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# OAR Box 1778 Prepped by Ollie Stewart



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Number: 

# 46 ) ll-B-2 1
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# A-90-0 6

Printed 10/28/2008 9:50:53 AM Sheet 46 of 276P. 2

x. .
' -.yiO STx. UNITE D STATE S ENVIRONMENTA LPrt U I L^^J-J" B " 2 1 Offic e o fAi rQualit yPlannin q ari d Standard s Researc h Triangl e Park , Nort h Carolin a 2771 1

: ' j NO V1338

NOT E T O WAL T STEVENSO N RE : Determining the "Basis " o f an Affecte d F b Recently , yo u aske d me howt o determin e th e "basis " o f a n existing facilit y(specifically , a.utilit yboiler)

. Thi s "basis " woul d be use d in calculating whethe r th e annua l maintenanc e expenditur e fo r tha t facilit ywoul d excee d th e allowanc e specifie d i n 4 0 CFR Subpar t A(NSP S "Genera l Provisions")

. Firs t o f all , according t o Subpar t A , §60.14 a "[A]n yphysica l o r operationa l chang e t o a n existing facilit ywhic hresult s in an increas e i n the emissio n rat e t o the atmospher e o f an ypollutan t t o whic ha standard applie s shal l b e considere d a modificatio n withi n th e meaning o f Sectio n 11 1 o f th e Act. " However , §60.14e(2 ) states : a n increas e i n productio n rat e o f an existing facility , i f tha t increas e can be accomplishe d withou t a capita l expenditur e o n tha t facility , shal l no t b e considere d a modification

. Finally , 4 0 CFR §60. 2 define s a "capita l expenditure " a s a n expenditur e fo r a physica l o r operationa l chang e t o a n existing facilit ytha t exceed s "...th e produc t o f th e applicabl e annua l asse t guidelin e repai r allowanc e percentag e specifie d i n th e lates t editio n o f Interna l Revenu e Servic e (IRS ) Publicatio n 53 4 an d th e existing facility' s basi s i s define d b

ySectio n 101 2 o f th e Interna l Revenu e Code. " A s I mentioned , Th e IR S no longe r publishe s thes e guidelin e repai r allowance s i n thei r Publicatio n 53 4 (entitle d Depreciation ) becaus e the allowance s d o no t appl yt o propert y subjec t t o th e newdepreciatio n rule s (i.e. , propert yplace d i n servic e afte r January1 , 1981)
. However , th e lates t cop yo f Publicatio n 53 4 i n whic hth e guideline s d o appea r (the Decembe r 198 4 edition ) give s a repai r allowanc e o f 5%
. fo r "Asse t Guidelin e Clas s 49.13 , Electri c Utilit yStea mProductio n Plant. " Th e IR S Publicatio n o f a propert ya s follows : depreciatio n i s the sam e figuring th e gai n o n a s a purchas e price. " (Empha s origina l basi s woul d be i A s Figur e 2- 2 o f th e EA B shows , th e TD I i s th e su m an d indirec t cost s fo r in 53 4 (Decembe r 1984 ) define s th e "basis " "The basi s use d fo r figuring a s th e basi s tha t woul d b e use d fo r le
. [The ] basi s i s usuall yth e i s mine. ) Fo r an existing facility , th e t s tota l depreciabl e investmen t (TDI)
. Contro l Cos t Manua l (Third Edition ) o f th e purchase d equipmen t cost , direc t stalling tha t equipment , an d th e cost sP. 3

o f sit e preparation , buildings , an d off-sit e facilities

. I n fact , the onl ycapita l cost s no t include d i n th e TD I ar e lan d an d working capital , neithe r o f whic hi s depreciabl e according t o IR S rules
. Th e TD I i s th e cos t use d wit hth e 5 % facto r t o determin e i f a "modification " too k place
. However , fo r NSP S purposes , th e TD I o f a

n affecte d facilit yexclude s on-sit e equipment , buildings , etc. , tha t ar e no t par t o f th e affecte d facility

. Fo r example , i f th e affecte d facilit ywer e a boile r i n a powe r plant , th e basi s (TDI ) woul d no t includ e th e generator , cooling tower , an d othe r equipmen t i n th e plant
. Anothe r ter

mtha t ofte n enter s depreciatio n calculation s i s th e "adjuste d basis " o f a property
. IR S Publicatio n 53 4 indicate s tha t th e "adjuste d basis " o f a propert yi s it s origina l basi s plu s an

yimprovement s mad e t o i t les s an ycasualt ylosse s o r depreciatio n deduction s taken
. Thus , th e "adjuste d basis " o f a propert ywoul d likel ychang e fro mtaxyea r t o taxyear . Perhap s th e mos t importan t questio n is : whe n determining a facility' s basi s (o r adjuste d basis ) i n wha t yea r dollar s shoul d w e expres s th e result ? Shoul d w e jus t tak e th e basi s (o r TDI ) o f th e facilit ya s calculate d whe n th e facilit ywa s built , regardles s o f howlong ag o tha t ma yhav e been ? O r shoul d w e tak e th e basi s (o r TDI ) an d escalat e i t (vi a some escalatio n index ) t o curren t dollars ? (I n th e forme r case , th e basi s woul d b e i n nomina l dollars ; i n th e latte r case , i n constan t dollars. ) IR S Publicatio n 53 4 i s silen t o n ho wth e basi s shoul d b e expressed
. However , t o obtai n an authoritativ e opinion , o n Octobe r 2 0 I phone d Fran

k Collins , a Valuatio n Enginee r wit hth e IR S Examinatio n Divisio n i n Atlanta
. Fran k (who use d t o wor k i n EAB , incidentally ) tol d m e tha t IR S calculate s th e "basis " o f a propert yi n nomina l dollars
. Frank adde d tha t th e "basis " i s expresse d i n nomina l dollar s becaus e bot hi t an d depreciatio n ar e taxaccounting concepts , an d accountant s alway s dea l i n nomina l dollars
. I n addition , I aske d JAC ACorporation , ou r contractor , t o loo k int o thi s matter
. Thei r finding s agree d wit hmin e regardin g th e definition s o f "basis " an d "adjuste d basis. " Th e IR S doe s provid e an alternativ e measur e o f a property' s "basis, " tha t being th e "fai r marke t value. " However , a s JACAstate d i n thei r Octobe r 3 1 lette r t o m e (attached) , th e "fai r marke t value " measur e applie s onl yt o suc hpropert ya s dividends , compensatio n receive d i n kind , an d account s receivable

. Clearly , "fai r marke t value " woul d no t appl yt o determining th e basi s o f an affecte d facility

. Finally , I'v e als o attache d a copyo f ^5410 , Section

. 101 2 o f th e Interna l Revenu e Code
. I t supplement s th e informatio n provide d i n JACA' s letter
. cP. 4

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I hop e tha t thi s not e answer s you r questions

. I f you' d lik e t o tal k mor e abou t this , pleas e stop by
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# JACA ' | d IY JI ,CORP. Managemen t Consultants * Engineers

Octobe r 31 , 198 8 Mr , Wi n1a

m Vatavuk Cos t andEconomi c Impac t Sectio n Offic e o f A1 r Qualit y

Plannin g andStandard s U.S . EPA Researc hTriangl e Park , N C 2771 1 Dea r Bill : Followin gupo

nou r telephon e conversatio ntoday , Sectio n60. 2 o f 4 0 CFRdefine s a capita l expenditure , for purpose s o f establishin gnew sourc e performanc e standards , a s "a nexpenditur e fo r a physica l o r operationa l chang e t o a nexistin gfacilit y whic hexceed s the produc t o f th e applicabl e 'annua l asse t guidelin e repai r allowanc e percentage ' specifie d1nthe lates t editio no f Interna l Revenu e Servic e (IRS ) Publicatio n53 4 an dthe existin gfacility' s basis , a s define db y Sectio n101 2 o f th e Interna l Revenu e Code. " I ndefininga modificatio nt o anexistin gfacility , Sectio n 60.14(e)(1 ) specificall y exclude s "maintenance , repair , an dreplacemen t whic hthe Administrato r determine s t o b e routin e fo r a sourc e category... " Also , m Sectio n60.14(e)(2) , 1 t 1 s statedtha t a productio nrat e increas e w i nno t b e considere da modificatio n1 f the Increas e canb e accomplishe d withou t a capita l expenditure . Sectio n101 2 o f the Interna l Revenu e Cod e state s tha t M 1 ngeneral , the unadjuste dbasi s o f propert y 1 s It s cos t unles s th e la w prescribe s a differen t basis. " Not e tha t propert y ma y als o underg o "adjustments " (henc e "unadjuste dbasis " I nthe abov e quote ) t o reflec t "certai naddition s o r subtraction s fo r expenditures , transactions , o r recoverie s o f capital... " (Section1011) . Th e us e o f cos t a s a valuatio nbasi s 1 s predominant . Th e discussio ni nSectio n101 2 o f on e alternativ e — fai r marke t valu e -- , for example , mention s onl y dividends , compensatio nreceive d1 nkind , an d account s receivable . Pleas e cal l m e 1 f yo uhave any question s o r requir e furthe r analysis . Sincerel y yours ,

CHUC KMARSHAL L Vic e President , Economic s an dBusines s Consulting CM:ka d
550 Pinetow n Road , For tWashington , PA

. 19034-*_(2^5H^ ^