IRS Revokes Favorable PLR Concerning Ability of Tribe to Pass ITCs to Lessee in Master-Tenant Structure

In recently released Private Letter Ruling 2016-40-010 (the new ruling), the IRS prospectively revoked PLR 2013-10-001 (the original ruling), concluding that a Native American tribe may not elect to pass investment tax credits (ITC) associated with renewable energy assets on reservation lands to a taxable entity under Section 50(d)(5) of the Tax Code.  [Click here for our discussion of PLR 2013-10-001.]

The original ruling describes the Tribe’s plans to place in service renewable energy assets on reservation lands.  The assets will constitute “Section 48 energy property” that qualifies for the ITC.  The renewable energy assets will generate electricity that will be sold to third parties and used by the Tribe in its governmental activities.  The Tribe will maintain ownership of the renewable assets at all times, but will lease the assets to a lessee, during which time the lessee will operate the assets and will be entitled to the net revenues derived from the operation of the assets, including the net revenue derived from the sale of electricity to third party utilities and the Tribe.  At the conclusion of the lease, the Tribe will assume control over the renewable energy assets.  The Tribe and the lessee desired to make the election under Section 50(d)(5) of the Tax Code to allow the ITCs associated with the renewable energy assets to be passed-through the lease to the lessee.  While not stated in the original ruling, it can be assumed that the Tribe and lessee were contemplating a standard “master-tenant” or “lease pass-through” structure, in which the lessor and lessee agree that the lessee will claim the ITC, with the lease terminating shortly after the five-year ITC recapture period.

In the original ruling, the IRS was requested to rule that the Tribe (an entity not subject to federal income taxation) was able to make the Section 50(d)(5) election.  The IRS ruled favorably after analyzing the issues that would be the cause of concern; that is, whether the Tribe should be considered a tax-exempt organization under Section 50(b)(3) of the Tax Code or a governmental unit under Section 50(b)(4) of the Tax Code.  If the Tribe fell within the scope of these provisions, then no ITC would have been available to the lessee.

In our analysis of the original ruling, we questioned the strength of the IRS’s reasoning supporting its conclusion that the Tribe was not a tax-exempt organization under Section 50(b)(3)  and whether the IRS would consistently interpret that section as inapplicable to Native American tribes.  We cautioned investors against relying too heavily on the original ruling or the reasoning contained therein and reminded readers that private letter rulings are only binding on the IRS with respect to the taxpayer that obtained it and may not be used or cited as precedent by other taxpayers.

The new ruling revokes the original ruling without comment, other than stating that such a determination was made “after reconsideration.”  The original ruling is revoked prospectively, meaning that the Tribe may place no further reliance on the ruling on a go-forward basis.