Output Facilities (I.R.C. 141)

October 18, 2012

General Background

Special rules apply to the application of the private business tests to output facilities that do not apply to other facilities.

“Output facilities” include electric and gas generation, transmission, distribution and related facilities, and water collection, storage and distribution facilities.  A reservoir, for instance, is an output facility.  However, a pipeline to transport wastewater for disposal is not an output facility.  See PLR 200026020 (and City of Santa Rosa, California v. C.I.R., 120 T.C. 339, Tax Ct. Rep. (CCH) 55145).

The 1997 final private activity bond regulations reserve Section 1.141-7 of the Regulations because “regulatory changes are dramatically affecting the electric power industry” but state that the final 1997 regulations otherwise apply to bonds issued to finance output facilities.

Application of Private Business Tests

The following comes from White, “Private Activity Bond Tests,” 2012 Edition, West.  “The purchase pursuant to a contract by a nongovernmental person of available output from an output facility financed with bond proceeds is taken into account under the private business tests if the purchase satisfies the ‘burdens and benefits test’ discussed below.  In the case of other arrangements for use of an output facility, as well as in the case of an output contract that is properly characterized as a lease for federal income tax purposes, the general rules relating to private business tests apply.”

“For purposes of the above rules, a tenant in common interest in a generating facility is a separate property interest treated as a separate facility, and therefore if the tenant-in-common interest is owned by a governmental unit and financed with bonds, the ownership interest of the other tenants in common in the output facility are not treated as private business use.”  See, e.g., example 1 in Treas. Reg. 1.141-7(i).

See also PLR 200501003 applying the example to a pool of generator equipment owned jointly by various governmental issuers.

PLR 201727003:  Concerns allocation of output, multipurpose allocations and other output contract related private business use matters.

Questions, Answers, References

  1. A reservoir is owned by a farmers corporation.  Shares are owned by a local city and by other private parties.  The city is required to finance its allocable portion of the reservoir improvements.  Can the improvements be financed with tax-exempt bonds?
  2. PLR 201507002 (October 28, 2014):  Private business use of proceeds to be used for 1st water supply improvements, services allocable to improvements, and equipment allocable to 1st water supply doesn’t exceed 10 percent; and 2nd water supply improvements, including services allocable to improvements, and equipment allocable to 2nd water supply constitute facilities for furnishing of water under Code Sec. 142(a)(4) and 142(e).
  3. PLR 9142012 (Jul. 17, 1991) (aka “Alabama” ruling): A prepayment for electric power capacity is not a private loan or arrangement that gives rise to private business use.



October 18, 2012


See Peracchi v. C.I.R. (143 F.3d 487) regarding basis in promissory notes.