Despite our best efforts to bring clarity to the debate on the taxation of SRECs, it continues to be a complex issue. We will continue to write about it, not with the expectation that we’ll ever get an answer (short of any official statement from the IRS), but with the expectation that we can provide some perspectives that will allow you and your tax attorney to make the best decision (and please do point your tax advisors to these blog posts). Our earlier blog post providing the perspective of a CPA in New Jersey, who felt that SRECs could be considered a subsidy, drew some attention.

One response from Mark Bolinger, a Research Scientist at Lawrence Berkeley National Laboratory, was of particular interest because, in addition to highlighting the fault in claiming SRECs as a subsidy, he explains why you wouldn’t want the IRS to consider them a subsidy. The question over the taxation of SREC income has further implications because of the ITC or cash grant. If the SRECs were excluded from taxation because they are considered some sort of “subsidy,” then the cost basis of the ITC would have to be reduced by the value of the “subsidy.” He contends that system owners might prefer to pay taxes on SRECs than to reduce the cost basis of the 30% ITC.

Mark pointed out IRS Private Letter Ruling 201035003 which dealt with such a case involving the upfront sale of SRECs to a utility company in which the taxpayer requested affirmation that the proceeds from the sale did not affect the cost basis of the ITC and, subsequently, that the SREC sale not be treated as a subsidy, but rather a taxable sale. According to the private ruling which cannot be cited as precedent, the upfront sale of SRECs was deemed to be a taxable transaction ineligible for the Section 136 exclusion.

He writes: “Specifically, if the SREC payments did actually fall under the Section 136 exclusion and were therefore not taxable, then the basis for the 30% ITC or cash grant would (by law) need to be reduced by the amount of the non-taxable SREC payments (i.e., the 30% benefit would apply to a smaller dollar amount — smaller because you would need to subtract the SREC payments from the eligible system cost).  But how do you know in the project’s first year — when calculating the size of your ITC — what the value of a future stream of SREC payments will be over the life of a PV system?  You can’t know this at the time you are calculating your ITC (SREC prices will vary, system output will vary, no agreement on appropriate discount rate), which almost by default means that SREC payments cannot be considered non-taxable.”

He goes on to say: “it’s not even clear that trying to avoid taxes by seeking refuge under Section 136 is even advantageous to the taxpayer.  The knee-jerk response is always “no taxes mean more value,” but if no taxes also means a reduction in the basis to which the 30% ITC or cash grant apply, then you might — depending on your marginal tax rate — actually prefer to pay the taxes and leave the basis whole.”

This is the most sound reasoning that we’ve seen yet for paying taxes on your SREC income. At the very least it is a strong argument against considering SREC income as a subsidy. It doesn’t necessarily refute one unofficial argument that the SREC income cannot be taxed if it is paying down the cost of an initial capital investment, though we’re confident there are plenty of counterarguments out there. Regardless, the SRECs and Taxes issue will continue to be one left up to interpretation. We will be sure to continue to add contributions from our community in the Taxes section of our blog, and if anyone from the IRS is reading… we’ve got 10,000 readers interested in what you have to say!

Here is the conclusion of the Private Letter Ruling described above:

IRS Private Letter Ruling 201035003
Law & Analysis

Section 25D(a)(1) of the Code allows an individual a credit against the tax imposed for the taxable year in an amount equal to 30 percent of the qualified solar electric property expenditures made by the taxpayer during such year.

Section 25D(d)(2) defines the term “qualified solar electric property expenditure” as an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.

Section 25D(e)(1) allows the expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property and for piping or wiring to interconnect such property to the dwelling unit to be taken into account for purposes of § 25D.

Under § 25D(e)(8)(A), generally, for purposes of determining the tax year when the credit is allowed, an expenditure with respect to an item shall be treated as made when the original installation of the item is completed. Under § 25D(e)(8)(B), in the case of an expenditure in connection with the construction or reconstruction of a structure, such expenditure shall be treated as made when the original use of the constructed or reconstructed structure by the taxpayer begins.

Section 61(a) provides, that, except as otherwise provided by law, gross income means all income from whatever source derived, including gains derived from dealings in property (§ 61(a)(3)). Under § 61, Congress intends to tax all gains or undeniable accessions to wealth, clearly realized, over which taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).

Section 136 provides an exception to this general rule, stating that gross income does not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure. Section 136(b) provides, in relevant part, that a taxpayer may not take a tax credit (such as the credit under § 25D) for an expenditure to the extent of the amount excluded as a subsidy under § 136(a) with respect to the expenditure.

In the current situation, Taxpayer sold all of the environmental attributes associated with the RECs to Public Utility in exchange for a payment. As such, Public Utility’s payment to Taxpayer is neither a rebate nor purchase-price adjustment, since Public Utility has no reasonable nexus to the cost or sale of the subject property from the vendor, X. Also, the payment is not a “subsidy” intended to facilitate the acquisition of property deemed advantageous to the payor, though Public Utility may make such PLR-102696-10 4 payments in other contexts. Rather, Taxpayer represents that the transaction between the parties is effectively a sale or exchange of property and property rights. Public Utility will in fact make no payment to Taxpayer absent the transfer of Taxpayer’s valuable property interests (namely, the RECs associated with the Residential Solar System purchased by Taxpayer from X), and the parties specifically state that the subject payment is to be made in consideration of the transfer of such property interests.

Based solely on the information submitted and representations made, we conclude that the proceeds from this sales transaction are not within the purview of § 136. Consequently, Taxpayer must include gain from the sale of the RECs to Public Utility in Taxpayer’s gross income under § 61(a). Further, Taxpayer is not required under § 136(b) to reduce the basis in the Residential Solar System. Taxpayer represents that the Residential Solar System generates electricity for Taxpayer’s residence located in the United States. Thus, Taxpayer may take a credit for 30 % of the expenditures for qualified solar electric property, and Taxpayer does not have to reduce the expenditure by the amount of the REC Payment.

The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by Taxpayer. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Except as specifically set forth above, we express no opinion concerning the federal income tax consequences of the facts or transactions described above under any other provision of the Code. Specifically, we express no opinion on whether the amounts allocated to the qualified expenditures are correct and thus we express no opinion on the accuracy of the tax credit amount.

This ruling is directed only to the taxpayer who requested it. Under § 6110(k)(3) of the Code, a letter ruling may not be used or cited as precedent.

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