. 2003B, a standard open-access interconnection agreement (IA) for large (50 megawatts or greater) generators. After that date, the transmission utility receiving an advance for network upgrades may treat the advance as not taxable so long as the advance is repaid in accordance with the IA of Order No. 2003B. And for an IA entered before December 20, 2004, the advance may be treated as not taxable so long as the IA requires repayment in cash or transmission credits, consistent with FERC decisional precedents. [Standardization of Generator Interconnection Agreements and Procedures, 109 FERC ¶ 61,287 (2005)] [NEW MATTER]