United States

IRS updates safe harbor for property transfers to utilities


In response to the expanded interlinking of electricity transmission and distribution systems, the IRS released Notice 2016-36. This notice provides a safe harbor method of accounting for transfers of property from either an electricity generation or cogeneration facility or an energy storage facility to a regulated public utility, used to facilitate the transmission of electricity over the utility’s transmission system. Under the safe harbor, the utility will treat the transfer as a contribution to the capital of a taxpayer, which is generally not considered gross income under section 118(a).

Federal regulations require a utility to interconnect with facilities to allow for the sale of power produced by those facilities. Under the regulations, the facility bears the cost of any equipment and installation required to make the connection between the utility and facility (the intertie). After a facility constructs the intertie, the utility generally takes legal title to the intertie and the facility sells electricity to the utility pursuant to a long-term power purchase contract.

The notice modifies and supersedes several previous notices regarding the treatment of transfers of property to regulated public utilities. The previous notices generally required the facilities to have a long-term purchase contract or long-term interconnection agreement to qualify for the safe harbor treatment (nonrecognition of income or Contribution in Aid of Construction treatment) on the transfer of an intertie to a regulated public utility. The new safe harbor in the notice removes the requirements that the power generator have a long-term power purchase contract or long-term interconnection agreement with the utility to qualify for the safe harbor treatment. For example, a generator may contribute an intertie to a utility even if the generator is interconnected with a distribution system, rather than a transmission system, provided certain requirements detailed in the notice are met. In addition, the notice extends the provisions of the safe harbor to transfer of the interties from energy storage facilities to regulated public utilities. The notice also requires the facility to recover the costs of constructing the intertie using the straight-line method over a useful life that is treated as 20 years.

Notice 2016-36 also provides guidance on the tax treatment when a power purchase contract between a generator and a utility is terminated. If the utility obtains or retains ownership (for tax purposes) of the intertie, the generator is deemed to transfer the intertie to the utility as of the first day of such termination.

A change in the utility’s treatment of a transfer of an intertie, including a change to or from the safe harbor provided in Notice 2016-36, is a change in method of accounting.


As the safe harbor is considered a method of accounting and a taxpayer wishing to change its method of accounting to the safe harbor method is required to compute a section 481(a) adjustment, there may be a tax-savings opportunity for eligible taxpayers on adoption of this safe harbor method. Impacted taxpayers should consult with their tax advisors to determine the federal tax impact of changing to the provided safe harbor method.


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