Street Lights Properly Classified As Seven Year Recovery Property By Utility

In PPL Corporation v. Commissioner, 135 TC No. 8, the IRS lost its argument that an electric utility could not depreciate street lights over a seven year period under MACRS. The IRS argued such street lights were properly categorized under asset class 49.14, Electric Utility Transmission and Distribution Plant (with a recovery period of 20 years) or, if not then, then asset class 00.3 land improvements (with a recover period of 15 years).

The taxpayer contended, and the Tax Court agreed, that these street light are property without a class life, and therefore cost recovery takes place over seven years.

The Tax Court noted that while the lights were a relatively minor part of the utility’s business, for depreciation purposes the actual use of the item is what counts. Street lights are not used to deliver electricity, but rather to provide a service of providing light. The court distinguished various classification methods under other regulatory regimes that it argued allowed lumping the lights with the transmission lines, holding that they were not relevant for, and did not address, the matters of concern for tax depreciation.

The Court also rejected the IRS’s claim that such lights were land improvements. First, the Court noted that the majority of the lights were simply affixed to poles or foundations, and could be easily moved. The taxpayer stored such lights for future use. The court also found that since such lights often have to moved during their useful life, they are not intended to be permanent.

One cautionary point on the case is that the Tax Court’s ruling also covered the subset of the street lights that are set in concrete, but it held those were not land improvements primarily due to technical rules that, due to the IRS raising the issue late in the case, made proving that treatment the burden of the IRS, a burden the court found the IRS did not carry. Thus if a taxpayer has such lights that are set directly in the ground (as opposed to being attached to a foundation), this case doesn’t give any real assurance that the IRS would not be able to force the taxpayer to treat the property as land improvements.

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