1603 Treasury Cash Grant

My article The Dramatic Arc of the PTC was just published in  North American WindPower and discusses the history of the production tax credit (PTC) from its original enactment to the phaseout.  Here’s the text of the article:

The production tax credit (PTC) is the force that spurred the U.S. wind industry from an immaterial segment of power generation in the early 1990s to providing the fastest-growing job in America – wind turbine technician. At the end of 2016, the total wind capacity in the U.S. was more than 82 GW. Now, like the finale of a Fourth of July fireworks show, the PTC has several more exciting bursts to go and then will, in theory, peter out.

Continue Reading The Dramatic Arc of the PTC

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).

 

First published in the February 9, 2016 edition of Bloomberg BNA’s Daily Tax Report

The U.S. Court of Federal Claims in a recent opinion, Bishop Hill Energy LLC v. United States, ruled against a discovery request made to the U.S. Treasury Department. The court’s opinion appeared to fumble the analysis of why Treasury shouldn’t have to produce certain documents in conjunction with litigation over a shortfall in Treasury’s cash grant award for a wind project.

To read the article, please click here: Bloomberg-BNA-1603-Discovery-Article-Bloomberg-BNA-4-28-16_mod.pdf

 

First published in Bloomberg BNA’s Daily Tax Report of November 25, 2014

In many renewable energy transactions, a ‘‘developer fee’’ is a critical feature—it is often the means by which the developer extracts its profits from months or years of work and risk.

In addition, all or part of the fee may be included in the property’s eligible basis for purposes of accelerated depreciation and the investment tax credit, thereby increasing the tax benefits available to a tax investor. Yet there is very little guidance in the tax law for determining when a developer’s fee will be respected as reasonable and included in the asset’s basis for tax purposes.

To read the full article, please click here: Project Finance Developer Fees Explained Bloomberg BNA_mod