What is a facility?

Although the term "facility" appears over 100 times in the Code and over 200 times in the regulations, nowhere is it defined. A recent revenue ruling, which addresses a relatively obscure energy tax credit, finally provides some useful guidance on the meaning of the term.

Rev. Rul. 94-31 considers Sec. 45, enacted by the Energy Policy Act of 1992, which provides a production credit for facilities placed in service after Dec. 31, 1993. In the ruling, the taxpayer had placed a windfarm in service prior to 1994. The windfarm consisted of an array of wind turbines, supporting towers, pads, transformers, roadways, fencing, power collection systems, and monitoring and meteorological equipment. In 1994, the taxpayer replaced some of the turbines, towers and pads, and sought to claim the credit on production from the new turbines.

The question was whether the "facility" was the entire windfarm or some component of the windfarm. The IRS could probably have taken a restriction and ruled that only an entirely new windfarm would be an eligible facility. After all, a "facility" does imply an amalgamation of assets, which would be inconsistent with allowing the credit for a new single asset such as a turbine. The Service took a middle ground, treating the turbine, tower and pad as a facility. This suggests that while a "facility" is at least a combination of several assets, it need not be the entire collection of functionally interrelated equipment.

Rev. Rul. 94-31 obviously provides some guidance on the meaning of the term "facility." By analogy, it may also be useful in determining what constitutes an "asset" for depreciation and other purposes. If a collection of assets, such as a turbine grouping, constitutes a facility that can be placed in service independently of other related assets, it undoubtedly also constitutes a separate asset for depreciation purposes. The usefulness of the ruling in depreciation contexts will probably depend heavily on the particular facts of each case.