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Scratching a Seven-Year Itch: IRS Allows Faster Depreciation of District Cooling Property
Posted in Government

As first appeared Nov. 15, 2011, on the International District Energy Association WebsiteIRS finding allows depreciation up to 70% faster than comparable property

In a major win for district cooling systems, the Internal Revenue Service found in a private letter ruling that a district cooling system could be depreciated over seven years. The IRS issued the private letter ruling to a power company whose subsidiary owns a district cooling system consisting of three plants, the underground network of pipes and the heat exchangers on customer property.

Equipment not used for steam or water supply or for pipeline conveyances.

In finding for the district cooling system, the IRS determined that the plants, pipes and heat exchangers were equipment used neither for steam supply nor water supply. Such a finding would have required the district cooling system to depreciate the equipment over 20 and 25 years, respectively. The IRS also determined that the district cooling system did not comprise equipment used in pipeline conveyance of petroleum, gas and other products. That equipment is depreciated over 15 years. Because the district cooling system property did not fit into these asset classes, it is properly categorized in a catchall category that allows seven year depreciation. Important factors cited by the IRS for these determinations were that the chilled water was in a closed loop system, was never converted to steam, was not supplied to customers and was wholly returned to the plants for re-chilling.

District cooling system not “structural components”.

The IRS further determined that the district cooling equipment did not constitute “structural components” of its customers’ buildings, distinguishing the present facts from a district cooling system examined in a 1981 US Tax Court decision. The IRS relied on the economic independence of the present district cooling system to distinguish it from the district cooling system in the 1981 case, where economic interdependence had been found. Salient factors in the IRS’s analysis included the absence of a contractual right for customers to take over the system, the ability of customers to disconnect from the system and use another energy source for cooling, and due to the interconnected network of chilled water pipes, each building in which the plants were located was not required to be served by the plant located in that building.


While the private letter ruling is a major victory, a private letter ruling is specific to the taxpayer to whom it is issued and the facts specifically set forth therein. Seek legal counsel before taking action based on any private letter ruling. The private letter ruling (PLR 201131010) is available online at



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