In Section 407(a)(3)(E) of the American Taxpayer Relief Act of 2012 (2012 ATRA), Congress enacted a new rule applicable to hydropower facilities that produce incremental hydropower production (i.e., those described in IRC §45(d)(9)(A)(i)). Under the new rule, which took effect on January 2, 2013, an efficiency improvement or addition to capacity will be treated as placed in service before January 1, 2014, if the construction of the improvement or addition begins before that date.  The 2012 ATRA redesignated IRC §45(d)(9)(A) and §45(d)(9)(B) as §45(d)(9)(A)(i) and §45(d)(9)(A)(ii), respectively. It also redesignated IRC §45(d)(9)(C) (the credit period rule applicable to facilities that produce incremental hydropower production) as §45(d)(9)(B). 

Before the redesignations, the credit period rule applied to facilities described in pre-2012 ATRA IRC §45(d)(9)(A), i.e., hydropower facilities that produce incremental hydropower production.  Although the 2012 ATRA redesignated IRC §45(d)(9)(A) as §45(d)(9)(A)(i), no conforming amendment was made to the credit period rule, which has the effect of greatly expanding the scope of the scope of facilities that are subject to the §45(d)(9)(B) credit period rule: 

•           Before the 2012 ATRA, "facilities described in [IRC §45(d)(9)(A)]" was limited to hydropower facilities that produce incremental hydropower production.

•           After the 2012 ATRA, "facilities described in [IRC §45(d)(9)(A)]" means all qualified hydropower facilities, including previously nonhydroelectric dams that begin to generate electricity for the first time.

Thus, the unintended consequence of Congress's (apparently inadvertent) failure to make a conforming amendment to the credit period rule in IRC §45(d)(9)(B) is that the credit period rule now applies to all qualified hydropower facilities, not just those that produce incremental hydropower production. 

Arguably, IRC §45(d)(9)(B) yields the same result regardless of whether one reads it as is, or whether one reads it as it apparently was intended to read, because any electricity generation by a facility described in IRC §45(d)(9)(A)(ii) represents an "addition to capacity".  This fact too suggests that Congress did not intend to expand the scope or otherwise alter the meaning of the credit period rule, but rather inadvertently failed to amend the credit period rule to conform to the redesignation of pre-2012 ATRA IRC §45(d)(9)(A) as §45(d)(9)(A)(i).

Lisa M. Pfenninger, J.D., LL.M.

Federal Tax Law Editor