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July 30, 2021

IRS rules that solar facilities are not public utility property

In PLR 202130005, the IRS ruled that facilities generating solar electricity will not be public utility property (PUP) under IRC Section 168(i)(10) and former IRC Section 46(f)(5).

The IRS also ruled that the facilities should not be treated as PUP owned by the public utility and the financial institution contributing capital to build the facilities.


Taxpayer is a public utility that produces electricity. Commission regulates Taxpayer's rates, which are generally established on a cost-of-service rate-of-return basis.

Taxpayer applied to Commission for permission to build solar electric generation facilities (facilities) and for approval of affiliated interest agreements related to ownership and operation of the facilities.

Taxpayer will organize a single-member limited liability company (HoldCo), which will organize a set of LLCs (Project HoldCos), which will organize separate single-member LLCs (ProjectCos) that will own each facility. An outside financial institution (Partner) will contribute capital to each Project HoldCo under an agreement that will allocate (1) cash and property distributions, (2) profits, losses and tax credits and (3) other rights and responsibilities between HoldCo and the financial institution. For federal income tax purposes, each Project HoldCo and associated ProjectCo owning a facility will be treated as a partnership.

Each partnership expects to use market-based rates for sales of electricity, capacity and ancillary services. Partnerships will not sell electricity directly to Taxpayer but to the wholesale electricity markets administered by Operator. Taxpayer will then buy electricity from the wholesale electricity markets at market prices.

Taxpayer will request permission from the Commission to (1) include the unrecovered cost of its investment in the partnerships in its rate base and (2) recover the cost of its investment in the partnerships ratably over a certain number of years. Cash distributions from the partnerships to Taxpayer will reduce cost of service recoverable from customers.

The Taxpayer asked the IRS for two rulings:

  • Whether the facilities owned by each partnership are PUP, which would make them subject to normalization rules
  • Whether the facilities should be treated as PUP owned by Taxpayer and/or Partner

Law and analysis

IRC Section 168(i)(10) defines public utility property as property used predominantly in the trade or business of furnishing or selling electrical energy if the rates for furnishing or selling have been established or approved by a state or political subdivision.

Treas. Reg. Section 1.46-3(g)(2) defines the regulated rates as those established or approved on a rate-of-return basis.

Depreciation under IRC Section 168 will not apply if the utility does not use the normalization method of accounting. The operative rules for normalizing timing differences from use of different methods and periods of depreciation are only logical in the context of rate-of-return regulation.

The IRS said a facility must have three characteristics to qualify as PUP:

  1. It must be used predominantly in the trade or business of furnishing or selling electricity.
  2. The rates for the sale must be established or approved by one of the listed agencies or instrumentalities.
  3. The rates must be established on a rate-of-return basis.

Under Treas. Reg. Section 1.167(l)-3(c), if property held by a partnership is not PUP in the hands of the partnership, but would be PUP if an election was made under IRC Section 761 to be excluded from partnership treatment, then IRC Section 167(l) is applied and the partners are treated as directly owning the property in proportion to their partnership interests. Treas. Reg. Section 1.167(l)- 3(c) first requires a determination whether the property is PUP at the partnership level. If the property is not PUP, the regulation then requires considering whether that property would be PUP at the partner level, but only if the partners are eligible to elect out of partnership treatment under IRC Section 761.

The facilities owned by each partnership are not PUP

In its analysis, the IRS said the facilities will meet the first PUP requirement because they will be used to furnish electricity. The facilities will meet the second PUP requirement because each partnership is under the Commission's jurisdiction. The IRS said the facilities are not PUP, regardless of the first two requirements because each partnership will charge market-based rates to Operator for electricity to be produced by the facilities.

The facilities should not be treated as PUP owned by Taxpayer or Partner

The IRS first noted that the facilities are not considered PUP in the hands of the partnerships. In addition, because Taxpayer represents that Taxpayer and Partner cannot elect out of partnership treatment under IRC Section 761, the analysis cannot continue under Treas. Reg. Section 1.167(l)-3(c), and the facilities are not treated as PUP owned by Taxpayer or Partner.


Similar to numerous recent private letter rulings, this PLR shows the ever-increasing interest that regulated utilities have in investing in renewable energy facilities in a manner that allows them to be competitive with market prices. This PLR complements those other PLRs and shows that utilities may take multiple routes in structuring their renewable investments, although most rely on the use of market rates to avoid normalization pitfalls. Utilities that have previously only utilized power purchase agreements for procuring green energy should revisit the ability to own and operate renewable energy facilities in a competitive manner.


Contact Information
For additional information concerning this Alert, please contact:
Americas Power & Utilities Tax Group
   • Mike Reno (
   • Brian Murphy (