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.

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.

by Gale E. Chan, Martha Groves Pugh, Philip Tingle, Madeline Chiampou Tully and Amy E. Drake

The Internal Revenue Service (IRS) has issued additional guidance relating to when construction begins with respect to wind and other qualified facilities for purposes of the production tax credit and investment tax credit. This guidance focuses on the continuous construction and continuous efforts tests and the effects of ownership transfers of a facility after construction has begun.

To read the full article, click here.

by Gale Chan, Martha Groves Pugh and Philip Tingle

Last week, we reported that the Internal Revenue Service (IRS) issued Notice 2013-29 (Notice) to to provide guidance on eligibility for the production tax credit (PTC) and investment tax credit (ITC). On April 25, 2013, the Internal Revenue Service (IRS) updated the Notice. Under the IRS’s additional guidance, a binding contract that has a liquidated damages provision that limits damages to at least 5 percent of the total contract price will not be treated as limiting damages to a specified amount. 

When the Notice was first issued on April 15, 2013, it provided that a contract is binding only if the contract did not limit damages to a specified amount, including the use of a liquidated damages provision. This language differed from the treatment of a binding contract under the guidance issued by the Department of Treasury with respect to the grant program under section 1603 of the American Recovery and Reinvestment Act of 2009 because the Section 1603 Grant program, like the bonus depreciation regulations, provided that a liquidated damages provision that limited damages to an amount that was equal to at least 5 percent of the total contract price would not be treated as limiting damages in a contract to a specified amount. As updated, the Notice is now in line with the definition of binding contract under the guidance issued with respect to the Section 1603 Grant as well as the IRS’s own regulations regarding a binding contract in the bonus depreciation regulations.

by Gale Chan, Martha Groves Pugh and Philip Tingle

The Internal Revenue Service (IRS) issued Notice 2013-29 to provide guidance on eligibility for the production tax credit (PTC) and the investment tax credit (ITC). Under the most recent extension of the PTC and ITC, enacted by Congress on January 1, 2013, a renewable energy facility must begin construction before January 1, 2014 to be eligible for the PTC or ITC.  The IRS’ Notice largely follows the guidance that Treasury provided with respect to Section 1603 grants and provides that a taxpayer may establish that construction has begun either by demonstrating that physical work of a significant nature has begun or by satisfying a five percent safe harbor.  Key differences between the Section 1603 Guidance and the IRS’ Notice on the PTC and ITC are highlighted below.

Under the IRS’ Notice, physical work of a significant nature must be with respect to tangible property that is integral to the facility.  Thus, property integral to the production of electricity is included but not property used for the transmission of electricity.  Power conditioning equipment, such as a transformer, is an integral part of the facility.

Either on-site or off-site work can be sufficient to demonstrate the beginning of construction.  If work is performed off-site, the work can be performed either by the taxpayer or by another person for the taxpayer pursuant to a binding written contract.  A contract is binding only if it is enforceable under local law against the taxpayer (or a predecessor), and the contract does not limit damages to a specified amount.  This definition is a departure from the 1603 Guidance, which determined that a contract is binding so long as the liquidated damages provision in the contract does not limit damages to less than five percent of the total contract price.

A taxpayer must maintain a continuous program of construction of a significant nature.  The IRS’ Notice lists detailed examples, not provided in the 1603 Guidance, of allowable disruptions that are beyond the control of the taxpayer, including: severe weather, licensing and permitting delays, delays requested in writing by a government agency, financing delays of less than six months, and supply shortages.p>

Alternatively, like the 1603 Guidance, the IRS’ Notice includes a safe harbor that provides eligibility for the PTC or ITC if the taxpayer pays or incurs five percent or more of the total costs of the facility.  All costs properly included in the depreciable basis of the facility are taken into account.  However, the cost of land or any property not integral to the facility is not included. 

Unlike the 1603 Guidance, the IRS’ Notice imposes a continuous efforts requirement for the safe harbor and includes a taxpayer favorable provision related to cost overruns.  Facts and circumstances indicating continuous efforts include paying or incurring additional amounts included in the total cost of the facility, obtaining permits, and entering into binding written contracts for components or future work.  With respect to a single project comprised of multiple facilities, the IRS’ Notice provides that if the actual cost of the project exceeds the anticipated cost such that the safe harbor amount is less than five percent of the actual total costs, the safe harbor is not fully satisfied.  However, the PTC or ITC may be claimed with respect to some, but not all, of the individual facilities whose total costs are not more than 20 times greater than the amount the taxpayer paid or incurred before January 1, 2014.

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 such corporation is held by one or more tax-exempt entities (other than a foreign person or entity). Section 168(g) identifies certain types of properties that are subject to the longer Alternative Depreciation System (ADS) recovery periods including any “tax-exempt use property.” The notice reaffirms that section 168(h)(6) applies to any partnership that owns property and has a tax-exempt entity or a tax-exempt controlled entity as a partner even if the partnership is eligible for a Section 1603 grant.  The notice suggests that if a tax-exempt controlled entity applies for a Section 1603 grant through a U.S. corporation, although the U.S. corporation is grant eligible, it will still be subject to ADS depreciation system.  It is also important to note that a tax-exempt controlled entity would not be eligible for investment tax credits even though it is eligible for the grant.

The notice addresses how a taxpayer of multiple units of property who treats the multiple units as a single unit (grouping election) for determining the beginning of construction and the date the property is placed in service for grant purposes will be affected by the grouping election for tax deprecation purpose. The notice confirms that the taxpayer’s grouping election for grant purposes will not affect the determination of the unit of property for tax deprecation purposes or the date that property is placed in service for purposes of calculating the relevant depreciation deductions. This conclusion is not surprising as the grant rules on a grouping election departed from the federal tax rules on this point.

Lastly, the notice addresses the federal income tax consequences of a sale-leaseback transaction more than three months after the seller/lessee originally placed the project in service. The notice states that, under the sale-leaseback tax rules and Section 1603 grant rules, the purchaser/lessor is not eligible for the grant because the project was sold and leased back more than three months after the project was placed in service, and the purchaser/lessor may not elect to pass through the grant to the seller/lessee because the project was sold and leased back more than three months after the project was placed in service. Rather, the seller/lessee is the taxpayer placing the property in service and is therefore eligible for the grant. The notice provides that the seller/lessee must, as a result, reduce its basis in the project by 50 percent of the amount of the grant before determining gain or loss on the sale of the project to the purchaser/lessor. The seller/lessee is not required to report income equal to 50 percent of the amount of the grant ratably over the five-year recapture period. This portion of the notice provides federal tax certainty to the treatment of a sale-leaseback transaction where the seller/lessee does not sell and lease back the project within three months of the project being placed in service for tax purposes.