The IRS in Private Letter Ruling 201607004 ruled that a particular state organization’s payments to subsidize residential solar photovoltaic systems was an energy conversion subsidy under IRC §136 that was excludable from income.
Under this program the organization will pay the consumer a subsidy to cover part of the cost of installing an approved photovoltaic system. The organization is entitled to any credits and any other “tradable energy or environmental related commodity produced or created by the PV systems.” The organization insures that the size of the unit installed is not larger than what would be expected to be necessary to provide for the customer’s use of electricity.
Under IRC §136(a), gross income does not include the value any direct or indirect subsidy provided by a public utility for costs related to the purchase or installation of energy conservation measures. A taxpayer reduces the basis of any such property acquired by the amount of subsidy. As well, the taxpayer is not allowed a “double benefit” for any such expenditure (that is, a credit or other deduction related to the subsidized portion of the cost).
The IRS therefore concludes in this case:
The statutory requirements for the exclusion of the above described subsidies made by Organization from the gross income of the residential PV system owners are satisfied in the instant circumstances. The payments are made for purposes, and within the limitations, described in § 136(c)(1). Under the legislative scheme enacted by State as administered through Organization, the described payments are made "directly or indirectly" by Utility A and Utility B satisfying the terms of § 136(c)(2)(B), through Organization, to the residential customers.
We conclude, therefore, that the above described subsidies made by Organization are excludable from the gross incomes of the residential PV system owners for federal income tax purposes, under § 136 of the Code.
The ruling may cause some readers to vaguely recall that earlier they had read about a similar program where the IRS gave a ruling that seemed to hold directly the opposite, finding that the payment represented income. If so, you are likely thinking of PLR 201035003.
In that case the taxpayer received a single upfront payment from the utility for power expected to be generated by the renewable energy system installed. The taxpayer sought, and received, a ruling in that case that the amount was not a subsidy but rather was gross income—the exact opposite of what this taxpayer asked for.
You might wonder why a taxpayer would want the amount included in income—but recall that if the purchase is subsidized the taxpayer cannot claim a credit (such as the federal energy credit under IRC §25D) on the amount of the subsidy. In that case, unlike this one, the consumer retained rights to any credits and, at least for some taxpayers, the credit on that amount paid (which would reduce basis if it was a subsidy, and thus reduce the credit) was expected to be larger than the tax due on the income.
In the case that the IRS just issued the ruling on, remember that the consumer did not retain any rights to claim any credits. So in this case, if the amount was not a subsidy there would have been a tax cost to entering the program.
It’s tough to know exactly what facts in the two cases are key to explain the different results, aside from the fact that the taxpayers asking for the rulings wanted the different results. The most plausible explanation (aside from just giving the answer asked for) is that the current program was designed specifically to limit the production to the amount needed by the customer, while the program covered by the 2010 ruling was meant to allow the utilities to meet their goals for total production from renewable resources. But, as should be clear, it’s not absolutely the case that those two goals must be at odds with each other.