Rev. Rul. 84-85

1984-1 C.B. 10, 1984-25 I.R.B. 4.

                       Internal Revenue Service
                                 Revenue Ruling

       INVESTMENT CREDIT;  FIRST PLACED IN SERVICE;  SOLID WASTE DISPOSAL

                                    FACILITY

                            Published: June 18, 1984

Section 46. - -Amount of Credit, 26 CFR 1.46-3:  Qualified investment.

  Investment credit;  first placed in service;  solid waste disposal facility.  A solid waste disposal facility was first placed in service for investment credit purposes on the date it became operational, although it was not able to operate at its rated capacity.  Rev. Rul. 79-98 clarified.

ISSUE

  Has the facility described below been "placed in service" within the meaning of section 1.46-3(d) of the Income Tax Regulations even though it is not able to operate at its rated capacity?

FACTS

  X, a corporation, constructed a solid waste disposal facility to produce energy from solid waste.  The facility is designed to (1) shred the solid waste to a uniform size;  (2) separate the combustible materials in the shredded waste from the non-combustible materials;  (3) separate, magnetically, the ferrous metal from the non-combustible waste (for recycling);  and (4) use the combustible materials as boiler fuel for the production of steam.  Steam is sold to P for distribution through P's existing steam distribution system.

  Soon after construction was completed in early 1981, start-up of the facility began.  In April, all the boilers of the facility, which are designed primarily to burn the fuel derived from solid waste but are equipped to burn fuel oil, began producing steam, which X delivered to P's distribution system.  The initial production was from fuel oil.  X began shredding solid waste in June, and one of the three boilers was first fired on the fuel derived from waste in July.  The first steam produced from solid waste was supplied to P on August 20.  As of September 30, 1981, all components of the facility were, or had been, in operation, and the facility was producing saleable steam.  The facility was experiencing operational problems, however, and was processing solid waste and producing steam at well below its rated capacity.

LAW AND ANALYSIS

  Section 38 of the Code allows a credit against federal income tax for qualified investment in section 38 property, and under section 46(c) the credit is allowable in any taxable year in which new or used section 38 property is placed in service.

  Section 1.46-3(d)(1) of the Income Tax Regulations provides that for purposes of the investment tax credit, property shall be considered placed in service in the earlier of the following taxable years:  (i) the taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins;  or (ii) the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.

  Section 1.46-3(d)(2)(iii) of the regulations provides that equipment acquired by a taxpayer for a specifically assigned function in a taxpayer's trade or business that is operational but is undergoing testing to eliminate any defects is considered to be in a condition or state of readiness and availability for a specifically assigned function.

  Rev. Rul. 76-256, 1976-2 C.B. 46, states that a coalfired electric generating unit was in a condition or state of readiness or availability for a specifically assigned function when the necessary permits and licenses had been approved, the critical tests for the various components were completed, synchronization was achieved, and daily operation of the unit had begun, notwithstanding that the generating unit would undergo further testing to eliminate any defects.

  Similarly, Rev. Rul. 76-428, 1976-2 C.B. 47, states that a nuclear electric generating unit was fully operational and "placed in service" on December 23, 1975, even though it was still undergoing testing to eliminate any defects and to demonstrate reliability.

  Rev. Rul. 79-98, 1979-1 C.B. 103, states that a nuclear electric generating unit was placed in service on the date it became operational, rather than the date the taxpayer formally accepted the unit from the contractor.  Although the revenue ruling states that the unit was able to operate at its rated capacity without failure, this fact is not considered to be a prerequisite for operational status;  consistent with Rev.Ruls. 76-256 and 76-428, it is only a fact demonstrative of operational status.

  In this case, all three boiler units of the facility were producing steam from processed waste as of September 30, 1981. Although the facility was experiencing operational problems and was not able to operate at its rated capacity, it was being operated on a regular basis and saleable steam was being produced.  Thus, the facility was operational on September 30, 1981.

HOLDING

  The recovery property that makes up the subject facility was placed in service for investment credit purposes by September 30, 1981.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 79-98, 1979-1 C.B. 103, is clarified. The determination of when a facility is placed in service is not necessarily dependent on whether the facility is able to operate at its rated capacity.

Rev. Rul. 84-85, 1984-1 C.B. 10, 1984-25 I.R.B. 4.