Global Project Finance

CRS Report on the Production Tax Credit

21 Oct '14

On October 2, the Congressional Research Service (CRS) published an overview of the production tax credit (PTC). The report is available here. It contains a helpful summary of the history of the PTC and an insightful discussion of the PTC and the alternative minimum tax.

The report’s only shortcoming as discussed below is not applying a particularly critical eye to either a cited study regarding tax incentives for renewables from the National Academy of Sciences that employed a questionable methodology or to President Obama’s proposal to replace the investment tax credit (ITC) for solar and other technologies with the PTC.

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Discovery Order Issued in “SolarCity” Cash Grant Litigation — Treasury to Provide Benchmarking Materials

14 Oct '14

On October 6, 2014, Judge Eric G. Bruggink of the U.S. Court of Federal Claims issued an order on the disputed production of documents and interrogatory responses requested from the U.S. Department of the Treasury by plaintiffs, investors in cash-grant-eligible solar projects sponsored by SolarCity, in connection with their challenge to Treasury’s calculation of their Section 1603 cash grant awards.  Judge Bruggink heard oral argument on the discovery disputes on August 29, 2014.  That hearing is covered in a September 3 blog post, which also references earlier posts providing background and early developments in the case.

Consistent with his rulings issued from the bench during the August 29 oral argument, Judge Bruggink ordered Treasury to produce documents sufficient to identify the “benchmark” or “threshold” amounts it used in evaluating Section 1603 solar project applications and, to the extent such benchmarks were higher than the amounts claimed in plaintiffs’ applications, documents sufficient to identify how such benchmarks were derived.  He also ordered Treasury to produce all documents and information, including materials submitted by third parties in connection with the Section 1603 program, upon which Treasury relied in evaluating plaintiffs’ Section 1603 applications.

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Joint Committee’s Report on Energy Tax Incentives Misses the Mark on Green Jobs

07 Oct '14

The Joint Committee on Taxation (JCT) on September 16 published a report analyzing federal energy tax incentives. The report is available here. The report is generally insightful; however, it has a misguided job-creation discussion. 

With respect to the issue of job creation, the report provides: “Commensurate with its relatively small contribution to the overall U.S. energy portfolio, the renewable electricity sector is not a major source of employment in the United States.” A footnote provides the statistics behind the report’s conclusion:

The Bureau of Labor Statistics estimates that, for 2011, there were 3,780 private-sector green goods and services jobs in hydroelectric power generation, 2,724 in wind power generation, 1,166 in biomass power generation, 1,017 in geothermal power generation and 522 in solar power generation. Bureau of Labor Statistics, News Release: Employment in Green Goods and Services - 2011, USDL-13-0476, March 19, 2013.

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Cash Grant Sequester Rate Increased From 7.2 to 7.3 Percent for Fiscal Year 2015

30 Sep '14

The Department of the Treasury has announced that for fiscal year 2015 the Cash Grant 1 sequester rate will be increased from 7.2 to 7.3 percent.  The announcement is available here. The change applies to Cash Grants paid on or after October 1, 2014, and on or before September 30, 2015, regardless of when the application was submitted to Treasury. 

The effect of the sequester is that if a solar project has an “eligible basis” of $1,000 then the 30 percent Cash Grant would have been $300; however, the 7.3 percent sequester results in it being only $278.10.  If a project owner wishes to avoid the sequester, it has the option to claim the 30 percent investment tax credit under Section 48 of the Internal Revenue Code; however, efficient use of that credit requires a federal income tax liability that can be offset by the credit.

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Ruling on Discovery Disputes in “SolarCity” Cash Grant Litigation

03 Sep '14

On August 29, 2014, Judge Bruggink heard oral argument and ruled on plaintiffs’ motion to compel the production of documents and information requested from the Department of the Treasury (“Treasury”) regarding plaintiffs’ challenge to Treasury’s calculation of Section 1603 cash grant awards for solar projects. Plaintiffs, special-purpose entities that invested in cash-grant-eligible solar projects sponsored by SolarCity, filed a complaint in the Court of Federal Claims on February 22, 2013, challenging adjustments made by Treasury that resulted in reduced cash grant awards.

Background and early developments in the case are covered in blog posts of May 21, June 2, July 9, August 14 and September 20, the most recent of which concerns Judge Bruggink’s denial of the Department of Justice’s (DOJ) motion to dismiss the complaint. Since that time, discovery disputes have slowed the progress of the litigation, leading plaintiffs to file the motion to compel at issue in the hearing held last Friday.

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IRS Comments on its PTC Start of Construction Guidance

21 Aug '14

On August 20, the American Wind Energy Association (AWEA) held a webinar to discuss Internal Revenue Service (IRS) Notice 2014-46, which clarified the rules for wind projects to be grandfathered for production tax credit (PTC) eligibility purposes as having started construction in 2013.  A prior post discussing Notice 2014-46 is available here.

The highlight of the panel was that it included representatives of the IRS who commented on Notice 2014-46 and answered questions from the other panelists. The IRS’s primary representative was Christopher Kelley, who recently rejoined the IRS after a stint at Treasury.  Mr. Kelley was joined by his IRS colleagues Jamie Park, Philip Tiegerman and Jennifer Bernardini.

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CRS Report Takes Negative View on Bonus Depreciation

31 Jul '14

The Congressional Research Service (CRS) has issued a report analyzing the economic effects of bonus depreciation. CRS has very little to say that is positive about bonus depreciation. CRS views it as neither an effective economic stimulus nor as a means of promoting a level playing field for economic growth among various sectors of the American economy.  The report is available here

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SolarCity and Sunrun File Suit Challenging Arizona Property Tax on Leased Solar Systems

08 Jul '14

SolarCity Corporation and Sunrun Inc. (collectively, the “Companies”) filed suit on June 30, 2014 challenging the Arizona Department of Revenue’s (ADOR) position that certain solar systems owned by the Companies (the “Systems”) are subject to property tax.  The ADOR’s interpretation of the relevant statutes, if upheld, could result in millions of dollars in property taxes. 1

The property taxes challenged in the complaint, which can be found here, are with respect to leased solar equipment.  The Companies pay the upfront costs of the Systems and are responsible for installing and maintaining them at the customers’ properties.  The rent that the customers pay for the use of the Systems is less than what they would otherwise pay for electricity – a savings of approximately $30 per month in the case of a three-bedroom home.  The lease is essentially a means of financing the cost of the Systems, which enables the customers to make lease payments that are less than what they would otherwise pay to their electric utility companies. 

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IRS Will Issue Further PTC Start of Construction Guidance

12 May '14

On Friday, Christopher Kelley of the Treasury Office of Tax Legislative Counsel announced that the IRS would be issuing additional guidance to determine whether projects started construction in 2013 as is necessary to be eligible for production tax credits.  Kelley’s comments were made in at an American Bar Association Section of Taxation meeting in Washington, DC.1

The guidance is in response to requests from the wind industry for further clarification as to two issues.  First, what level of physical work was required for projects, which did not opt to satisfy the 5% safe harbor, to be deemed to have started construction in 2013 as is necessary for production tax credit eligibility?  Second, what level of legal stake must a developer have had in a project in 2013 to have purchased equipment pursuant to a master supply agreement with a manufacturer that is subsequently transferred to the project in order to enable the project to satisfy the 5% safe harbor?

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MLPs, REITs and YieldCos Poster from WindPower

08 May '14

Here’s the link to the poster that I presented at WindPower on master limited partnerships (MLPs), real estate investment trusts (REITs) and YieldCos.

The poster explains (i) the limited extent to which MLPs and REITs, each of which have a tax-advantaged status, can invest in wind projects under current tax law, (ii) how proposed changes in tax law if enacted would permit MLPs to expand their ability to invest in wind projects and (iii) how the yieldco vehicle, which is a publicly traded C-corporation without any special tax status, is being used for wind projects in lieu of MLP vehicles.

CRS Analyzes the Production Tax Credit and Related Policies

23 Apr '14

With both chambers of Congress considering the extension of the production tax credit (PTC), the Congressional Research Service published a report on April 7, 2014, The Renewable Energy Production Tax Credit: In Brief. The report is available here.

The report is relatively even handed and provides a number of interesting data points. Overall, the report is generally supportive of the PTC but suggests that a direct tax on carbon emissions would be more efficient. A tax on carbon would eliminate the costs associated with executing tax equity transactions. That is tax equity investors do not provide wind developers with a dollar-for-dollar benefit for each dollar of PTC allocated to them. From a policy perspective, I find it difficult to favor the PTC over a direct carbon tax; however, a direct tax on carbon is not a viable legislative strategy given the current composition of Congress. In contrast, the PTC has greater political viability, in the form of bipartisan support since its enactment in 1992, and promotes reduction in carbon emissions.

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NREL Analyzes Production Tax Credit Extension Implications for U.S. Manufacturing

17 Apr '14

The National Renewable Energy Laboratory (NREL), which is a component of the U.S. Department of Energy, has published a report analyzing the implications of the extension of the production tax credit (PTC) for U.S. manufacturing and employment levels. The report is available here.

The report finds that significant manufacturing facilities have opened in the U.S. due to the growth of wind electricity production which is bolstered by the PTC. The report concludes (1) that to maintain the current level of U.S. manufacturing related to the industry would require wind deployment levels at the average that occurred from 2008 to 2012 and (2) to maintain that level of deployment would require extension of the PTC through 2021.

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Developers Turn to Tax Opinion Insurance to Solve the “Starting Physical Work of a Significant Nature” PTC Eligibility Issue

07 Apr '14

Industry reports suggest that three developers have purchased tax opinion insurance to provide financial assurance to tax equity investors that their projects will be production tax credit (“PTC”) eligible.  Use of this insurance product appears to be how the developers are bridging the gap between what their law firms are prepared to opine constituted “starting physical work of a significant nature” 1 in 2013 and the PTC eligibility risk certain cautious tax equity investors are prepared to bear.

Below is a description of tax opinion insurance generally followed by background with respect to the PTC eligibility issue in question.

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Senate Finance Committee Approves PTC Extension Through 2015

03 Apr '14

Today, the Senate Finance Committee approved and reported the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act. It includes an extension of the 2.3 cents per kilowatt hour production tax credit for wind for projects that "start construction" before the end of 2015. 

Although, Senator Wyden (D-OR) created some nervousness by not including the production tax credit extension in the bill he initially introduced on April 1, it is not surprising to see the Senate Finance Committee approve the extension of the production tax credit given the support it has from Senators Cantwell (D-WA), Grassley (R-IA), Wyden and others. Senator Toomey (R-PA) introduced an amendment to strike the production tax credit and other renewable energy incentives from the extension bill, but his amendment was defeated by a committee vote of 6-18. 

The passage of the Expire Act by the Senate Finance Committee is a first step in a long legislative journey and may not on its own to create enough confidence to spur investment in the development of new projects.

Wyden’s Extenders Bill Due March 31 - PTC Advocates Muster for the Fight

27 Mar '14

Senator Wyden (D-OR), chairman of the Senate Finance Committee, stated that he will release his “extenders” bill on March 31 and that the included provisions will be renewed through the end of 2015.  Senator Rockefeller (D-WV) stated that Wyden’s bill will not include “offsets” for the cost of the extenders.1

An extension through 2015 would be good news for the wind industry; however, there are still questions that the wind industry will not have answered until it sees the bill on March 31. For instance, will Wyden retain the “start of construction” approach from the last extension or revert to the customary “placed-in-service” standard? There is a significant difference, since start of construction would merely require that a wind project start construction by the end of 2015, while a placed-in-service standard would require the project to be operational by the end of 2015.

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Project Perspectives Winter 2014 Edition

24 Mar '14

Akin Gump is pleased to announce our winter 2014 edition of the Project Perspectives Newsletter. Please click here to read Project Perspectives.

Contents

Oil and Gas Industry Discussion. 1
The False Claims Act: The Government’s Sword in Cash Grant Audits 7
Is a 50 Percent Renewables Portfolio Standard in California’s Future? 9
State Tax Update: A Summary of Recent State Renewable Energy Tax Law Developments 11
Why End-Users Are Investing (Big) In Distributed Generation 13
An Analysis of U.S. Energy Policy Objectives: Green and Brown Power Options Examined 18
U.S. Solar M&A Market Update 21
Will Residential Solar Debt Financing Eclipse The Third-Party Ownership Model? 23

 

 

Obama’s Plan to Ax the Solar Investment Tax Credit

17 Mar '14

In President Obama’s 2014 State of the Union address, he said: “Every four minutes, another American home or business goes solar; every panel pounded into place by a worker whose job can’t be outsourced. Let’s continue that progress with a smarter tax policy that stops giving $4 billion a year to fossil fuel industries that don’t need it, so that we can invest more in fuels of the future that do.” 

With such an endorsement, the solar industry thought its tax priorities were in a prime position in the executive branch, but five weeks later the administration’s fiscal year 2015 budget proposal was released and included a proposal to completely repeal the solar investment tax credit after 2016.1

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Obama’s Proposals for Renewable Energy Tax Incentives Compared to Camp’s

05 Mar '14

Here’s a chart that compares how Pres. Obama’s fiscal year 2015 budget proposal addresses renewable energy to how Rep. Camp’s (R-MI) proposal for fundamental tax reform addresses renewable energy.  Camp is chairman of the Ways and Means Committee. 

A prior blog post addressed former Sen. Baucus’s (D-MT) energy tax reform proposal. Sen. Baucus introduced his proposal in his capacity as chairman of the Finance Committee but shortly thereafter accepted an appointment to be ambassador to China.  This has left his proposal without a champion.

Tax Court Penalizes Salesman for Aggressive Placed in Service Interpretation

05 Mar '14

Here’s an article that I recently published in Tax Notes Today.  It discusses the 2013 case Brown v. Commissioner in which the Tax Court did not accept an insurance salesman’s conclusion that his personal Bombardier Challenger aircraft was placed in service in 2003, despite the fact that it was flown to business meetings in 2003.  The Tax Court analysis in part relied on cases involving a wind farm and a hydroelectric dam, so the case has relevance in analyzing whether renewable energy projects have been placed in service.

Fierce Energy Interview: Tax Credits, MACRS and MLPs for Renewables

25 Feb '14

As natural gas prices sit at a five year high, it is important to remember a fundamental economic principle, that is, commodities do not stay low priced forever. Demand for and regulation of natural gas is likely to increase. Therefore, although, natural gas is relatively inexpensive today, it is unlikely to remain so indefinitely. As utilities in the Northeast and Midwest are experiencing this winter with the demand for natural gas for home heating purposes driving the price up, renewables are an excellent hedge against natural gas price increases.

In that theme, click here for a link to Fierce Energy’s interview. The focus of the interview was what tax credits, MARCS and the possibility of MLP status for renewables means for utilities.

Letter to The Washington Post Defending the PTC

10 Feb '14

The Washington Post in an editorial of January 20 described the extension of the production tax credit (PTC) for wind as “wasteful.” The Post’s editorial is available here.  

However, The Post’s editorial board has penned multiple editorials expressing concern about climate change and noting that the United States lacks a coherent policy to address it. Below is my letter to the editor responding to the mischaracterization of the PTC and noting the inconsistency in being concerned about climate change and then characterizing the PTC as wasteful. 

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Treasury Inspector General Report on 1603 Cash Grant Seems Off the Mark

07 Feb '14

On December 17, the Treasury Inspector General for Tax Administration released Review of Section 1603 Grants in Lieu of Energy Investment Tax Credit which is available here. Either there is some confusion associated with the report or the 1603 grant samples included in the study referenced in the report were unusual.

The summary of the report is:

"The IRS is currently conducting a Compliance Initiative Project on taxpayers that received Section 1603 grants primarily in 2009. .  .  . The Large Business and International Division selected and examined 16 taxpayers and reportedly identified significant issues in eight.  Similarly, the Small Business/Self-Employed Division selected 83 taxpayers for examination and identified changes in 51."

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Congressional Research Service on PTC and Other Tax Extenders

28 Jan '14

The Congressional Research Service (CRS) published a whitepaper addressing the tax provisions that lapsed at the end of 2013. The whitepaper is available here. Of particular interest to the renewable energy industry is the extension of the production tax credit (PTC) and the ability to elect the investment tax credit in lieu thereof. The whitepaper also touches on the new market tax credit (NMTC) for economically disadvantaged communities that lapsed at the end of 2013 and the Section 1603 Treasury Cash Grant Program which lapsed in earlier years. 

In general, the whitepaper paints the concept of extenders (i.e., tax provisions that are enacted with a sunset and then regularly extended in subsequent legislation) as poor tax policy. For this and other reasons, the Obama administration has proposed to make the PTC permanent as did Senator Baucus’s tax reform proposal for energy. That proposal is discussed in my blog post available here.  

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IRS Revises Historic Tax Credit Revenue Procedure

14 Jan '14

Revenue Procedure 2014-12 provides a safe harbor for historic tax credit (i.e., the Section 47 rehabilitation tax credit) partnership transactions. On January 8, the IRS issued a revised version of it that provides a clarification of two technical issues.  The revised revenue procedure is available here and a redline comparison against the prior version is available here.  The clarifying revisions are certainly welcome; however, the revised revenue procedure still suffers from all but one of the ambiguities discussed in prior blog posts available here and here.

The revenue procedure provides that a tax equity investor may have the benefit of a “put” option; provided, the option price is the fair market value of the tax equity investor’s interest as determined at the time of the exercise of the option.  The original revenue procedure required that in determining the fair market value of the tax equity investor’s partnership interest that contracts between related parties were not to be considered.  As discussed in the blog post here it was unclear as to how the tax equity investor’s interest in master tenant partnership structure (i.e., an inverted lease) was to be determined because in that structure the head lease is between related parties and is the source much of the economics for the tax equity investor.  A diagram of the master tenant partnership structure is available here.

The IRS recognized this problem and revised the revenue procedure to permit consideration of related party contracts in the fair market value determination, so long as such contracts are on arm’s length terms and with economics consistent with arrangements in real estate development projects that do not qualify for historic tax credits.1 

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Informal Clarification of Historic Tax Credit Safe Harbor

06 Jan '14

Informal conversations with the drafters of Revenue Procedure 2012-14 (the “Revenue Procedure”) have clarified the safe harbor’s pretax economics requirements. The Revenue Procedure is available here.

The Value Requirement

The Revenue Procedure includes the requirement that  the tax equity investor’s “interest must [have] a reasonably anticipated value commensurate with the [tax equity investor’s] overall percentage interest in the Partnership, separate from any federal, state and local tax deductions, allowances, credits and other tax attributes to be allocated” (the “Value Requirement”).1 

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IRS Guidance for Historic Tax Credit Transactions: Partnership Flips and Inverted Leases

02 Jan '14

The IRS released Revenue Procedure 2014-12 on December 30.  It is available here.  It addresses the structuring of historic tax credit transactions (i.e., transactions involving rehabilitation tax credits provided for in section 47 of the Internal Revenue Code (the “Code”)).  It is similar in scope to Revenue Procedure 2007-65, 1 which addresses the structuring of production tax credit partnership transactions involving wind farms.  

Revenue Procedure 2014-12 provides a safe harbor for only a partnership’s allocation of tax credits. It does not address any other issues (e.g., economic substance or tax ownership).  Thus, the actual safe harbor is rather narrow.  Nonetheless, the conventional wisdom is that, if a transaction satisfies a published safe harbor, the IRS may be unlikely to attack it on audit with respect to issues beyond the scope of the safe harbor. 

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Baucus Post-2016 Proposal: No Change to PTC & ITC Reduced to 20 Percent

18 Dec '13

Today, the chairman of the Senate Finance Committee, Max Baucus (D-MT), released his proposal for energy tax incentives as part of overall tax reform. The proposal is thoughtful and merits serious consideration by the renewable energy industry. Importantly, it eliminates the discrepancy in the tax benefits available to different types of energy technologies. Here are links to the official documents: a one page summary, an eight page summary, a 30 page legislative history and the statutory language.

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CRS Report on the Administration’s Proposal to Repeal Tax Breaks for the Oil & Gas Industry

04 Dec '13

The Congressional Research Service (CRS) on October 30 published a report on the Obama Administration’s proposal to repeal or modify certain tax benefits provided to the oil and gas industry.  The report is available here.

Two of the changes are repealing tax credits that have phase outs when oil prices are high (under the theory that, when oil prices are high, further encouragement from the Internal Revenue Code is not necessary).  Since oil prices have been high for several years, the credits have not been applicable for some time.

Four of the changes apply to only independent oil and gas producers.  The changes conform the tax provisions to apply to the independents as they presently apply to the “major” oil and gas companies (e.g., ExxonMobil).  Because the majors have managed to achieve record profits under these tax provisions, it is difficult to forecast too dire a result for the independents due to these changes.

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What does the New IRS PTC Guidance for Start of Construction Mean for Projects?

25 Nov '13

Akin Gump partners, David Burton, Adam Umanoff and Josh Williams hosted a webinar earlier in November that discussed the new IRS guidance with respect to the start of construction rules to qualify for the production tax credit (PTC) or for qualified technologies the investment tax credit (ITC). The presentation is available here and the webinar discussed the following:

  • What clarifications did the recent IRS guidance offer on the expanded “start of construction” safe harbor for renewable energy projects?
  • What steps should projects take to meet the start of construction requirements?
  • What are solutions to typical problems confronted by project owners seeking to start construction in 2013?

MLP Renewables Bill Scored at a Modest $1.3 Billion

20 Nov '13

Senator Coons (D-DE), the lead sponsor of the Master Limited Partnership Parity Act (S. 795), has received the scoring estimate for that bill from the Joint Committee on Taxation. According to the senator’s office, it is scored at a $1.3 billion cost over its first 10 years.1 Ten years is the period used for scoring. One would hope it would be relatively easy to find “revenue raisers” to offset that modest cost. Revenue raisers are often closing what are perceived by the public to be tax loopholes.

The typical cost of a one-year extension of the production tax credit is usually several times the estimate for the permanent legislative changes proposed in the MLP Parity Act; however, tax credits are also far more valuable to the renewables industry than the MLP Parity Act is. See here. Thus, the MLP Parity Act should be passed to give renewables the same tax advantage provided to fossil fuels, rather than as a trade for not extending tax credits for renewables.

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Sen. Sessions Pens Letter to Treasury Critical of SolarCity and 1603 Practices

19 Nov '13

In a letter dated November 18, Senator Jeff Sessions (R-AL) wrote Secretary of the Treasury Jacob Lew a critical letter with questions regarding the Cash Grant program, SolarCity’s purported practices and the investment tax credit.  The letter is available here.

It is unfortunate that Senator Sessions does not appreciate how cautious and deliberate Treasury has been in administering the Cash Grant program.  In fact, the SolarCity litigation that the letter references is essentially a response to Treasury’s exceedingly high level of caution and deliberation in the administration of the Cash Grant program.  There are projects with Cash Grants that have been delayed over a year.

The letter was apparently triggered by an August 31 article in Barron’s titled Dark Clouds Over SolarCity; the article is referenced in a footnote to the letter.  It is not clear why the senator’s office opted to produce this letter two and half months after the article.

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Economists’ Paper Suggest Carbon Tax Would have Minimal Determinate on U.S. GDP

12 Nov '13

Economists Lawrence Goulder and Marc Hafstead in October published Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide on behalf of Resources for the Future.  The paper is available here.  The paper analyzes the effect on the U.S. economy of the adoption of a $10 per ton carbon tax starting in 2013 that increases 5 percent per year to the year 2040.  The paper considers three scenarios for using the revenue raised by the carbon tax:  (i) cash rebates to households; (ii) a reduction in personal income tax rates; and (iii) a reduction in corporate income tax rates.  However, in all scenarios, 15 percent of the revenues from the carbon tax are used to provide “tradeable exemptions” for companies in the 10 industries projected to suffer the largest reductions in profits due to the carbon tax.  Further, in none of the scenarios is an economic benefit included for the health or environmental benefits of reduced carbon emissions.

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U.S. Tax Policy Effect on Greenhouse Gases Report Summary and Critique

28 Oct '13

Congress asked the National Research Council, National Academy of Science, the National Academy of Engineering and the Institute of Medicine to study the effect of U.S. tax policy on carbon and other greenhouse gas emissions.  The full report of June 20 is available here. Below are key excerpts from the report.  The report is relatively pessimistic with respect to tax policy improving greenhouse gases; however, as explained below the report used flaw assumptions for the cost of wind and natural gas that skewed its conclusions.

The excerpts from the report are divided into four topics: percentage depletion, renewable energy tax credits, renewable energy portfolio standards (RPS) and the availability of accelerated depreciation for equipment generally (e.g., manufacturing equipment, computers).

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Cash Grant Sequester Percentage Reduced to 7.2%

21 Oct '13

Treasury has issued an updated message on sequestration on its 1603 Program website, which can be accessed here. The sequestration message specifies that the reduction percentage applicable to any Section 1603 cash grant award made on or after October 1, 2013 through September 30, 2014, will be 7.2%, irrespective of when the application was received by Treasury. Cash grant awards made on or after March 1, 2013 through September 30, 2013 had been subject to an 8.7% sequestration reduction percentage. The 7.2% reduction percentage applicable through September 30, 2014 is slightly lower than the projected 7.3% reduction percentage indicated in the April 10, 2013 Office of Management and Budget report titled OMB Sequestration Preview Report to the President and Congress for Fiscal Year 2014 and OMB Report to the Congress on the Joint Committee Reductions for Fiscal Year 2014 (which can be accessed here. The sequestration reduction rate will be applied unless and until the federal government enacts a law that cancels or otherwise impacts the sequester.

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AWEA’s Wall Street Conference – Sound Bites from Panelists

24 Sep '13

AWEA recently held its annual Wall Street conference.  Below are selected sound bites from panelists speaking on September 10th about finance, the state of market for wind in the United States, and the health of the tax equity market.  An effort was made to be as loyal as possible to what the panelists said, but this was prepared without the benefit of a transcript or a recording.  Further, edits were made in the interest of clarity.  The sound bites are organized by topic, rather than appearing in the order in which they were said. 

Tax Equity Volume in 2013

“Eleven deals totaling $1.75 billion have been awarded.

“Four deals totaling $.4 billion are closing to being awarded.

“Seven more deals will be in the market before year end. 

“This year there will be more deals than in either of the prior two years.  There could be $4 billion of tax closed in 2013.”

John Eber, Managing Director Energy Investments, J.P. Morgan

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“SolarCity” Cash Grant Case Survives DOJ’s Motion to Dismiss

20 Sep '13

Today, Judge Bruggnick of the Court of Federal Claims denied the Department of Justice’s (DOJ) motion to dismiss the complaint filed by two special purpose entities affiliated with SolarCity regarding the Treasury’s calculation of the 1603 cash grant awards for solar projects.  The judge’s order is available here. Unfortunately, the order is quite short and does not contain any legal discussion but rather references reasons stated during oral argument. 

Although, surviving a motion to dismiss is a far cry from winning the case, the judge’s determination is a positive indication for this case and for similarly situated Cash Grant applicants that are considering bringing actions to contest how Treasury has administered the 1603 Cash Grant program. The outcome of this litigation has implication both for 1603 Cash Grant applicants and for the tone of future IRS audits of investment tax credit transactions because Treasury was supposed to be following the investment tax credit rules for calculating the amount of the Cash Grant award. Thus, principles decided in this litigation in theory will also apply to investment tax credit transactions.

The judge gave DOJ until October 21 to prepare answer to the complaint. Prior blog posts about this case are available [Aug. 14 post], [July 9 post], [June 2 post] and [May 21 post].

Treasury may be Planning to Issue More PTC “Start of Construction” Guidance

10 Sep '13

Today, at the American Wind Energy Association’s Finance & Investment Seminar in Manhattan Attorney-Advisor Christopher Kelley of the U.S. Treasury, speaking on his own behalf, said that the Treasury and IRS are considering further guidance to clarify the requirement that wind projects start construction in 2013 and then pursue continual work towards completion in order to be eligible for production tax credits. His comments were qualified and made it clear that there is a possibility that no further guidance would be provided.  It was acknowledged that if such guidance was published in mid-November that it would be too late to spur much in the way of equipment orders. 

Another Treasury official on June 17 had written Congress that Treasury “believe[d] that Notice 2013-29 provides the desired degree of certain in the marketplace and allows renewable energy project to move forward.” A blog post discussing this Treasury letter is available here, and client alerts discussing Notice 2013-29 are available here and here.  Treasury appears to be having second thoughts as to whether “desired degree of certainty” was in fact provided by Notice 2013-29.

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Letter Correcting the Renewables Industry’s Position on MLP Legislative Tradeoffs

09 Sep '13

Here is a link to my letter to the editor of Tax Notes that corrects statements in an article by Lee Sheppard, a noted tax journalist, that provided that the renewables industry was prepared to trade tax credits for legislatively expanding the definition of “qualified” income for purposes of the master limited partnership rules to include income from renewable energy projects. 

If a publicly traded partnership (known as “master limited partnership” (MLP)) has at least 90 percent of its income from “qualified” sources, then it is eligible to avoid the corporate level income tax typically imposed on U.S. publicly traded entities.  I.R.C. § 7704.  Bills have been introduced in Congress to amend the definition of “qualified” income to include income from renewable energy projects.  The proposed legislation is discussed in blog posts of [Aug. 1], [Apr. 9] and [Mar. 12].  The letter to the editor quotes statements from leaders in the renewable energy industry that make it clear that although the industry would like the expansion of the MLP rules, the industry is not prepared to trade tax credits in order to obtain such an expansion.

The letter also corrects misstatements in the article about the tax and the GAAP treatment of leasing transactions.

SEIA Publishes White Paper on Fair Market Value for Income Tax Purposes

04 Sep '13

The Solar Energy Industry Association (SEIA) has published a white paper that addresses the income tax rules for determining fair market value. The white paper is available here

Fair market value is critical in analyzing the tax benefits of solar projects because in many structures it determines the amount of investment tax credit and accelerated depreciation available to the owner of the project. The white paper highlights both best practices and common pitfalls. For those involved in the renewable energy industry, even if not as a tax professional, the fair market value and tax basis concepts in the white paper are worth being familiar with.  Further, the tax principles described in the white paper are broadly applicable to tax planning generally, even outside of the renewables area.

The white paper was prepared by SEIA’s Tax Working Group (of which I am a member); however, the accounting firm CohnReznick deserves much of the credit for being the driving force in authoring it.

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New York Supports Solar with Expanded Net Metering & Sales Tax Exemptions

23 Aug '13

In July, the New York Public Service Commission increased the solar net metering limits for businesses and residences.

The limit for businesses was increased from 50 kilowatts to 200 kilowatts. This is significant for warehouses, factories, big box stores and other businesses with substantial roof space. The limit for residences was increased from 7 kilowatts to 25 kilowatts. Click here to see a summary of the New York net metering rules. Few homes have the roof space for more than 10 kilowatts; therefore, if a homeowner wants to use the full 25 kilowatts, a ground-mounted array would likely be needed.

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Senators’ Letter Defends Renewables in Tax Reform

20 Aug '13

Senator Jeffrey Merkley (D-OR) along with 26 of his Democratic colleagues and Angus King (I-ME) wrote to Senators Baucus and Hatch of the Finance Committee to advocate for renewable energy tax incentives in the context of tax reform. The letter is available here.

The letter is not specific as to how long tax credits should be extended for, but it is clear that the credits would not be permanent as it references changing the sunset rules for all technologies from the placed in service date to the start of construction date.1  In addition, the letter does not reference MACRS depreciation. MACRS can be worth almost as much to a project as tax credits, so it is odd that the letter left that out. Is it a signal that in the tax reform process the Senate Democrats are prepared to trade MACRS for tax credits? The combined implication of these two references in the letter is somewhat concerning. Are the signatories of the letter planning to trade MACRS which is a permanent provision of the Internal Revenue Code for tax credits that would be “long-term” but nonetheless have a sunset date?

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DOJ Fires Back in SolarCity Cash Grant Litigation Motion to Dismiss Battle

14 Aug '13

On August 12, the Department of Justice filed a brief in response to the plaintiffs’ opposition to DOJ’s motion to dismiss. A copy of the brief is available here. The plaintiffs are special purpose entities that invested in cash grant eligible solar projects sponsored by SolarCity, and they allege that the Treasury paid smaller grants than they were entitled to. Background about the Court of Federal Claims litigation is available in blog posts of May 21, June 2 and July 9.

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Senator Grassley Proposes Repeal of Fossil Fuel Tax Incentives if any Renewables Tax Incentives Expire

08 Aug '13

The tax press is reporting comments made by Senator Grassley (R-IA) at a Department of Energy forum on biomass.  Senator Grassley is reported to have said: “Congress should ‘do away with the incentives for oil’ tax breaks if tax breaks for alternative energy are repealed or allowed to expire.” The report goes on to provide: “Grassley … declined to specify which incentives he was referring to, simply saying ‘any of them.’”1

Senator Grassley has a long history of being a staunch supporter of renewables; the renewable energy industry likely appreciates the spunk reflected in his comments. However, given the almost century of support that Congress has provided the fossil fuel industry in comparison to the relatively recent significant support the nascent renewables industry has received, the suggested scenario is far from equitable.

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Twelve Best States for Solar

07 Aug '13

The Environment America Research & Policy Center released a report on July 23 that ranks what the center has determined are the twelve best states for solar. Information about the report is available here. The criteria include total installed capacity, capacity installed in the past year, actual production of solar energy and policies that encourage solar energy. The states from first to twelfth are:

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Senate Hearing on Extending the MLP Rules to Renewables

01 Aug '13

On July 31, 2013, the Senate Finance Subcommittee Energy, Natural Resources, and Infrastructure held a hearing on the Master Limited Partnership Parity Act (S. 765). The bill would extend the master limited partnership (MLP) tax rules to renewable energy assets. The MLP rules provide a means to raise equity from retail investors while avoiding the “corporate” layer of income tax. These rules and the proposed legislation are discussed in the post below. Click here to see a link to our March 12, 2013, blog post.

The bill is sponsored by Senators Coons (D-DE), Moran (R-KA), Murkowski (R-AK) and Stabenow (D-MI). It also has bi partisan support in the House. Senator Stabenow chairs the subcommittee that held the hearing, so she made the opening remarks, and her written comments avoided directly referencing the bill.

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CRS says Bonus Depreciation Has Little Stimulative Bang for the Buck

30 Jul '13

The Congressional Research Service published a report on July 15, 2013 on bonus depreciation and expensing allowances. The report is available here.The report is lukewarm at best as to the economic benefits of these tax incentives.

Expensing arising under Section 179 and permits a taxpayer to deduct in full its first $500,000 of investment in new equipment it places in service in 2013.  It is of little interest to tax equity investors, so the remainder of this post will focus on bonus deprecation.

The bonus depreciation rules permit a taxpayer to deduct in 2013 50 percent of the cost of new equipment placed in service in 2013; provided the equipment has a recovery period of twenty years or less.  Renewable energy assets qualify, as do gas fired power plants and electric transmission lines.  In addition to the 50 percent deduction, the taxpayer is entitled to claim the applicable MACRS percentage deduction on the remaining 50 percent of the cost.

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CRS Reports on Energy Policy but Mischaracterizes the PTC Extension

23 Jul '13

On July 17, the Congressional Research Service released a report: Energy Policy: 113th Congress Issues. The report is available here.  

The report has little analysis and mostly summarizes the current energy debate between those concerned about greenhouse gasses and those concerned about the economic costs of addressing the same. 

Oddly, the report mischaracterizes the extension of the production tax credit (PTC) that was enacted this January: “The 112th Congress[‘s] … most significant action was extension of energy tax credits, including the PTC for wind energy, to January 1, 2014, as part of P.L. 112-240, the American Taxpayer Relief Act of 2012.” The PTC was not extended “to January 1, 2014” it was extended for projects that start construction before January 1, 2014.1  The “start of construction” distinction is important: projects that are in service in 2014 or even later can qualify, if construction commenced in 2013.  For a discussion of the “start of construction” rules, see our client alerts available here and here.

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GAO Determines U.S. Corporations Pay an Effective Tax Rate of 12.6 Percent

21 Jul '13

In a report from the Government Accounting Office (GAO) to Congress that was made public on July 1, the GAO determined that in 2010 profitable U.S. corporations with assets of $10 million or more paid 12.6 percent of their pretax worldwide income in federal taxes.  The report is available here.

The report may seem too wonky to be of interest to a sexy industry like renewable energy, but so long as the American energy policy is effectuated through corporate income tax incentives the report should be of particular interest to renewable energy developers and the associated industries.  If large American corporations are paying only 12.6 percent of their worldwide income in federal taxes, they are likely to have little interest in tax credits and accelerated depreciation from renewable energy projects.  That means the market for tax equity is thin; therefore, the most critical component of developers’ capital structure is expensive and the economics of developing renewable energy projects are at best challenging.

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The SAVE Act – Valuing Energy Savings

11 Jul '13

Consumers interested in energy-efficient homes will benefit if a recent bill, called the SAVE Act (Sensible Accounting to Value Energy), becomes law.  The law, if enacted, would require Fannie Mae, Freddie Mac and the Federal Housing Administration to take energy savings into account when underwriting home mortgages. 

Current practice generally does not factor any value into the home mortgage analysis for the savings derived from an energy-efficient home.  The bill would require these cost savings to be factored into the analysis both in terms of evaluating the borrower’s income as compared to his or her monthly expenses and for purposes of valuing the home.  The end result should be that a borrower would qualify for a larger loan. 

The SAVE Act was introduced by Senators Michael Bennet (D-Co.) and Johnny Isakson (R-Ga.) on June 6, 2013.  It is widely supported by a coalition of business, real estate, energy and environmental groups. 

Here is a link to the bill and a link to the factsheet for the bill.

Brief in “SolarCity” Cash Grant Litigation Provides Insight into Strategy

09 Jul '13

Covington & Burling’s reply brief to the government’s brief in support of its motion to dismiss provides insight into SolarCity’s strategy.  The complaint appears to be as much about providing SolarCity with leverage in negotiations with the Treasury regarding its pending 1603 Cash Grant applications as it is about recovering the $8 million Cash Grant shortfall referenced in the complaint. 

Covington’s brief is available here.  Here are links to posts about the original complaint and the Government’s motion to dismiss.

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Treasury Tells Congress PTC Guidance Provides the Desired Degree of Certainty in the Marketplace

26 Jun '13

A letter from Treasury Assistant Secretary for Legislative Affairs Fitzpayne to Rep. Coffman (R-CO) dated June 17, 2013 addresses the IRS’ recent guidance with respect to the “beginning construction” requirement for PTC eligibility.  The letter is available here.  The guidance in question is Notice 2013-29.  A client alert discussing the notice is available here and a subsequent alert discussing a clarification to the notice is available here.

A highlight of Treasury’s letter is the statement: “We believe this guidance provides the desired degree of certainty in the marketplace and allows renewable energy projects to move forward” (emphasis added).

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CBO’s Carbon Tax Report -Interesting but Inconclusive

11 Jun '13

The Congressional Budget Office (CBO) on May 22, 2013 published a report with respect to the potential economic and environmental consequences of the imposition of a carbon tax in the United States. The report is available here. The report highlights a number of interesting dynamics between tax and environmental policy but avoided reaching any meaningful conclusions.

A Large Source of Tax Revenue

  • If the carbon tax were set at $20 per metric ton of greenhouse emissions in 2012 and inflated at 5.6 percent a year, then in a ten year period it would raise $1.2 trillion in taxes. This is comparable to the revenues raised from all excise taxes (e.g., taxes imposed on tobacco, alcohol and gasoline) and exceeds the proceeds of estate and gift taxes.
  • A tax of $20 per ton of emissions would result in an increase in the price of gasoline of 20 cents per gallon.

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DOJ Moves to Dismiss SolarCity’s Cash Grant Case

02 Jun '13

The Department of Justice (DOJ) filed a motion for the Court of Federal Claims to dismiss SolarCity’s1 case against Treasury with respect to the administration of the 1603 Cash Grant program. DOJ’s brief in support of its motion is available here.  

DOJ’s grounds for dismissal are that the Court of Federal Claims has a specific jurisdiction to hear patent and copyright cases, government contract cases and claims for payments from the federal government (including tax refund cases)2 while SolarCity alleges that Treasury’s administration of Cash Grant program violated the 1603 statute. 

Further, DOJ asserts that SolarCity is effectively seeking the court to review Treasury’s Cash Grant guidance for compliance with the Administrative Procedures Act, which is not within the jurisdiction of the Court of Federal Claims’. The Administrative Procedures Act is the federal statute that requires federal agencies to provide notice and an opportunity to comment before promulgating rules.3 Interestingly, the complaint does not actually reference the Administrative Procedure Act, probably because the plaintiffs’ counsel, Covington & Burling, was trying to avoid this jurisdictional issue.

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Supreme Court Denies Certiorari in Historic Boardwalk Hall

28 May '13

Today, the Supreme Court denied a petition to review the 3rd Circuit’s opinion in favor of the IRS in the Historic Boardwalk Hall case which involved eligibility for federal historic tax credits for rehabilitation of a historic building.1

In Historic Boardwalk Hall, an affiliate of Pitney Bowes entered into a highly structured transaction in which it was insulated from much of the risk and reward with respect to the operation of a convention hall in Atlantic City; nonetheless, the transaction was intended to result in the allocation of a large federal investment tax credit to Pitney Bowes.

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SolarCity Sues the United States over Treasury’s Administration of the Cash Grant Program

21 May '13

SolarCity in the name of two special purpose entities filed a complaint in February in the Court of Federal Claims. The complaint alleges that the United States Treasury failed to follow applicable law in administering the Cash Grant program. The complaint seeks in excess of $8 million dollars in damages. The complaint is available here.

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New Guidance Provides Taxpayers with Definitions of Units of Property and Major Components For Capitalizing Power Generation Property Expenditures

20 May '13

On April 30, the Internal Revenue Service (IRS) issued guidance (Revenue Procedure 2013-24 http://www.irs.gov/pub/irs-drop/rp-13-24.pdf) providing definitions of “units of property” and “major components” that taxpayers may use to determine whether expenditures to maintain, replace or improve steam or electric power generation property must be capitalized (and depreciated, rather than expensed) under Section 263(a) of the Internal Revenue Code.  This is of particular interest to utilities and independent power producers.

At a high level, to determine which expenditures are deductible as repairs or capitalized as improvements in this context, a determination must be made regarding to which discrete “unit of property” or “major component” such expenditures relate.  Generally, for this purpose, a major component is a part of a larger unit of property.

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The Real Cost of the IRS Tea Party Scandal

17 May '13

The actions of the tax professionals in the IRS’ Tax Exempt division in discriminating against applications for tax-exempt status based on the apparent political views of the applicant are offensive and worthy of punishment. The IRS Commissioner and leader of the division have already lost their jobs and more IRS employees will be punished. 

The problem with the tax-exempt application process was identified and publicized by the Treasury Inspector General for Tax Administration. This should give the public comfort that at some level there are functioning checks and balances at the IRS.

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New York State Senate Votes to Extend NY-Sun Initiative

14 May '13

The New York State Senate unanimously passed the New York Solar Bill (S.2522), which would extend the NY-Sun Initiative, an existing public-private partnership aimed at significantly increasingly the amount of solar electricity generated in the state, through 2023. The NY-Sun Initiative currently provides incentives for the expansion of solar electricity generating facilities in New York State through grants for the construction of solar production facilities and tax credits for residential homeowners and commercial businesses that install solar panels on their rooftops and properties. The New York Solar Bill would also provide a tax credit for manufacturers of solar energy production and storage equipment located in the state. The Bill awaits passage in the New York State Assembly.

We understand that the New York Solar Bill is part of a larger legislative effort currently underway in the New York State Legislature and that additional bills and action by the Legislature and New York Governor Andrew M. Cuomo are expected in the near future.

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New York Enacts Electric Vehicle Recharging Station Tax Credit to Compliment the Federal Tax Credit

10 May '13

Included in New York State’s recently enacted fiscal plan is a tax credit for electric vehicle recharging equipment equal to the lesser of 50% of the cost and $5,000 for each installation.  The credit is valid against corporate tax, corporate franchise tax and personal income tax.  The credit expires after December 31, 2017. The credit is not refundable and does not reduce New York alternative minimum tax liability; however, it may be carried forward fifteen years.  New Yorkers with electric cars should consider taking advantage of the credit by installing charging stations at their homes.  Also, parking garages that seek to improve their “green” status should consider installing electric vehicle charging equipment for their customers and claiming the credit.

The New York tax credit compliments the federal tax credit.  The American 2012 Taxpayer Relief Act extended the federal credit for refueling equipment placed in service before January 1, 2014. The federal credit is 30 percent but limited to $50,000 per taxpayer; therefore, the federal credit is not much help to companies that want to install many recharging stations across a region. The federal tax credit is not refundable; it does not reduce a taxpayer’s alternative minimum tax liability, but it may be carried forward for 20 years.

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Treasury Provides Automatic 90- Day Extension for Submission of Final Cash Grant Applications

07 May '13

To be eligible for a 1603 Treasury Cash Grant, a “begun construction” application was required to be submitted prior to October 1, 2012.  Further, wind projects must have been placed in service prior to January 1, 2013, and solar projects must be placed in service prior to January 1, 2017.  Treasury’s rules provide that an application at this stage in the program must be submitted within 90 days of the project being placed in service.

Some grant applicants were having trouble with this deadline.  For instance, some applicants struggled with determining the precise date their project was placed in service, because the test for placement in service is a multi-factor test that has subjective elements.1 Treasury has generously implemented an automatic 90-day extension. Here is a link to Treasury’s web site http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx. Now, from the placed in service date, an applicant that requests the extension, has up to 180 days to submit an application.

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Congressional Research Service’s Report on Energy Efficiency Tax Credits for Consumers

29 Apr '13

On April 16, 2013, the Congressional Research Service published a report on home energy efficiency tax credits for consumers.  The report is available here. The tax credits arise under Sections 25C and 25D of the Internal Revenue Code.  The tax credits are available to individuals without regards to the passive activity loss rules that generally limit the ability of individuals to use tax credits.

The Section 25C credit is for the purchase of energy efficient windows and doors and energy efficient mechanicals, such as air conditioners, heat pumps and hot water heaters. The credit for windows and doors is for 10 percent of the cost of the windows or doors and has a lifetime cap of $200. For the energy efficient mechanicals, each item of equipment has its own tax credit amount and all of the mechanicals have a lifetime cap of $500. The Section 25C credits are not available for vacation homes, investment properties or any new construction. The Section 25C credit may not be carried forward or back, so if the taxpayer does not have a tax liability in the year in which the improvements are made the credit is of no value. The credit expires at the end of this year.

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In Honor of Earth Day

23 Apr '13

April 22, 2012, the 43rd Anniversary of Earth Day, was an important reminder of the need to remain committed to our environment.  Thankfully, Sens. Chris Coons (D-Del) and Ron Wyden (D-Ore) did not miss the opportunity, and spoke yesterday about what should be non-controversial legislation to allow alternative energy projects to benefit from a tax-advantaged financing structure that has been available to fossil fuel energy projects for decades.

What I’m referring to is something called a “master limited partnership” (or MLP).  An MLP is an entity that is taxed as a partnership (in other words, no entity level tax), but which has widely held interests that can be traded much like shares of stock.  Oil, natural gas, coal and pipeline projects have been using this structure to expand their access to capital since the 1980s.  (For additional discussion of MLPs, see David Burton’s post of March 12, 2013 - “A Camel’s Nose Under the Tent: MLP Legislation”).

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Installing Solar on Your House and Keeping the Tax Credits

22 Apr '13

Many homeowners have opted to fund the cost of adding solar panels to their homes by entering into a lease or a power purchase agreement with companies like SunPower or OneRoof. But what are the tax rules if you want to own the system yourself and use the tax credits to reduce your own taxes?

Internal Revenue Code Section 25D provides an income tax credit equal to 30 percent of the cost of solar panels (including installation costs) on the taxpayer’s residence. The credit is available even if the taxpayer is subject to the alternative minimum tax, as many homeowners are in states like California and New Jersey where solar is popular. The credit does not apply to solar panels installed after 2016.

The Section 25D credit broader in scope than the Code Section 48 investment tax credit claimed by investors: it is expressly available for expenditures for “solar panel(s) or other property installed as a roof (or portion thereof)”, even if “it constitutes a structural component of the structure on which it is used.”

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PTC Start of Construction Guidance may be Clarified

19 Apr '13

As the renewable energy industry absorbs the IRS’ production tax credit (PTC) guidance, Notice 2013-29 (http://www.irs.gov/pub/irs-drop/n-13-29.pdf) that was issued Monday, two glitches have surfaced: liquidated damages and master contracts.  The notice is summarized in a Client Alert available here.

As discussed in the Client Alert, a taxpayer to have its project eligible for PTCs must in 2013 either (i) start physical work of a significant nature or (ii) incur at least 5 percent of the cost of the project.  If the developer uses work by or payments to a contractor to achieve this, the arrangement with the contractor must be a “binding written contract”.

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Effect of Potential Passthrough Reform on Renewables Industry

18 Apr '13

On March 12, Dave Camp (R-MI), who is chair of the House of Representatives’ Ways & Means Committee, released a revised discussion draft for tax reform focusing on simplifying the taxation of small business owners.  Part of the proposed reform is to bring closer together both passthrough regimes:  the “partnership” and “S-corporation” regimes under subchapter K and subchapter S, respectively. 

The Committee is currently looking into two options for making this passthrough reform. The second proposal, which is discussed below, has raised some concerns within the renewable energy industry about whether flip partnerships with tax equity investors would be permissible.  Recent comments by government officials during a KPMG webinar suggest that flip partnerships would continue to be a viable structure. 

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Obama Administration’s Budget Proposal

11 Apr '13

The Obama Administration’s budget proposal for fiscal year 2014 would make the production tax credit permanent and refundable.  Refundability would mean that developers without sufficient tax liability to use the credits would receive a cash refund from the IRS.  If enacted in the form proposed, projects that start construction after December 31, 2013 would be eligible. The question is whether such an expansion would pass the Republican-controlled House of Representatives.

If enacted the Administration’s budget would end the sequestration rules that since March 1st have applied to Treasury’s Cash Grant payments for renewable energy projects and certain other federal programs. It appears unlikely that any headway will be made on this issue until midsummer when, in the context of the debt ceiling, it is expected that the Congress and the President will negotiate a “grand compromise” with respect to tax reform, entitlements and other spending.

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White House Seeks to Expand Energy Tax Policy

09 Apr '13

The White House by legislative or administrative action intends to expand tax policy with respect to renewable energy. Two areas under consideration by the Administration are (i) Senators Coons (D-Del.) and Jerry Moran’s (R-Kan.) bill to expand the ability of master limited partnerships (MLPs) to invest in renewables by treating renewable energy income as “good” income for purposes of the 90 percent qualifying income test and (ii) permitting solar projects to be “qualifying” assets for real estate investment trusts (REITs). The MLP bill is discussed in the blog post below of March 13.

Heather Zichal, deputy assistant to the President for energy and climate change, made these comments yesterday. The strategy is apparently based on a political judgment that an energy bill would be unlikely to garner sufficient support to be enacted; therefore, changes to tax policy are seen as a viable second choice.1

With respect to REITs, the White House may not need to wait for Congress. As widely reported, Renewable Energy Trust Capital, Inc. has filed a private letter ruling request with respect to utility scale ground mounted solar being effectively “real property” for purposes of the REIT rules. That ruling was expected at the end of January, but there has yet to be a public report of it being issued.

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Class Action Bar Targets Residential Solar

05 Apr '13

SunRun, Inc. (“SunRun”) has been targeted by a consumer class action lawsuit. Mr. Shawn Reed of California is the named plaintiff in the complaint against SunRun. Mr. Reed and his lawyers, Hagens Berman Sobol Shapiro LLP, seek similarly situated consumers to be designated as a “class” so that they can sue SunRun in a single action. The class action complaint is available here.  Akin Gump is not involved in this lawsuit.

The lawsuit has three allegations:

1. It was deceptive for SunRun to include predictions of increased energy prices in California in its marketing materials. SunRun’s marketing materials referenced a 6 percent annual average increase in electricity prices nationwide over the last 30 years. The plaintiff asserts that this fact confused him and caused him to assume that prices would increase in California to make his investment in a home solar system more lucrative.

2. The plaintiff was misled to believe that, if he sold his house and the buyer did not want to continue to pay for the solar system, SunRun would come and remove the system, and he would have no further liability. This is based on SunRun’s contract referencing the fact that, at the end of the stipulated term, SunRun would come and remove the system at no cost to the homeowner (if the homeowner does not purchase the system or renew the contract). The plaintiff thought this provision also applied to a termination during the term, despite there being an express provision in the contract that a termination during the term accelerated the obligation to make the payments due for the remainder of the term.

3. At the time the system was installed on the plaintiff’s home, SunRun did not have a California contractor’s license.  SunRun started installing solar systems in 2007, but did not obtain a California contractor’s license until February 2012.

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Treasury & IRS to Issue PTC Guidance as Soon as Possible

03 Apr '13

Treasury Assistant Secretary for Legislative Affairs, Alastair Fitzpayne, wrote Senator Michael Bennet (D-CO) on March 28 that the “start of construction” production tax credit guidance that the wind industry is eagerly awaiting will be issued “as soon as possible.” The letter provided no other color. It will be interesting to see what “as soon as possible” means to Treasury.

Lack of guidance is impeding the development of new renewable energy projects; favorable government guidance would likely spark orders for turbines and the construction of projects. Such activity would benefit the still-high unemployment rate in the United States as well as spur the economy generally.

To read PTC letter from Treasury to Senator Michael Bennet click here.

IRS Inflation Adjustment Increases PTC to 2.3 cents per KwH

02 Apr '13

The IRS has published its annual inflation adjustment for production tax credits. The adjustment results in the production tax credit increasing from 2.2 cents per kilowatt hour to 2.3 cents per kilowatt hour for wind, closed-loop biomass and geothermal. This is good news for developers as each hour of electricity generated by their qualified projects is slightly more valuable for tax credit purposes. 

The production tax credit in 2013 is 1.1 cents per kilowatt hour for open-loop biomass, small irrigation, landfill gas, trash combustion, qualified hydropower and marine and hydrokinetic energy facilities.

Further, the phaseout that in theory applies to production tax credits when energy prices are raised to a level where the production tax credit is thought to be unnecessary, will not be triggered in calendar year 2013. No one in the industry worries too much about the phaseout, but it is good to know that it will not be a problem in 2013.

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GAO Report on Federal Wind Incentives

01 Apr '13

The Government Accounting Office (GAO) published a report analyzing 82 federal incentives for wind projects, some of which also apply to other types of renewable power generation. Three of the incentives were found to have not provided any support to wind projects in fiscal year 2011. The incentives are implemented by nine federal agencies. As is the case for most activities of the federal government, it is not surprising that the GAO found some inefficiencies and duplication. 

As readers of this blog are aware, most of the federal support for wind power generation is facilitated by means of the Internal Revenue Code. In addition, to the production tax credit, the investment tax credit (only available if a project elects to forego the production tax credit) and accelerated depreciation, the GAO identified two subsidized bond programs: a credit for building manufacturing facilities for renewable energy components; and a credit for individuals that purchase renewable energy equipment for their homes.

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Germany Debates How to Pay for Renewables

27 Mar '13

Germany has been praised for its political ambition to shift from nuclear and fossil fuels to renewable sources of energy.  Its so-called “Energiewende” has sparked debate on how to address rising costs for consumers while supporting the renewables policy. 

At a first joint meeting on February 14, 2013, the federal ministers for the environment and for economics and technology have proposed legislation that would freeze the renewable energy surcharge consumers currently pay through 2014 and cap further increases of the surcharge at 2.5 percent per year as of 2015. 

The federal ministers also proposed to partially shift the economic burden of the Energiewende from consumers to producers.  Their proposals include a new “energy solidarity tax” charged to new, as well as existing, solar and wind energy generators; the cancellation of a biogas promotion bonus (the so-called “Güllebonus”); higher cost sharing by energy-intensive industries, mandatory direct marketing by large plant operators as opposed to access to fixed feed-in tariffs; and lower reimbursements for curtailment.

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New York Times Magazine Advises on the Ethics of Being a Tax Lawyer

25 Mar '13

Tax lawyers were the topic of the weekly ethics column in The New York Times Magazine. An unnamed New York tax lawyer wrote the ethicist asking, “Is advising wealthy companies of ways to reduce their tax bills through sophisticated legal structures ethically permissible?” The ethicist responded, “You need to do your job to the best of your abilities, within the existing rules. You should, however, voice your moral apprehension about the use of such loopholes to the company you represent.” The column is available here.

One advantage to a practice focused on the tax aspects of renewable energy is that such ethical questions do not really arise. Using one’s tax expertise to maximize tax credits funding renewable energy that leads to lower carbon emissions is, generally, a worthy endeavor by any measure.1

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Bloomberg Publishes Optimistic Article on IRS PTC Guidance

22 Mar '13

Christopher Martin of Bloomberg in an article dated March 21 writes that “The Internal Revenue Service is poised to release guidance” with respect to the “start of construction” rules to qualify wind projects for production tax credits that expire for projects that start construction after this year. I hope the IRS proves the author to be correct. Here’s the link. For more coverage, see the post below of January 31.

Sen. Wyden Gets the Message: Oil and Gas Incentives Are Inconsistent with Energy Technology Parity

21 Mar '13

Today, Sen. Wyden (D-OR) spoke to the Edison Electric Institute. He said, “On energy, the guiding principles [should] be technology neutrality—that you don't favor one technology over another—and what amounts to parity.… You just distort the market if some sources get these enormous incentives and others don’t.” The senator went on to acknowledge that a goal of parity would require examining oil and gas tax incentives.1

Sen. Wyden’s comments about oil and gas tax incentives are consistent with a post on this blog of March 6, – Level Playing Fields.

The oil and gas tax incentives are permanent fixtures of the Internal Revenue Code, so they do not draw the attention that the production and investment tax credits do when they have to be renewed every few years. Nonetheless, including tax and other government benefits, the Environmental Law Institute found that, from 2002 to 2008, the United States spends almost six times as much on subsidies for fossil fuels versus renewables. 2

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Holders of Refundable Tax Credit Energy Bonds Face 8.7 Percent Sequester

15 Mar '13

Cash Grant applicants are not the only participants in the clean energy industry subject to the sequester. Holders of New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds will feel the pain of sequester too.

The Internal Revenue Service has announced that any holder of an eligible bond that files Form 8038-CP (the form to elect to receive a cash payment, rather than a tax credit) after March 1, 2013 will have their refundable tax credit payments reduced by 8.7 percent. The percentage is subject to change either when Congress acts or after the close of the fiscal year on September 30, 2013.

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Senator Coburn Suggests to Treasury a Cut to Cash Grant Payments

14 Mar '13

Senator Coburn’s (R-OK) letter of March 13 to Treasury Secretary Lew suggests ways to reallocate spending at Treasury to mitigate the effect of sequester on funding for tax enforcement efforts.

The letter notes that it is estimated the sequester will result in a $187 million reduction in Treasury Cash Grants. The senator is not happy with that reduction, and his letter appears to suggest that Treasury should further reduce Cash Grant payments beyond the 8.7 percent mandated by the sequester.

Senator Coburn’s rationale for targeting Cash Grants is that the Cash Grants for wind projects have been paid disproportionately to developers with foreign ownership, and, at one point, more than two-thirds of the turbines that had qualified for Cash Grants were made by foreign manufacturers.

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A Camel’s Nose under the Tent: MLP Legislation

12 Mar '13

The oil and gas industry benefits from the master limited partnership (MLPs) rules.  Those rules provide that oil and gas businesses (and certain other businesses) may raise equity in the public markets but without liability for corporate income tax.  MLPs enable the oil and gas industry to raise capital from retail investors at tax advantaged rates.

Advocates for the renewable energy industry point out that the Internal Revenue Code requires that 90 perecent of an MLP’s income to come from qualified sources (e.g., oil or gas operations) and income from renewable energy projects is not a qualified source.  Thus, the advocates suggest that Congress should amend the definition of qualified sources to include income from renewable energy projects.

The next phase of the conversation is that the industry’s most significant problem is a lack of tax equity providers.  And merely making renewable energy eligible for MLP treatment would not address that shortage, because the investors that buy units in the MLP would be mostly individuals: individual investors would still be subject to the passive activity loss rules and the at-risk rules that would prevent them from using the tax credits and accelerated depreciation in an efficient manner.

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Level Playing Fields

06 Mar '13

Many opponents of  renewable energy use the rhetoric that tax benefits for renewable energy should be eliminated, so renewables compete on a level playing field with conventional forms of energy.  An assumption in this statement is that other forms of energy do not benefit from tax subsidies.  Let’s examine the tax benefits for natural gas and oil.

Finite natural resources, like oil and gas, are subject to a cost-recovery calculation for tax purposes known as depletion.  It is their equivalent to depreciation.  There are two types of depletion: percentage and cost.  Big players, like ExxonMobil, are required to use cost depletion.  Cost depletion is analogous to straight-line depreciation and is not that sexy.

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Barclays Shutters U.K. Tax Unit and Adopts Sweeping Standard for Future Transactions

27 Feb '13

On February 12, the CEO of Barclays announced that the bank is shuttering its U.K. tax-structuring unit.  The unit had previously been extremely lucrative and high-profile in structuring and executing tax-advantaged transactions in the United Kingdom.1

It is unclear if the move was the result of a change in the appetite for such transactions in the United Kingdom market or represented a change of view by Barclays about the transactions.

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FASB Surprised by the Sequester Too

26 Feb '13

 As the effective date of March 1 for sequestration approaches, we continue to learn more about its scope. Surprisingly, the Financial Accounting Standards Board (FASB) will feel the pain of the sequester too.

The FASB, unlike the Treasury cash grant program, is not taxpayer funded. The Securities and Exchange Commission (S.E.C.) has delegated to the FASB the responsibility to promulgate generally accepted accounting principles (GAAP).

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New York State Green Energy Incentives for Consumers: Use Them Since You Are Paying For Them

24 Feb '13

In fiscal year 2010-2011, the New York State Energy Research Development Authority spent $413.9 million statewide on various energy programs, most of which are focused on encouraging consumer energy conservation and green energy use.1

In that same time period, the Authority was provided with funding of $289.9 million through a “system benefit” charge paid by gas and electric customers. On a typical bill, that charge is 2 percent for electricity customers and 1 percent for natural gas customers.2

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