On January 19, 2017, the US Internal Revenue Service (IRS) released Revenue Procedure 2017-19 (the “Rev. Proc.”) providing a safe harbor for certain alternative energy sales contracts with federal agencies to be treated as service contracts under Section 7701(e)(3). The safe harbor is important because, if such a contract is treated as a lease to the federal agency, a solar project would constitute “tax-exempt use property” that is ineligible for the investment tax credit (ITC) and accelerated depreciation (including bonus depreciation).
On December 15, 2016, the US Internal Revenue Service (the “IRS”) released Notice 2017-4 (the “Notice”), which updates previous IRS “start of construction” guidance by extending the Continuity Safe Harbor (described below) to December 31, 2018, and modifying and clarifying Notice 2016-31.1 The Notice is good news for developers with projects for which physical construction started during 2013 in that the extension gives them five years to complete construction and have the project placed in service. The Notice also means they need not worry about whether minimal amounts of physical construction during 2013 would cause these projects to be ineligible for the extension if the extension was only available to projects that commenced construction during 2014.
As discussed in more detail below, the Notice provides that a facility will be deemed to automatically meet the continuous construction requirement if it is placed in service by the later of (i) December 31, 2018 (a two-year extension of the prior deadline) or (ii) the end of the calendar year that is four years after the year in which construction started (the “Continuity Safe Harbor”). Continue Reading IRS Extends Continuity Safe Harbor Until December 31, 2018
Rumblings in the market suggest that some tax equity investors are preparing for the possibility that the 2017 marginal corporate federal income tax rate may be much lower than the current 35 percent. Such tax equity investors are concerned that this could result in them having insufficient tax appetite in 2017 to make tax equity investments. Such a concern is unfounded.
First, broad tax reform measures (like changes in corporate rates) are never effective in the year they are enacted. Businesses, the IRS and tax professionals need time to implement the new rules. This includes financial planning, but also includes the IRS drafting new forms and tax preparation companies updating their software.
Further, since 1954 the only instance of tax reform being passed in the first year a new President was in office was Ronald Reagan in 1981. (And again, those changes were effective starting in 1982.)
Below is a chart I prepared summarizing the timeline of major federal income tax reform legislation since 1954:
The post below addresses the legality of the expected withdraw from the Paris Agreement on climate change by the United States under the next Administration.
The White House characterized the Paris Agreement on climate change as an “executive agreement” that was adopted upon signing by the President, and as such a subsequent President can terminate it. Under the US Constitution, the difference between an executive agreement and a treaty is that a treaty must be ratified by two-thirds of the Senate, which is a process President Obama did not initiate.
As reflected in Article 15 of the Paris Agreement, the agreement has no penalty for withdrawing from (or ignoring) it: “A mechanism to facilitate implementation of and promote compliance with the provisions of this agreement is hereby established. [That] mechanism … shall consist of a committee that … shall function in a manner that is … non-adversarial and non-punitive.” Continue Reading Legality of Exit from Paris Climate Pact
On October 31, 2016, the US Court of Federal Claims decided that Halloween was the perfect day to release its opinion in Alta v. United States, and the plaintiffs no doubt are enjoying this treat.
The case came about when the plaintiffs brought suit against the Treasury for the alleged underpayment of over $206 million in grants under section 1603 of the American Recovery and Reinvestment Tax Act of 2009. That section provides the owners of certain renewable energy projects with a grant equal to 30 percent of the specified energy property’s basis.
As the court aptly stated: “And therein lies the dispute.” Importantly, the court emphasized the general rule that “[b]asis, as defined in the IRC, is the cost of property to its owner” and, while there are “exceptions to the general rule that purchase price determines basis,” such exceptions did not apply under the facts of this case. Accordingly, the court found that the plaintiffs were entitled to the full amount of their grants and awarded damages equal to the shortfall plus reasonable costs.
The cases involved 20 plaintiffs, all of which were special purpose limited liability companies organized for the benefit of various institutional investors. For 19 of the plaintiffs, the purported basis was set via a sale of a wind project or an undivided interest therein to it from the developer that was followed by a lease back to the developer. For one plaintiff, the basis was set in outright sale from the developer to the plaintiff without a lease; that is, the plaintiff operated the project directly. All of the wind projects were contracted to Southern California Edison pursuant to a long-term fixed-price power purchase agreement (“PPA”). All of the projects were sold prior to their start of commercial operation.
The government, in denying payment of the full amount of the grant applied for, argued that basis should be calculated from “the value of each wind farm’s grant-eligible constituent parts and their respective development and construction costs.” Everything else would be categorized as either goodwill or going-concern value. Accepting the plaintiffs’ argument, argued the government, would mean accepting an inflated and improper number far in excess of what the assets would justify.
The plaintiffs’ determination of eligible basis was purchase price “minus small allocations for ineligible property such as land and transmission lines.” Continue Reading Court of Federal Claims to Treasury: “Basis Equals Purchase Price”
The Court of Federal Claims on October 28 entered judgment in favor of Alta Wind cash grant applicants awarding them collectively over $206 million for grants under Section 1603 of the American Recovery and Reinvestment Tax Act that the Treasury had declined to pay. The two page judgment is available at Alta Wind Judgment Oct 2016.
The judgment is clearly good news for the renewable energy industry and the many other cash grant applicants who Treasury awarded smaller cash grants than they applied for. Other project owners who were shorted by Treasury are likely to be inspired by this judgment to bring lawsuits in the Court of Federal Claims to recover the difference between what they applied for and what Treasury awarded.
There is a substantive judicial opinion that accompanies the judgment. That opinion is still under seal (i.e., is not publicly available), while the judge and the parties determine what text must be redacted from the public version in order to protect proprietary information.
Congress provided that the Section 1603 cash grant rules “mimic” the investment tax credit (ITC) rules in Section 48 of the Internal Revenue Code (the Code); therefore, the Court’s opinion is likely to provide the renewable energy industry and its tax advisers with clarification of how to determine the ITC eligible. In many renewable energy transactions, that basis results from a sale of the project at fair market value as confirmed by an independent appraisal. The opinion may provide some clarification as to the methodology and considerations to be used in such an appraisal.
The decision is likely to have more significance to the solar industry than wind projects, as wind projects typically claim the Code Section 45 production tax credit (PTC), which is 2.3 cents per Kilowatt hour of production during the first ten years of operation of the project; therefore, the amount of the PTC is not affected by the tax basis (or the fair market value of the project).
The Department of Justice can appeal the case to the Federal Circuit. Therefore, there may another chapter in this story that could potentially change the outcome. However, to the extent the Federal Circuit were to view the amount of the cash grant award as a question of fact then it will only overturn the decision of the Court of Federal Claims if the factual findings were clearly erroneous. Federal Rule of Civil Procedure 52(a)(6).
The Congressional Research Service (CRS) has issued its periodic report on the investment tax credit (ITC).
The report has a helpful summary of current law, useful history and data regarding the cost of the ITC; however, it omits certain ITC eligible technologies from its discussion. The full report is available here: CRS 2016 ITC Report.
Below is a helpful table included in the CRS report that summarizes the tax credit phase out rules for certain renewable energy technologies:
Below are soundbites from panel discussions on September 14, 2016 at Solar Power International in Las Vegas. The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or a recording.
Supply of Tax Equity Investment
“There are 32 tax equity investors in the renewables market, about 26 of those invest in solar.” — Managing Director from a Money Center Bank
“It is very challenging when syndicators are trying to bring in new investors. Each new investor takes nine to 15 months to work through its approval issues.” — Director, Renewable Energy Investments for a Commercial Bank
“We continue to see insurance companies get into the market. They like the asset. You might have newcomers that invest in 20 MW of projects in commercial transactions.” — Managing Director of a Boutique Financial Advisor
“There are more investors for solar than wind. Wind is limited to experienced project [financiers]. Overall there is enough tax equity capacity for solar.” — Managing Director of a Boutique Financial Advisor
“We prioritize tax equity investment opportunities based on:
- Basic project finance fundamentals – quality of the sponsor and its management team, the quality of the power purchase agreement (“PPA”), the quality of the equipment and its warranties, and pro forma stress tests.
- The minimum amount out the door. For solar, we want to be investing $75 to $100 million per transaction. If the transaction involves commercial and industrial or residential projects, we like it to take no more than six to nine months to deploy that amount.
- Repeat business. Does the sponsor have a pipeline of projects, so we can reuse the papers we have” negotiated. — Managing Director from a Money Center Bank
On August 30, 2016, the US Internal Revenue Service (“IRS”) finalized regulations that clarify the definition of real property for purposes of the real estate investment trust (“REIT”) provisions under Section 856. The final regulations generally are consistent with the proposed regulations that were released in May 2014. (See our earlier update, “Proposed Regulations Provide REITs a Framework for Solar Energy Property,” from May 14, 2014.) Certain solar industry participants were advocating for solar to be a REIT-eligible asset class in an effort to create a new market for solar projects in the event that the investment tax credit (“ITC”) declined to 10 percent after 2016. In December 2015, Congress extended the ITC with a gradual phase-down. (See our earlier update, “Certain US Energy Tax Credits Extended, But Phaseout Dates Scheduled,” from December 28, 2015.) The extension made the need to make solar a viable asset class for REITs a less pressing issue. It is fortunate for the solar industry that it does not have to rely on REITs, as the new regulations only enable REITs to own solar projects in limited situations.
The final regulations keep the facts and circumstances framework, as opposed to bright-line rules, for determining whether property is real property for purposes of Section 856. Therefore, all of the specific facts of a particular solar energy property will need to be analyzed to determine its REIT classification. The final regulations apply for taxable years beginning after August 31, 2016. Continue Reading As Expected, Final REIT Regulations Offer Little Help for Solar
Below are soundbites from panelists at the Renewable Energy Finance Forum Wall Street held in New York City on June 21 and 22, 2016. The soundbites are divided by topic below: market conditions, the tax equity market, cost of capital, community solar, challenges facing the renewables market, net metering, the YieldCo market, economics for utilities and storage.
“The market is long capital and short projects.” Boutique Investment Banker
“The brightest spot in clean tech today is that panels, turbines, batteries and balance of system are all moving down in cost.” Bulge Bracket Investment Banker
“Year over year there have been very precipitous declines in the cost of these technologies.” Boutique Investment Banker
“Before the expiration of the production tax credit, wind will reach grid parity [with electricity from natural gas] in many parts of the country.” Bulge Bracket Investment Banker
Background: The production tax credit is available for projects that “start construction” prior to 2021, and to meet the Internal Revenue Service safe harbor a wind project would have to be placed in service prior to 2026. Our article discussing the start of construction rules for wind projects is available here.