Rev. Rul. 76-268

Advice has been requested, under the circumstances described below, whether a liquefied natural gas (LNG) facility is public utility property within the definition of section 1.46-3(g) of the Income Tax Regulations for investment credit purposes.

The taxpayer is an intrastate rate-regulated gas utility, subject to the regulatory jurisdiction of the state public service commission, that operates 2,500 miles of gas distribution lines. The taxpayer operates an LNG facility, with a pressure range in excess of 125 pounds per square inch gauge (psig), within its distribution area consisting of the following components: (1) a short section of pipeline spur that connects the LNG facility with a 50-mile pipeline that the taxpayer operates for the benefit of itself and two co-owning distribution utilities to which it sells gas (The 50-mile pipeline connects an interstate gas transmission supply pipeline with the point of entry into the taxpayer's distribution system proper, and with the LNG facility); (2) LNG machinery and equipment; and (3) an LNG storage tank.

The LNG facility liquefies and stores excess natural gas, received in off-peak periods, for subsequent vaporization and distribution through the local distribution area.

The LNG facility was constructed and placed in service by the taxpayer after August 15, 1971, and before January 22, 1975, and is depreciable property having a useful life of 3 years or more.

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment in section 38 property. The determination of what property qualifies as section 38 property is made in accordance with the rules provided in section 48.

Section 48(a)(1) of the Code provides, in part, that the term "section 38 property" means tangible personal property, or other tangible property (not including a building and its structural components) but only if the other tangible property is used as an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or constitutes a research or storage facility used in connection with any of the foregoing activities. To qualify as "section 38 property," the property must also be property with respect to which depreciation is allowable and must have a useful life of 3 years or more.

In the case of public utility property, section 46(c)(3)(A) of the Code limits the amount of the qualified investment to 4/7 of the amount determined under section 46(c)(1). For this purpose, section 46(c)(3)(B)(ii) defines "public utility property" to include property used predominantly in the trade or business of the furnishing or sale of gas through a local distribution system.

Section 1.46-3(g)(4)(i) of the regulations provides, in part, that with respect to properties of a taxpayer engaged in both the transmission of gas and the local distribution of gas, section 38 property shall be considered as used predominantly in the trade or business of the furnishing or sale of gas through a local distribution system if expenditures for such property are chargeable (or would be chargeable) to accounts 360 through 363, inclusive, (Local Storage Plant) of the Uniform System of Accounts prescribed by the Federal Power Commission (F.P.C.) for natural gas companies, effective January 1, 1961.

These four accounts effective January 1, 1961, are described as follows: Account 360 includes the cost of land and land rights used in connection with local storage of gas in holders within or adjacent to distribution areas. Account 361 includes the cost, in place, of structures and improvements used in connection with local storage of gas within or adjacent to distribution areas. Account 362 includes the cost installed of holders and associated appliances used in the storage of gas above ground or in underground receptacles installed for local storage purposes, and provides that the cost of holders of LNG are to be included in a sub-account of 362. Account 363 includes the cost installed of other equipment used in connection with the storage of gas within or adjacent to distribution areas. (The revision of 18 CFR, effective April 1, 1974, designates Accounts 360, 361, 362, 363, 363.1, 363.2, 363.3, 363.4 and 363.5 as Other Storage Plant accounts, rather than as Local Storage Plant accounts. Section 1.46-3(g)(4)(i) of the regulations is predicated on the account descriptions effective January 1, 1961.)

The use of the taxpayer's LNG facility for liquefaction and storage of excess natural gas, received in off-peak demand periods, for subsequent vaporization and distribution through a system within the local distribution area during peak demand periods is identical to that of an LNG gas holder as mentioned in the F.P.C. local storage plant account 362 description, effective January 1, 1961. Therefore, since F.P.C. account 362 description provides that the cost of holders of LNG are to be included in a sub-account of 362, and section 1.46-3(g)(4)(i) of the regulations provides that when costs of property are chargeable to F.P.C. account 362, such property shall be considered as used predominantly in the trade or business of the furnishing or sale of gas through a local distribution system, such property as the LNG facility is public utility property within the definition of section 1.46-3(g).

Accordingly, the taxpayer's LNG facility, if otherwise qualified, is public utility property within the definition of section 1.46-3(g) of the regulations and entitled to an investment credit allowance of 4/7 of the amount otherwise determined under section 46 of the Code. This eligibility is applicable to the short section of pipeline spur, the LNG machinery and equipment, and the LNG storage tank.

See section 301(a) of the Tax Reduction Act of 1975, which allows higher investment credits for property that is constructed, reconstructed, or erected, and placed in service after January 21, 1975, and before January 1, 1977.

¹ Also released as IR-1627, dated June 25, 1976.