Tax
Subscribe to Tax's Posts

Supreme Court Agrees to Hear Divided Circuit Case Regarding Creditability of Foreign Taxes

by Martha Groves Pugh, James A. Riedy and Kevin Spencer

In PPL Corporation v. Commissioner, the Supreme Court will likely set forth the test of how U.S. taxpayers should determine whether a foreign tax is creditable for U.S. income tax purposes.  This decision may have far-reaching ramifications for many U.S. taxpayers who routinely claim foreign tax credits.

To read the full article, click here.




Changing Qualification Requirements for PTC Could Have Big Impact for Wind

by Martha Groves Pugh and William Friedman

The wind industry is pushing for an extension of the renewable energy production tax credit (PTC), which is currently scheduled to expire at the end of the year.  The PTC has helped spur investment in wind by providing a tax credit of 2.2 cents per kilowatt hour of wind energy produced.  It has been successful in growing the industry, but new wind projects have slowed this year to due uncertainty over the PTC’s extension. Historically, when Congress declined to extend the PTC, new wind projects fall drastically.  

Despite the political battles surrounding the tax credit, the Senate Finance Committee voted 19-5 to extend the PTC as part of a proposed tax extender package.  The bill, called the Family and Business Tax Cut Certainty Act of 2012, would extend the wind production tax credit for one year, through December 31, 2013.

The bill also contains a change to the qualification requirements for wind facilities, which has received little attention despite its important implications.  Previously, wind facilities had to be placed in service before they could qualify for the PTC.  Under the proposed extension, facilities will be eligible for the tax credit so long as construction begins before January 1, 2014.

The new qualification requirement would extend the impact of the PTC beyond 2013 by providing an incentive to begin construction during the year regardless of when the facility becomes operational.  The change would also provide certainty to new wind projects.  Under the old qualification requirement, a wind facility had to meet an operational deadline on the back end of their construction schedule.  The new qualification requirement front ends the relevant date, providing greater certainty that the facility will be able to take advantage of the tax credit.  The new qualification requirements have the potential to reinvigorate the wind industry.

Extending the PTC has implications for job growth, a critical issue in November’s election. One recent study by the Natural Resources Defense Council predicts that extending the PTC could create 17,000 new jobs, while letting it expire could cost 37,000. Despite the impacts on job creation, the House and Senate will likely consider the tax legislation, including the extension of the PTC for wind facilities, after the November election.




Wind Energy Industry Will Be Affected by Recent Trade Decisions, Tax Policy

On August 2, 2012, the U.S. Department of Commerce (DOC) published in the Federal Register its preliminary determinations in the antidumping (AD) investigations of Wind Towers from China and Vietnam.  DOC calculated preliminary AD margins for the Chinese mandatory and cooperative respondents ranging from 20.85 to 30.93 percent, while non-participating producers will face a margin of 72.69 percent.  Pursuant to its non-market economy (NME) AD calculation methodology, in which DOC estimates the costs of producing subject merchandise in China based on costs in a comparable "surrogate" market economy, DOC preliminarily selected the country recommended by the foreign producers—Ukraine—as the surrogate, finding that it provides the most specific information to value steel plate, the most significant input in the manufacture of wind towers.  For Vietnamese producers, DOC calculated preliminary AD margins ranging from 52.67 to 59.91 percent; India was selected as the surrogate country.

Importers of wind towers from China and Vietnam will be required to post cash deposits at the applicable rate calculated by DOC starting August 2, 2012.  DOC has postponed the deadline for the final determination in both cases, as well as in the companion countervailing duty case affecting imports from China only, for the maximum allowable statutory amount, i.e., until 135 days after publication of the preliminary determination notices, or December 17, 2012.

Meanwhile, legislative incentives may also have a great impact on the industry.  The wind industry has urged U.S. Congress to pass an extension of the production tax credit (PTC), which will expire at the end of this year.  There have been several proposals in Congress to extend the PTC to wind facilities that are placed in service after December 31, 2012.  Even though in years past the PTC and other provisions needing extensions to preserve the current tax treatment have often been extended in the waning moments of the Congress, it is more difficult than ever to predict whether such extensions will become law because of the impending election, the national debt debate and the current political environment.

For questions on the trade actions, contact David Levine or Raymond Paretzky.

For questions on the PTC, contact Martha Pugh.




Proposed Legislation Would Expand Use of Master Limited Partnerships to Renewable Energy Projects

by Madeline M. Chiampou and Brian Levy

Last week, Sens. Chris Coons, D.-Del., and Jerry Moran, R.-Kan., introduced bipartisan legislation aimed at expanding the use of master limited partnerships (MLPs) from fossil fuel-based energy projects such as oil, natural gas, coal extraction and pipeline projects to also include renewable energy projects. Interests in MLPs are traded on markets, like corporate stock. However, unlike corporations, MLPs are not subject to entity level tax; rather, the profits of MLPs are subject to taxation at the partner level, much like other entities treated as partnerships for federal tax purposes. These benefits are viewed as having significantly increased investment in fossil fuel-based projects in the United States. 

Congress first enacted tax legislation specifically relating to MLPs in 1987. The legislation required MLPs to derive at least 90 percent of their income (qualifying income) from certain categories of passive income, including income from resources subject to depletion, such as oil and gas. In 2008, the Emergency Economic Stabilization Act expanded the definition of qualifying income to include income from the transportation and storage of certain renewable and alternative fuels, such as ethanol, biodiesel and industrial-source carbon dioxide. The proposed legislation would expand the definition of qualifying income for MLP purposes to include income from wind, biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells and combined heat and power projects, as well as certain renewable transportation fuels. 

Under the current legislative regime, developers and investors typically invest in renewable energy projects through entities taxed as partnerships for tax purposes. Tax benefits available to such projects flow through to and are allocated among the partners. MLPs would also permit tax benefits to flow through to and be allocated among the MLP partners. Thus, for federal income tax purposes, there would not be many differences between the traditional partnership scenario and MLPs. From a transaction cost perspective, both traditional renewable energy partnerships and MLPs can involve significant transaction costs to developers and investors. However, since MLP interests are able to be traded on a market, investing in or exiting from MLPs may be easier than selling non-MLP partnership interests in the private market. As a result, MLPs are more attractive for some private investors who are more accustomed to buying and selling shares of stock than investing in partnerships. 

Most of the recent legislative focus from the renewable energy community has been on the impending expiration of tax credits related to the investment in and production of electricity through wind. Co-sponsor Coons has indicated that the proposed legislation should not be seen as a replacement to the expiring tax credits but as a complimentary piece of legislation. Without these tax credits or other tax incentives, the benefits of using MLPs alone may not be sufficient to make some renewable energy projects economically viable. However, it bears noting that any tax benefits generated by an MLP structure would be subject to existing limitations on the use of energy tax credits, such as the passive activity loss rules applicable to individuals and the investment tax credit and depreciation [...]

Continue Reading




The IRS Retains Control of Tax Issues Relating to the Section 1603 Grant

by Madeline M. Chiampou and Brian Levy

The Internal Revenue Service (IRS) recently set forth a set of questions and answers about the federal income tax consequences related to the receipt of a Section 1603 grant in lieu of investment tax credits for renewable energy projects in Notice 2012-23. While none of the guidance provided in this notice is novel, the purpose is to confirm that the IRS will follow Section 1603 grant guidance with respect to the specific rules set forth in the grant program relating to the tax treatment of grant recipients and qualification of taxpayers for the grant. Additionally, the notice indicates that, where the grant program departs from the rules in the Internal Revenue Code and Treasury regulations on which the grant program is based, the IRS will continue to follow the Internal Revenue Code and Treasury regulations with respect to the same renewable energy projects. For example, computing tax depreciation and making placed in service determinations will follow the code and Treasury regulations. 

The notice addresses the income tax consequences of the receipt of the grant and the taxpayer’s basis in the specified energy property. The notice states that the grant is not includible in the taxpayer’s gross income and the taxpayer’s basis in the specified energy property is reduced by 50 percent of the payment. This is clear from grant guidance and the notice only confirms that the grant is treated the same as an investment tax credit under Section 48 of the Internal Revenue Code.

The notice also addresses the income tax consequences to a taxpayer who receives both the grant and either a Department of Energy (DOE) loan guarantee or an energy conservation subsidy from a public utility. The notice confirms that receipt of a DOE loan guarantee does not reduce the taxpayer’s basis in its renewable energy project. With respect to energy conservation subsidies, the notice indicates that, under Section 136 of the Internal Revenue Code, an energy conservation subsidy provided by public utility might be excluded from income and therefore reduces the basis of specified energy property by the amount of the exclusion. This implies, as most tax practitioners understood, that energy conservation subsidies not expressly excluded from gross income statutorily are includible in income unless some other Internal Revenue Code exception applies. Referring specifically to a question and answer in the “Frequently Asked Questions” issued by the U.S. Department of the Treasury with respect to the grant, the notice confirmed that if an amount received is excluded from income, a corresponding basis reduction in the relevant property is warranted and, if no amount is excluded from income, then no reduction in basis is required.

The notice addresses whether Internal Revenue Code Section 168(h)(6) applies for purposes of determining the partnership’s depreciation deductions when a partnership that is eligible to receive a Section 1603 grant has as a partner a corporation that is a “tax-exempt controlled entity” (within the meaning of section 168[h][6][F]) meaning any corporation if 50 percent or more (in value) of the stock in [...]

Continue Reading




Key Energy-Related Tax Provisions in the 2013 Budget Proposal

by Madeline M. Chiampou, William R. Pomierski, Martha Groves Pugh, Philip Tingle and Brian Levy 

President Obama’s recently released budget proposal for the 2013 fiscal year contains energy-related tax provisions, including an extension of the Section 1603 grant in lieu of investment credits through 2012.

Please click here to view the entire White Paper in Adobe PDF format.




Presidential Commission Recommends Nuclear Waste Management and Funding Reforms

by Ari Peskoe

The Blue Ribbon Commission on America’s Nuclear Future released its final report detailing a new strategy for managing the nation’s nuclear waste.  The Commission’s key recommendations include removing nuclear waste management from the purview of the Department of Energy (DOE), creating a new federally chartered corporation to implement the waste management program and immediately overhauling how utilities fund the nation’s waste management activities.  The Commission submitted its report to Secretary of Energy Chu on January 26 and urged the Secretary to appoint a senior official at the agency to coordinate prompt implementation of the Commission’s recommendations.

President Obama formed the Commission following his decision to halt work on a geologic storage facility at Yucca Mountain, Nevada.  Despite more than two decades of work on developing that site, the United States still lacks a central repository for civilian nuclear waste, and nuclear waste remains at power plants around the country.  Since the early 1980s when Congress created the Nuclear Waste Fund (NWF), utilities have paid the federal government 0.1 cents per kilowatt-hour of nuclear electricity sold in order to fund nuclear waste management activities.  Much of that money collected from utilities, however, has been used by Congress to fund unrelated programs or to reduce the annual budget deficit.

Concluding that the DOE’s record in managing nuclear waste has “not inspired widespread confidence or trust,” the Commission recommended creating a new single-purpose organization to implement the nation’s nuclear waste management program.  The federally chartered corporation would site, license, build, and operate facilities for interim storage and permanent disposal.

The Commission highlighted that reforming the NWF is critical to the success of the new organization.  The report details “a web of budget rules” that have made the approximately $750 million in annual fee revenues and the $25 billion balance in the NWF “effectively inaccessible” for their intended purpose.  The Commission noted that pending legal action against the DOE aimed at suspending the collection of annual fees until a new waste management plan is in place underscores the “sense of outrage that the only aspect of the waste management program that has been implemented in full and on schedule is the part that involves collecting fees.”

The Commission recommended that utility fee payments into the NWF each year match actual spending on waste management activities.  Under this recommendation, the DOE would amend existing contracts with utilities to require utilities to retain the balance of annual fees in irrevocable trust accounts, which would be similar to qualified nuclear decommissioning funds.  According to the Commission, DOE and utilities could implement this proposal without new Congressional legislation.

In 1998, then-Secretary of Energy Frederico Pena proposed a similar scheme.  Under that proposal, utilities would have been allowed to invest the retained portion of fee payments at “market rates of return,” but pay the government in the future the balance of the fees at the Treasury rate.  The difference in interest would have been retained by the utilities to offset the costs of the [...]

Continue Reading




Welcome to McDermott’s Energy Business Law Blog

Welcome to McDermott’s Energy Business Law Blog.  Our objective in this forum is to provide our readers with insights into the evolving regulatory, business, tax and legal issues affecting the U.S. and international energy and commodities markets.  Contributions to this blog will be a collective effort of lawyers and professional staff that are part of McDermott’s broad-based energy practice, with ten U.S. and seven European offices, and a strategic alliance in China.  We will bring to bear our experience across the global energy sector, which spans exploration and production, oil, gas and refined products pipelines, storage and processing facilities, liquefied natural gas, refining and petrochemicals, electric power generation and transmission, renewable and alternative energy (including wind, solar, biofuels and others), trading and regulatory, carbon and emissions, metals and agriculture. 

We hope you find our energy blog to be an informative resource.  Please feel free to provide us any feedback on how we might improve our offerings.

Blake H. Winburne
Global Head, Energy Advisory Practice




STAY CONNECTED

TOPICS

ARCHIVES