SECTION 2. BACKGROUND

.01. 42 U.S.C § 8287 authorizes FAs to enter into ESPC ESAs with ESCOs for the purpose of achieving energy savings and benefits ancillary to energy savings. It also sets forth certain requirements for such ESPC ESAs. The ESPC ESA project structure is intended to facilitate onsite renewable energy generation projects. .02. The Office of Management and Budget (OMB) issued OMB Memorandum M–12–21 to provide further guidance to FAs regarding ESPCs that include thirdparty owned and operated onsite renewable energy generation assets and how they will be treated for Federal budgeting purposes. Specifically, OMB Memorandum M–12–21 requires title to the renew

1For more information about the reinstated HCTC, see Notice 2016–2, 2016–2 I.R.B. 265. Notice 2016–2 provides guidance on various issues relating to the HCTC, including information about eligibility for the HCTC, the types of coverage eligible for the HCTC, and guidance for those who claim the HCTC for a qualified health plan purchased through a Health Insurance Marketplace (also known as an Exchange) in 2014 and 2015.

Bulletin No. 2017–7 913 February 13, 2017

able energy generation asset to transfer to the FA at the end of the ESPC term. .03. The ESPC ESA is a type of ESPC that facilitates third-party owned and operated onsite energy generation projects in compliance with ESPC authority and OMB Memorandum M–12–21. An ESPC ESA may also include the implementation of other energy and water conservation measures as part of a comprehensive project. .04. The example in Section 5 of this revenue procedure illustrates a typical ESPC ESA that would satisfy the requirements of 42 U.S.C § 8287 and OMB Memorandum M–12–21. .05. Section 48(a) provides for an investment tax credit for certain energy property, including solar energy property described in § 48(a)(3)(A)(i). .06. Section 50(b)(4)(A)(i) disallows the investment tax credit if the property is used by the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing. This disallowance applies to property used under a lease unless the term of such lease is less than 6 months. .07. Section 7701(e) provides rules to determine, for federal income tax purposes, whether a contract that purports to be a service contract should be treated as a lease of property. Section 7701(e)(1) generally provides that a service contract will be treated as a lease of property if it is properly treated as a lease of property, taking into account all relevant factors including whether or not:

the service recipient is in physical possession of the property;

the service recipient controls the property;

the service recipient has a significant economic or possessory interest in the property;

the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract;

the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient; and

the total contract price does not substantially exceed the rental value of the property for the contract period.

.08. Notwithstanding the general rule of § 7701(e)(1), § 7701(e)(3) provides special rules for contracts or arrangements involving solid waste disposal, a cogeneration or alternative energy facility, and clean water facilities. Section 7701(e)(3)(D) provides that an “alternative energy facility” means a facility producing electrical or thermal energy if the primary energy source for the facility is not oil, natural gas, coal or nuclear power. Section 7701(e)(3)(A) provides that a purported service contract with respect to this type of facility will be treated as a service contract. .09. Section 7701(e)(4) provides that the special rule in § 7701(e)(3) will not apply, and thus the general rule in § 7701(e)(1) will apply, to any contract with respect to the facilities described in § 7701(e)(3) if:

the service recipient (or a related entity) operates the facility;

the service recipient (or a related entity) bears any significant financial burden if there is nonperformance under the contract, unless this burden is due to (i) reasons beyond the control of the service provider, (ii) a temporary shut-down for repairs, maintenance, or capital improvements, or (iii) the bankruptcy or other financial difficulty of the service provider;

the service recipient (or a related entity) receives any significant financial benefit if the operating costs of such facility are less than the standards of performance or operation under the contract, unless the benefit arises from reduced payments by the service recipient because of increased production or efficiency or the recovery of energy or other products; and

the service recipient (or a related entity) has an option or obligation to purchase all or part of the facility at a fixed and determinable price, other than for the fair market value of the facility.