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OAR Box 1778 

Prepped by Ollie Stewart 

Document Number: 

46) ll-B-21 

Docket Number: 

A-90-06 

Printed 10/28/2008 9:50:53 AM Sheet 46 of 276 
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UNITED STATES ENVIRONMENTAL PrtU I L ^^J-J" B"

2 1 

Office of Air Quality Planninq arid Standards 

Research Triangle Park, North Carolina 27711 

:

 'j NOV 1338 

NOTE TO WALT STEVENSON 

RE: Determining the "Basis" of an Affected Fb 

Recently, you asked me how to determine the "basis" of an 

existing facility (specifically, a.utility boiler). This "basis" 

would be used in calculating whether the annual maintenance 

expenditure for that facility would exceed the allowance 

specified in 40 CFR Subpart A (NSPS "General Provisions"). First 

of all, according to Subpart A, §60.14a "[A]ny physical or 

operational change to an existing facility which results in an 

increase in the emission rate to the atmosphere of any pollutant 

to which a standard applies shall be considered a modification 

within the meaning of Section 111 of the Act." 

However, §60.14e(2) states: an increase in production rate 

of an existing facility, if that increase can be accomplished 

without a capital expenditure on that facility, shall not be 

considered a modification. Finally, 40 CFR §60.2 defines a 

"capital expenditure" as an expenditure for a physical or 

operational change to an existing facility that exceeds 

"...the product of the applicable annual asset guideline repair 

allowance percentage specified in the latest edition of Internal 

Revenue Service (IRS) Publication 534 and the existing facility's 

basis is defined by Section 1012 of the Internal Revenue Code." 

As I mentioned, The IRS no longer publishes these guideline 

repair allowances in their Publication 534 (entitled 

Depreciation) because the allowances do not apply to property 

subject to the new depreciation rules (i.e., property placed in 

service after January 1, 1981). However, the latest copy of 

Publication 534 in which the guidelines do appear (the December 

1984 edition) gives a repair allowance of 5%. for "Asset Guideline 

Class 49.13, Electric Utility Steam Production Plant." 

The IRS Publication 

of a property as follows: 

depreciation is the same 

figuring the gain on a sa 

purchase price." (Emphas 

original basis would be i 

As Figure 2-2 of the EAB 

shows, the TDI is the sum 

and indirect costs for in 

534 (December 1984) defines the "basis" 

"The basis used for figuring 

as the basis that would be used for 

le. [The] basis is usually the 

is mine.) For an existing facility, the 

ts total depreciable investment (TDI). 

Control Cost Manual (Third Edition) 

of the purchased equipment cost, direct 

stalling that equipment, and the costs 
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of site preparation, buildings, and off-site facilities. In 

fact, the only capital costs not included in the TDI are land and 

working capital, neither of which is depreciable according to IRS 

rules. The TDI is the cost used with the 5% factor to determine 

if a "modification" took place. However, for NSPS purposes, the 

TDI of an affected facility excludes on-site equipment, 

buildings, etc., that are not part of the affected facility. For 

example, if the affected facility were a boiler in a power plant, 

the basis (TDI) would not include the generator, cooling tower, 

and other equipment in the plant. 

Another term that often enters depreciation calculations is 

the "adjusted basis" of a property. IRS Publication 534 

indicates that the "adjusted basis" of a property is its original 

basis plus any improvements made to it less any casualty losses 

or depreciation deductions taken. Thus, the "adjusted basis" of 

a property would likely change from tax year to tax year. 

Perhaps the most important question is: when determining a 

facility's basis (or adjusted basis) in what year dollars should 

we express the result? Should we just take the basis (or TDI) of 

the facility as calculated when the facility was built, 

regardless of how long ago that may have been? Or should we take 

the basis (or TDI) and escalate it (via some escalation index) to 

current dollars? (In the former case, the basis would be in 

nominal dollars; in the latter case, in constant dollars.) IRS 

Publication 534 is silent on how the basis should be expressed. 

However, to obtain an authoritative opinion, on October 20 I 

phoned Frank Collins, a Valuation Engineer with the IRS 

Examination Division in Atlanta. Frank (who used to work in EAB, 

incidentally) told me that IRS calculates the "basis" of a 

property in nominal dollars. Frank added that the "basis" is 

expressed in nominal dollars because both it and depreciation are 

tax accounting concepts, and accountants always deal in nominal 

dollars. 

In addition, I asked JACA Corporation, our contractor, to 

look into this matter. Their findings agreed with mine regarding 

the definitions of "basis" and "adjusted basis." The IRS does 

provide an alternative measure of a property's "basis," that 

being the "fair market value." However, as JACA stated in their 

October 31 letter to me (attached), the "fair market value" 

measure applies only to such property as dividends, compensation 

received in kind, and accounts receivable. Clearly, "fair market 

value" would not apply to determining the basis of an affected 

facility. Finally, I've also attached a copy of ^5410, 

Section. 1012 of the Internal Revenue Code. It supplements the 

information provided in JACA's letter. 

c 
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I hope that this note answers your questions. If you'd like 

to talk more about this, please stop by. _ 

Bill Vatavuk 

D' nf) 

cc: R. Ajax' 

T. Walton 

A. Wehe 

OAQPS:ESD:SDB:BVatavuk:mmitchell:.629-5309(MD-13) : 10/21/88 
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JACA' |d IYJ I, CORP. 

Management Consultants * Engineers 

October 31, 1988 

Mr, Win 1am Vatavuk 

Cost and Economic Impact Section 

Office of A1r Quality Planning 

and Standards 

U.S. EPA 

Research Triangle Park, NC 27711 

Dear Bill: 

Following up on our telephone conversation today, Section 60.2 of 40 

CFR defines a capital expenditure, for purposes of establishing new source 

performance standards, as "an expenditure for a physical or operational 

change to an existing facility which exceeds the product of the applicable 

'annual asset guideline repair allowance percentage' specified 1n the 

latest edition of Internal Revenue Service (IRS) Publication 534 and the 

existing facility's basis, as defined by Section 1012 of the Internal 

Revenue Code." In defining a modification to an existing facility, Section 

60.14(e)(1) specifically excludes "maintenance, repair, and replacement 

which the Administrator determines to be routine for a source category..." 

Also, m Section 60.14(e)(2), 1t 1s stated that a production rate increase 

w i n not be considered a modification 1f the Increase can be accomplished 

without a capital expenditure. 

Section 1012 of the Internal Revenue Code states that

 M1n general, 

the unadjusted basis of property 1s Its cost unless the law prescribes a 

different basis." Note that property may also undergo "adjustments" (hence 

"unadjusted basis" In the above quote) to reflect "certain additions or 

subtractions for expenditures, transactions, or recoveries of capital..." 

(Section 1011). The use of cost as a valuation basis 1s predominant. The 

discussion in Section 1012 of one alternative — fair market value --, for 

example, mentions only dividends, compensation received 1n kind, and 

accounts receivable. 

Please call me 1f you have any questions or require further analysis. 

Sincerely yours, 

CHUCK MARSHALL 

Vice President, Economics 

and Business Consulting 

CM:kad 

550 Pinetown Road, Fort Washington, PA. 19034-*_(2^5H^^