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 Bloomberg BNA’s Daily Tax Report on January 22, 2016

David Burton examines the Tax Court’s recent analysis in Leland v. Commissioner, favoring a lawyer’s bid for exception from the passive activity loss rules for his ‘‘material participation’’ of more than 100 hours per year in operations of a farm he owns in another state. ‘‘The application of the greater-than-100-hours standard appears to be a fertile area for litigation,’’ the author writes.

The article is available by clicking here: Bloomberg BNA Material Participation Article Bloomberg BNA lawyer-farmer_mod