SECTION 2. BACKGROUND

.01 Taxpayers that generate steam or electric power incur significant expenditures to maintain, replace, and improve generation property. Whether these expenditures are deductible as repairs under § 162 or must be capitalized as improvements under § 263(a) depends on whether the expenditures materially increase the value of the property or appreciably prolong its life. See § 1.162–4 of the Income Tax Regulations. In general, under § 263(a) the cost of replacing a unit of property or major component must be capitalized.

.02 A generation plant is composed of numerous functionally interdependent items of machinery and equipment, and it can be difficult to identify which items constitute discrete units of property, major components, or something else. As a consequence, taxpayers and the Internal Revenue Service (Service) often disagree about whether the cost to replace a particular item is a capital or deductible expense.

.03 To minimize disputes regarding the deductibility or capitalization of expenditures to maintain, replace, or improve generation property, this revenue procedure provides “unit of property” and “major

adjustment factor determined under section 45(e)(2)(B) for the calendar year, except that section 45(e)(2)(B) shall be applied by substituting 2005 for 1992.

INFLATION ADJUSTMENT FACTORS AND REFERENCE PRICES

The inflation adjustment factor for calendar year 2013 for qualified energy resources and refined coal is 1.5063. The inflation adjustment factor for Indian coal is 1.1538. The reference price for calendar year 2013 for facilities producing electricity from wind (based upon information provided by the Department of Energy) is 4.53 cents per kilowatt hour. The reference prices for fuel used as feedstock within the meaning of section 45(c)(7)(A), relating to refined coal production (based upon information provided by the Department of Energy) are $31.90 per ton for calendar year 2002 and $58.23 per ton for calendar year 2013. The reference prices for facilities producing electricity from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic energy have not been determined for calendar year 2013.

PHASEOUT CALCULATION

Because the 2013 reference price for electricity produced from wind (4.53 cents per kilowatt hour) does not exceed 8 cents multiplied by the inflation adjustment factor, the phaseout of the credit provided in section 45(b)(1) does not apply to such electricity sold during calendar year 2013. Because the 2013 reference price of fuel used as feedstock for refined coal ($58.23) does not exceed the $31.90 reference price of such fuel in 2002 multiplied by the inflation adjustment factor and 1.7, the phaseout of credit provided in section 45(e)(8)(B) does not apply to refined coal sold during calendar year 2013. Further, for electricity produced from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic energy, the phaseout of credit provided in section 45(b)(1) does not ap

ply to such electricity sold during calendar year 2013.

CREDIT AMOUNT BY QUALIFIED ENERGY RESOURCE AND FACILITY, REFINED COAL, AND INDIAN COAL

As required by section 45(b)(2), the 1.5 cent amount in section 45(a)(1), the 8 cent amount in section 45(b)(1), the $4.375 amount in section 45(e)(8)(A) and the $2.00 amount in section 45(e)(8)(D) are each adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the sale occurs. If any amount as increased under the preceding sentence is not a multiple of 0.1 cent, such amount is rounded to the nearest multiple of 0.1 cent. In the case of electricity produced in open-loop biomass facilities, small irrigation power facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic renewable energy facilities, section 45(b)(4)(A) requires the amount in effect under section 45(a)(1) (before rounding to the nearest 0.1 cent) to be reduced by one-half. Under the calculation required by section 45(b)(2), the credit for renewable electricity production for calendar year 2013 under section 45(a) is 2.3 cents per kilowatt hour on the sale of electricity produced from the qualified energy resources of wind, closed-loop biomass, geothermal energy, and solar energy, and 1.1 cents per kilowatt hour on the sale of electricity produced in open-loop biomass facilities, small irrigation power facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic energy facilities. Under the calculation required by section 45(b)(2), the credit for refined coal production for calendar year 2013 under section 45(e)(8)(A) is $6.590 per ton on the sale of qualified refined coal. The credit for Indian coal production for calendar year 2013 under section 45(e)(10)(B) is $2.308 per ton on the sale of Indian coal.

DRAFTING AND CONTACT INFORMATION

The principal author of this notice is Martha M. Garcia of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further

2013–22 I.R.B. 1142 May 28, 2013

similar electric generation property subsequently acquired in an applicable asset acquisition as defined in § 1060 or in a transaction to which § 338(h)(10) applies.

.03 Limitation . A taxpayer may not rely on the unit of property definitions provided in this revenue procedure for any other purpose of the Code or Regulations, including for determining the unit of property under other Code sections (for example, § 263A), or determining the asset for depreciation purposes (including placed in service dates, retirements, dispositions, or classification under § 168(e) or Rev. Proc. 87–56, 1987–2 C.B. 674), for the same or similar type of assets used in electric power generation.

.04 Example . X is an electric utility company that files its Federal income tax return on a calendar year basis. X operates a power plant to generate electricity and uses the unit of property and major component definitions provided by this revenue procedure for each of the following items of property: (1) a structure that is not a building under § 1.48–1(e)(1), (2) four pulverizers that grind coal, (3) one boiler that produces steam, (4) one turbine that converts the steam into mechanical energy, and (5) one generator that converts mechanical energy into electrical energy. In addition, the turbine contains a series of blades that cause the turbine to rotate when affected by the steam. Under section 5 and Appendix A, section 2, of this revenue procedure, X treats the structure (Appendix A, section 2.02), the boiler (Appendix A, section 2.03), the turbine (Appendix A, section 2.11), the generator (Appendix A, section 2.12), and each of the four pulverizers (Appendix A, section 2,18) as separate units of property. X is not required to treat components, such as the turbine blades, as separate units of property, but under Appendix A, section 2.11(2)(c), each complete set of blades in each section of the turbine must be treated as a major component.