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Kevin Spencer focuses his practice on tax controversy issues. Kevin represents clients in complicated tax disputes in court and before the Internal Revenue Service (IRS) at the IRS Appeals and Examination divisions. In addition to his tax controversy practice, Kevin has broad experience advising clients on various tax issues, including tax accounting, employment and reasonable compensation, civil and criminal tax penalties, IRS procedures, reportable transactions and tax shelters, renewable energy, state and local tax, and private client matters. After earning his Master of Tax degree, Kevin had the privilege to clerk for the Honorable Robert P. Ruwe on the US Tax Court. Read Kevin Spencer's full bio.

On July 27, 2018, the US Court of Appeals for the Federal Circuit in Alta Wind v. United States, reversed and remanded what had been a resounding victory for renewable energy. The US Court of Federal Claims had ruled that the plaintiff was entitled to claim a Section 1603 cash grant on the total amount paid for wind energy assets, including the value of certain power purchase agreements (PPAs).

We have reported on the Alta Wind case several times in the past two years:

Government Appeal of Alta Wind Supports Decision to File Suit Now

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Act Now To Preserve Your Section 1603 Grant

SOL and the 1603 Cash Grant – File Now or Forever Hold Your Peace

In reversing the trial court, the appellate court failed to answer the substantive question of whether a PPA that is part of the sale of a renewable energy facility is creditable for purposes of the Section 1603 cash grant.

Trial Court Decision

The Court of Federal Claims awarded the plaintiff damages of more than $206 million with respect to the cash grant under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). The court held that the government had underpaid the plaintiff its Section 1603 Grants arising from the development and purchase of large wind facilities when it refused to include the value of certain PPAs in the plaintiffs’ eligible basis for the cash grants. The trial court rejected the government’s argument that the plaintiffs’ basis was limited solely to development and construction costs. Instead, the court agreed with the plaintiffs that the arm’s-length purchase price of the projects prior to their placed-in-service date informed the projects’ creditable value. The court also determined that the PPAs specific to the wind facilities should not be treated as ineligible intangible property for purposes of the Section 1603 Grant. This meant that any value associated with the PPAs would be creditable for purposes of the Section 1603 Grant.

Federal Circuit Reverses and Remands 

The government appealed its loss to the Federal Circuit. In its opinion, the Federal Circuit reversed the trial court’s decision, and remanded the case back to the trial court with instructions. The Federal Circuit held that the purchase of the wind facilities should be properly treated as “applicable asset acquisitions” for purposes of Internal Revenue Code (IRC) section 1060, and the purchase prices must be allocated using the so-called “residual method.” The residual method requires a taxpayer to allocate the purchase price among seven categories. The purpose of the allocation is to discern what amount of a purchase price should be ascribed to each category of assets, which may have significance for other parts of the IRC. For example, if the purchase price includes depreciable plant equipment and non-depreciable property (e.g., cash and marketable securities), the residual method asks the taxpayer to allocate the total purchase price between the property classes.

The Federal Circuit remanded the case back to the Claims Court to determine the proper allocation of the purchase prices of the wind facilities.

Why Is This Case Important?  

If you are in the renewable energy industry, this decision is likely very important. Indeed, there are numerous taxpayers who did not receive the full amount of their Section 1603 Grant based upon the government’s reduction of the claim for the value of a PPA. This case will have precedential effect on those taxpayers’ claims. Moreover, the decision will affect how the industry prices deals for renewable facilities. These transactions have historically involved substantial financial modeling based upon cash flows.

The Federal Circuit Left the Primary Issue Unanswered

The Federal Circuit left the primary issue in the case, whether the PPA is creditable for purposes of the Section 1603 Grant, to the trial court to decide on remand. Accordingly, if the trial court determines that the PPAs cannot be divorced from the wind farm facilities assets, they will be correctly allocated to “Class V” in IRC section 1060, and will be credit able for purposes of the Section 1603 Grant. Implicitly, this is what the trial court had already decided, and the result would obtain the same economic result for the plaintiff as its original ruling. We will continue to follow this matter to see whether the trial court follows the prevailing thinking on this issue and of a decade of legal support.

Taxpayers are running out of time to file refund claims against the government. If the government reduced or denied your Section 1603 cash grant, you can file suit in the Court of Federal Claims against the government to reclaim your lost grant money. Don’t worry, you will not be alone. There are numerous taxpayers lining up actions against the government and seeking refunds from this mismanaged renewable energy incentive program. Indeed, the government lost in round one of Alta Wind I Owner-Lessor C. v. United States, 128 Fed. Cl. 702 (2016). In that case, the trial court awarded the plaintiffs more than $206 million in damages ruling that the government unreasonably reduced their Section 1603 cash grants.

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Changes to the energy credits proposed in the Tax Cuts and Jobs Act could impact the eligibility of renewable energy projects that had been relying on the guidance previously issued by the Internal Revenue Service.

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According to the Department of Energy (DOE) renewable energy wind installations had explosive growth through 2016, and added approximately 32,000 jobs since 2015, to a total of 102,000!

In the Wind Technologies Market Report, DOE says the Production Tax Credit (PTC) is directly responsible for the expansion. Congress, however, is phasing out the PTC, which DOE believes will lead to a slowing of the wind energy industry. The PTC is incrementally being phased out over a five year period, and ends completely in 2020. Read here for more information.

In a highly-anticipated Technical Advice Memorandum (TAM) dated March 23, 2017 and released on July 21, 2017, the Internal Revenue Service (IRS) ruled that two taxpayers who had invested in a Limited Liability Company that owned and operated a refined coal facility (the LLC) were not entitled to refined coal production credits they had claimed because their investment in the LLC was structured “solely to facilitate the prohibited purchase of refined coal tax credits.” This analysis marks a departure from the position staked out by the IRS in a number of recent refined coal credit cases, which focused on whether taxpayers claiming refined coal credits were partners in a partnership that owned and operated a refined coal facility.

Continue Reading IRS Rules (Again) That Taxpayers Are Not Entitled to Claimed Refined Coal Credits

As you may know, several taxpayers have sued the federal government because they believe they were underpaid under the Section 1603 grant program. Indeed, the taxpayer in the Alta Wind case was successful in convincing the court that the government had inappropriately reduced the amount of its 1603 grant by approximately $200 million. For more information about the Alta Wind case, see our previous On the Subject, “Act Now to Preserve Your Section 1603 Grant.” We have been following these cases, and believe that the grant applicants have strong arguments in their favor. As expected, right before the New Year, the US government appealed the Alta Wind case, asking the US Court of Appeals for the Federal Circuit to overturn that decision.

Taxpayers with the same or similar legal issue need to make a decision of what to do. We strongly recommend that you file your case immediately against the government seeking redress for the inappropriate reduction in the amount of the 1603 grant that the government paid to you. If you file suit, we expect the court will stay your case pending the outcome of the Alta Wind appeal. Nevertheless, we believe that this is the best course of action for the reasons outlined below:

  • First, filing suit now will toll the statute of limitations on your claims. Every case must be filed within the statute of limitations. If you do not file your suit within the statute of limitations, you will not be permitted to file suit in the future. Appeals can take years to resolve. If you wait until the court rules on the Alta Wind appeal you risk losing your claim because the statute of limitations may have expired by the time that case is fully decided. Filing your claim now will stop the limitations period from running, preserving your ability to have your claims heard by the court.
  • Second, we expect that the appeals court will affirm the taxpayer’s win in Alta Wind. If you have a pending case in court when that occurs, you will be in a better position than those taxpayers who wait to file suit because the government will have to address your case immediately after the appeal is decided and the stay is lifted. Moreover, filing suit and “getting in line” early will be especially important if the government tries to settle the claims against it because you will be able to argue that you should be entitled to a greater percentage of your claim than if you had filed after the appellate court rules against the government.
  • Lastly, filing suit now will increase your ability to withstand any attempts by the US Department of the Treasury to retroactively change the 1603 grant program. The new administration has taken over, and it is possible that it could implement rules for the Section 1603 grant program that are harmful to your claim and try to implement them retroactively. That is an issue that would have to be litigated, but your argument would be easier to make if you have a pending case at the time the rules are implemented.

We estimate that the cost of filing your suit will be very low, but the benefits can be very important to positioning yourself for the best possible outcome.

Additionally, we would encourage you to join forces with other taxpayers that have the same or similar issue, and file an amicus (“friend of the court”) brief in the pending Alta Wind appeals case. We are in the process of assembling a coalition of taxpayers to file an amicus brief. The amicus brief would, of course, be in support of the taxpayer’s case and legal theory, which could also improve your case in court.

Please contact us if you would like to discuss this matter further.

The US Court of Federal Claims awarded damages of more than $206 million to the Plaintiffs in a case with respect to the cash grant program under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). In its opinion, which was unsealed on Monday, October 31, the Court held that the US Treasury Department (Treasury) had underpaid the Section 1603 Grants arising from projects in the Alta Wind Energy Center because it had incorrectly reduced the Plaintiffs’ eligible basis in the projects. The Court rejected Treasury’s argument that the Plaintiffs’ basis in the facilities was limited to development and construction costs, and accepted Plaintiffs’ position that the arm’s-length purchase price of the projects prior to their placed-in-service date was a reasonable starting place for the projects’ value. The Court determined that the facilities, having not yet been placed in service and having only one customer pursuant to a master power purchase agreement (PPA), could not have any value assigned to goodwill or going concern value which would reduce the amount of eligible costs for purposes of the Section 1603 Grant. The Court noted that the transactions surrounding the sales of the facilities were conducted at arm’s length by economically self-interested parties and that the purchase prices and side agreements were not marked by “peculiar circumstances” which influenced the parties to agree to a price highly in excess of fair market value. Importantly, the Court also held that PPAs were more like land leases which should not be viewed as separate intangible assets from the underlying facilities, and are thus eligible property for purposes of the Section 1603 Grant. Finally, the Court accepted the Plaintiffs’ pro rata allocation of costs between eligible and ineligible property.

This significant decision is welcomed by the renewable energy industry and is an affirmation of a long held view by many taxpayers as to an appropriate measure of cost basis in the context of the Section 1603 Grant. The decision may also serve as much-needed guidance for determining cost basis for purposes of the investment tax credit under Code Section 48.

McDermott will be issuing a full On the Subject review and analysis of the Court’s opinion in the coming days.

As discussed in our post on April 7, US Congress extended the Production Tax Credit (PTC) under Internal Revenue Code (IRC) Section 45 and the Investment Tax Credit (ITC) under IRC Section 48 in December 2015, but failed to include extensions for certain types of renewable energy property, including fuel cell power plants, stationary microturbine power plants, small wind energy property, combined heat and power system property, and geothermal heat pump property. Some congressional leaders had stated that the omission was an oversight that would be addressed in 2016.

In March, President Barack Obama signed an extension of certain Federal Aviation Administration (FAA) programs and revenue provisions through July 15, 2016. This legislation was apparently crafted with an intentionally short timeframe to allow inclusion of the omitted PTC and ITC provisions in long-term FAA reauthorization legislation.  However, Senate Finance Committee members have indicated that the long-term FAA legislation will not include energy tax incentives. According to Tax Analysts, Senate Finance Committee member John Thune (R-SD) recently indicated that the extenders will not make it into the FAA reauthorization bill. Senator Richard Burr (R-NC) also said that the most likely vehicle for energy tax incentives would be an end-of-the-year tax bill.

On May 18, 2016, the Internal Revenue Service (IRS) revised Notice 2016-31 (Notice), its recent guidance on meeting the beginning of construction requirements for wind and other qualified facilities (including biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities). For a discussion of the Notice, click here. The revisions clarify that the Continuity Safe Harbor is satisfied if a taxpayer places a facility into service by the later of (1) the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2016. The revisions also include additional language that the Notice applies to any project for which a taxpayer claims the Section 45 production tax credit (PTC) or the Section 48 investment tax credit (ITC) that is placed in service after January 2, 2013.

The revised Notice also corrects mathematical errors in an example illustrating the application of the begin construction guidance in the Notice to retrofitted facilities. The revised example is as follows:

A taxpayer owns a wind farm composed of 13 turbines, pad and towers that no longer qualify for either the PTC or the ITC. Each facility has a fair market value of $1 million. The taxpayer replaces components worth $900,000 on 11 of the 13 facilities at a cost of $1.4 million for each facility. The fair market value of the remaining original components at each upgraded facility is $100,000. Thus, the total fair market value of each upgraded facility is $1.5 million. The total expenditures to retrofit the 11 facilities are $15.4 million. The taxpayer applies the single project rule. Because the fair market value of the remaining original components of each upgraded facility ($100,000) is not more than 20 percent of each facility’s total value of $1.5 million, each upgraded facility will be considered newly placed in service for purposes of the PTC and the ITC. Accordingly, if the taxpayer pays or incurs at least $770,000 (or 5 percent of $15.4 million) of qualified expenditures in 2016, the single project will be considered to have begun construction in 2016. Provided the taxpayer also meets the Continuous Efforts Test, each upgraded facility will be treated as a qualified facility for purposes of the PTC. However, no additional PTC or ITC will be allowed with respect to the two facilities that were not upgraded.

Taxpayers should consider talking with their advisors to discuss the application of these rules to their projects.

The Internal Revenue Service recently issued Notice 2016-31, which provides much-needed guidance for wind and other qualified facilities on meeting the beginning of construction requirements in light of the 2015 statutory extension and modification of the production tax credit and the investment tax credit. The Notice also revises and adds to the list of excusable disruptions that will not be taken into account when determining whether the continuity requirement has been met, and provides additional examples demonstrating “physical work of a significant nature” for different types of qualified facilities.

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