We have published our Legal Update on the Federal Circuit’s opinion in the Alta Wind case involving the calculation of eligible basis for 1603 Treasury cash grant purposes. The 1603 Treasury cash grant rules “mimic” the investment tax credit (ITC) rules, so the case has implications for ITC transactions being structured and end executed today.
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.”…
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