Updated safe harbor, transfer of property | KPMG | US

Updated safe harbor, transfers of property by electricity generators

Updated safe harbor, transfers of property

The IRS today released an advance version of Notice 2016-36 that provides a new safe harbor for transfers of property from an electricity generator, a co-generation facility or an energy storage facility to a regulated public utility used to facilitate the transmission of electricity over the utility's transmission system. The IRS notice states that such transfers will not be treated as income (a contribution in aid of construction) under section 118(b), but instead will be treated as a contribution to the capital of a corporation under section 118 (a).


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Notice 2016-36 [PDF 58 KB] updates safe harbors previously provided in earlier IRS notices (Notice 88-129, Notice 90-60, and Notice 2001-82) in an effort to “better accommodate current industry practices and technological advances and associated issues, such as grid congestion.”

New safe harbor

Today’s notice examines the safe harbor previously provided by Notice 88-129, Notice 90-60, and Notice 2001-82 and explains that since those notices were issued, electricity transmission and distribution systems “have evolved and become interlinked so that close coordination of operations within the major U.S. power grids is needed to maintain the various interlinked components.”

Accordingly, the earlier IRS notices are modified and superseded. Today’s notice provides a new safe harbor in which a transfer of an intertie to a regulated public utility will not be treated as a contribution in aid of construction under section 118(b) or give rise to gross income under section 118(a). Notice 2016-36 consolidates the safe harbor requirements under the prior notices, and removes a requirement that the generator must have a long-term power purchase contract or long-term interconnection agreement with the utility that constructs the upgrade. 

Because no long-term power purchase contract or long-term interconnection agreement is required under the new safe harbor, a generator (for example, a solar or wind farm) may contribute an intertie to a utility that qualifies under the new safe harbor even if the generator is interconnected with a distribution system, rather than a transmission system, if all requirements of today’s notice are satisfied.

Notice 2016-36 also extends the provisions of the safe harbor to transfers of interties from energy storage facilities to regulated public utilities. 

Effective date

The new safe harbor in Notice 2016-36 applies to transfers of interties meeting all of the requirements made on or after June 20, 2016. Taxpayers, however, may choose to rely on this safe harbor for transfers with respect to qualifying transfers made prior to June 20, 2016. Today’s notice states that the IRS will not issue private letter rulings involving this safe harbor.

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