Tax Equity Telegraph http://www.akingump.com © 2014 www.akingump.com YieldCos, MLPs and REITs Presentation http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/yieldcos-mlps-and-reits-presentation.html <p><a class="rubycontent-asset rubycontent-asset-31937" href="http://cdn.akingump.com/images/content/3/1/v2/31942/31937-4.pdf">Here</a> is the presentation from the webinar MLPs, REITs and YieldCos for Renewables Webinar 2.0 that I chaired on September 4. The presentation explains each type of vehicle, how the vehicles differ from each other, how the vehicles can invest in renewables and how master limited partnerships (MLPs) could invest to a far greater extent in renewables if Congress changes the definition of &ldquo;qualifying income&rdquo; to include income generated by renewable energy projects.</p> 8525 Fri, 12 Sep 2014 00:00:00 -0400 Ruling on Discovery Disputes in “SolarCity” Cash Grant Litigation http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/ruling-on-discovery-disputes-in-solarcity-cash-grant-litigation.html <p>On August 29, 2014, Judge Bruggink heard oral argument and ruled on plaintiffs&rsquo; motion to compel the production of documents and information requested from the Department of the Treasury (&ldquo;Treasury&rdquo;) regarding plaintiffs&rsquo; challenge to Treasury&rsquo;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.</p> <p>Background and early developments in the case are covered in blog posts of <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-sues-the-united-states-over-treasury-s-administration.html">May 21</a>, <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-moves-to-dismiss-solarcity-s-cash-grant-case-1.html">June 2</a>, <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/brief-in-solarcity-cash-grant-litigation-provides-insight-into.html">July 9</a>, <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-fires-back-in-solarcity-cash-grant-litigation-motion-to.html">August 14</a> and <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-cash-grant-case-survives-doj-s-motion-to-dismiss.html">September 20</a>, the most recent of which concerns Judge Bruggink&rsquo;s denial of the Department of Justice&rsquo;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.</p><p>The thrust of the parties&rsquo; dispute is whether certain information relating to other Section 1603 applicants and internal Treasury policies/guidelines is relevant to plaintiffs&rsquo; claims and is discoverable. At the hearing, the DOJ, arguing on behalf of Treasury, asserted that plaintiffs&rsquo; requests were overly broad and irrelevant, insofar as they sought information concerning approaches taken by Treasury with respect to other, unrelated applicants and the development of Treasury&rsquo;s general screening policies and benchmarks used in evaluating and adjusting applications. While Judge Bruggink mainly agreed with the DOJ&rsquo;s arguments, he also recognized the potential relevance of such information to how Treasury evaluated and adjusted plaintiffs&rsquo; cash grant awards, noting that even the DOJ&rsquo;s explanation of Treasury&rsquo;s approach to Section 1603 adjustments suggested a certain amount of imprecision in the process.</p> <p>Accordingly, Judge Bruggink generally limited plaintiffs&rsquo; discovery requests to information and documents concerning what Treasury had done with respect to their applications, although he also ruled currently discoverable other applications used by Treasury as a basis of comparison to adjust plaintiffs&rsquo; awards and, with respect to Treasury benchmarks that were higher than the amounts claimed by plaintiffs, information concerning how such benchmarks were derived. He deferred making a final ruling on the other information and documents sought by plaintiffs until after this material had been produced and reviewed.</p> <p>Fact discovery is currently scheduled to conclude by November 19, 2014 (which will be followed by expert reports and discovery), although Judge Bruggink expressed understandable doubt during the August 29 hearing that such discovery would indeed be complete by this date.</p> 8473 Wed, 03 Sep 2014 00:00:00 -0400 IRS Comments on its PTC Start of Construction Guidance http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-comments-on-its-ptc-start-of-construction-guidance.html <p>On August 20, the American Wind Energy Association (AWEA) held a webinar to discuss Internal Revenue Service (IRS)&nbsp;<a class="target-blank" href="http://cdn.akingump.com/images/content/3/1/v2/31675/2014-46-PTC-Third.pdf">Notice 2014-46</a>, which clarified the rules for wind projects to be grandfathered for production tax credit (PTC) eligibility purposes as having started construction in 2013.&nbsp; A prior post discussing Notice 2014-46 is available&nbsp;<a class="rubycontent-page-link rubycontent-page-8375 target-blank" href="/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-finally-releases-clarifications-to-ptc-start-of-construction-2.html">here</a>.</p> <p>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&rsquo;s primary representative was Christopher Kelley, who recently rejoined the IRS after a stint at Treasury.&nbsp; Mr. Kelley was joined by his IRS colleagues Jamie Park, Philip Tiegerman and Jennifer Bernardini.</p><p>Below are highlights of Mr. Kelley&rsquo;s remarks. Many remarks provide helpful clarifications of the rules or insight into the policy rationales for the rules. This post was prepared without the benefit of a transcript or a recording.&nbsp; Please feel free to contact the author to request corrections. Also, it is important to note that these remarks were informal and are not binding on the IRS.</p> <p>As background, Notice 2014-46 primarily clarified three points:</p> <p style="margin-left: 30px;">1. For projects that did not meet the safe harbor of spending 5 percent of their cost in 2013 and instead undertook &ldquo;significant physical work&rdquo; in 2013, there is no minimum threshold of work required as long as the work performed in 2013 was <strong>significant</strong> as provided for in the IRS notices.</p> <p style="margin-left: 30px;">2. Transfers of grandfathered projects are permissible, as long as either (a) the transfer includes contracts or land rights or (b) the transferee and transferor are more than 20 percent related.</p> <p style="margin-left: 30px;">3. If a project fell short of the 5 percent safe harbor, but at least 3 percent was spent in 2013, then the number of turbines included in the project that are tax-credit-eligible may be prorated accordingly.</p> <h3>Significant Physical Work</h3> <p>Mr. Kelley confirmed that the wind industry&rsquo;s reading of the physical work requirement in Notice 2014-46 was accurate: &ldquo;The significant physical work standard is a qualitative standard, rather than quantitative. There is no minimum amount of work that must have been done in 2013.&nbsp; There is no bright line. The test is somewhat nebulous. A lot of the test comes from the 1603 start of construction <a class="target-blank" href="http://www.treasury.gov/initiatives/recovery/Documents/FAQs%20for%20Begun%20Construction%20web4.pdf">FAQs</a>, bonus depreciation rules and investment tax credit rules going back to the 1960s.&rdquo;</p> <p>Mr. Kelley was asked if the level of &ldquo;physical work&rdquo; required increased proportionately with the size of the project. He responded, &ldquo;The size of the project does not matter. The work must be <strong>significant</strong> and done in 2013.&rdquo;</p> <p>Mr. Kelley was asked if excavating a single turbine site was sufficient.&nbsp; He responded, &ldquo;I don&rsquo;t want to speculate about specific fact patterns. You get some comfort from the language in the two notices.&rdquo;</p> <p>Mr. Kelley was asked if it was necessary to excavate, pour concrete <strong>and </strong>install bolts for one or more turbine sites in 2013 to achieve significant physical work in 2013. He said, &ldquo;It is fair reading that just starting excavation is enough without pouring concrete or installing bolts. The language says &lsquo;or,&rsquo; rather than &lsquo;and.&rsquo;<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp;Any one activity is sufficient.&rdquo;</p> <p>Mr. Kelley was asked if &ldquo;excavation has begun,&rdquo; if, at the end of 2013, a project owner started excavating a turbine site but did not &ldquo;finish off&rdquo; the excavation due to the pending winter being likely to damage the finishing work. His response was &ldquo;sounds like excavation has begun and is significant.&rdquo;</p> <p>Mr. Kelley was asked why examples were not included in Notice 2104-46. He said, &ldquo;Additional examples might perhaps cause more confusion than they help.&rdquo;</p> <h3>No Binding Written Contract Requirement for On-Site Work</h3> <p>Mr. Kelley was asked if a &ldquo;binding written contract&rdquo; was required for physical work that was conducted on the project site. After an apparent sidebar with his IRS colleagues, he responded, &ldquo;I don&rsquo;t think so if the work is done on site and is <strong>significant</strong>.&rdquo; This interpretation is helpful because section 4.02 of Notice 2013-29 provides, &ldquo;Both on-site and off-site work (performed either by the taxpayer or by another person under a binding written contract) may be taken into account for purposes of demonstrating that physical work of a significant nature has begun.&rdquo;&nbsp; Based on Mr. Kelley&rsquo;s comment, the parenthetical clause is intended to only modify &ldquo;off-site work.&rdquo;</p> <h3>Changes in the Location of the Project in Which Safe Harbored Equipment Will Be Used</h3> <p>Mr. Kelley was asked whether, if a developer has a master turbine contract with a manufacturer that was entered into 2013 and the 5 percent cost was incurred under that contract in 2013, the five percent safe harbor was met even if the developer did not know at what project site the turbines would be deployed. He responded, &ldquo;You do not have to know the address of the project in 2013. That&rsquo;s the point of the relocation provision of the notice.&rdquo;<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;</p> <p>He added that it is permissible to have purchased equipment for the 5 percent safe harbor and had &ldquo;multiple projects in mind&rdquo; for the same equipment. Further, he was asked if the reference in section 4.03 of Notice 2014-46 to a &ldquo;taxpayer also may begin construction of a facility in 2013 with the intent to develop the facility at a <strong>certain site</strong>&rdquo; requires a developer to be able to demonstrate that, in 2013, it had an intent to develop a particular site. His response was that the reference did not require that.</p> <h3>Transfers</h3> <p>Mr. Kelley made it clear that it is possible for one taxpayer to transfer only safe harbored equipment to a transferee that is more than 20 percent related to the transferor. The transferee can then undertake additional development work, such as obtaining land rights, permits, interconnection agreements or a power purchase agreement and then transfer the safe-harbored equipment plus those rights or agreements to an unrelated party. That unrelated party could then claim tax credits based on its ownership of the safe-harbored equipment.</p> <p>Mr. Kelley was asked for detail with respect to the requirement in section 4.03 of Notice 2014-46 that a transfer to an unrelated party include more than merely &ldquo;tangible personal property&rdquo; (i.e., equipment). He replied, &ldquo;The right way to look at it is to include land, a land lease, a power purchase agreement or an interconnection agreement. This rule is following the 1603 start of construction FAQs.&rdquo;</p> <p>The &ldquo;master contract&rdquo; rules in section 4.03(2) of <a class="target-blank" href="http://cdn.akingump.com/images/content/3/1/v2/31680/Notice-2013-29-PTC.pdf">Notice 2013-29</a>&nbsp;refer to transferring safe-harbored equipment to &ldquo;an affiliated special-purpose vehicle.&rdquo;&nbsp; Mr. Kelley was asked what the relationship is between &ldquo;an affiliated special-purpose vehicle&rdquo; and the 20-percent-related party standard with respect to transferees in section 4.03 of Notice 2014-46. He responded, &ldquo;The affiliated special-purpose vehicle language is borrowed from the 1603 start of construction FAQs. I don&rsquo;t have a comment on how to tie it to the related party rules.&rdquo;</p> <h3>Three Percent Standard for Prorating Tax Credits</h3> <p>Mr. Kelley was asked for the policy rationale for including section 5.01 of Notice 2014-46 that provides rules with respect to projects that are unable to meet either (a) the 5 percent spend in 2013 safe harbor or (b) the significant physical work requirement but for which at least 3 percent was spent in 2013. He noted that some project owners had explained to the IRS that they were building extremely large projects for which the 5 percent spend was not feasible; however, for reasons he did not specify, the projects were unable to meet the significant physical work standard. He explained that the government was persuaded that it was unreasonably harsh for such projects to be eligible for zero tax credits while a project for which &ldquo;excavation of a single turbine site&rdquo; occurred in 2013 would be eligible for full tax credits under the significant physical work standard. Thus, the IRS made a &ldquo;policy call to provide some relief but put in a three percent floor.&rdquo;</p> <p>A tangential ramification of this statement is that Mr. Kelley appears to have implicitly endorsed excavating a single turbine site as being sufficient for the start of significant physical work, although he sidestepped that question the first time it was asked.</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;<em>See Notice 2014-46, </em>&sect; 3; Notice 2013-29, &sect; 4.02.</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;<em>See </em>Notice 2014-46, &sect; 4.02.</p> </div> </div> 8424 Thu, 21 Aug 2014 00:00:00 -0400 IRS Finally Releases Clarifications to PTC “Start of Construction” Guidance http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-finally-releases-clarifications-to-ptc-start-of-construction-2.html <p>Today, the Internal Revenue Service (IRS) issued Notice 2014-46, which clarifies the rules for a wind project to be deemed to have started construction in 2013 as is necessary to be eligible for production tax credits (PTC) or the investment tax credit (ITC).&nbsp; The notice is available&nbsp;<a class="target-blank" href="http://www.irs.gov/pub/irs-drop/n-14-46.pdf">here</a>.</p> <p>The new guidance is generally consistent with the industry&rsquo;s requests for clarifications;<sup><a href="#_ftn1">1</a></sup>&nbsp;however, it adds unanticipated complexity with respect to the transfer of grandfathered projects.&nbsp; Also, it provides rules that the industry did not request with respect to projects that fall short of meeting the safe-harbor of spending 5 percent of their total cost in 2013.</p> <p>The applicability of the guidance is not limited to wind projects. It also applies to geothermal, biomass, landfill gas and some hydroelectric and ocean energy projects. Solar projects are not subject to the guidance and qualify for a 30 percent investment tax credit, so long as they are &ldquo;placed in service&rdquo; by the end of 2016.</p><p>I. Clarification of Physical Work of a Significant Nature</p> <p>The IRS in Notice 2013-29 provided two options for a project to be deemed to have met the statutory standard for tax credits of starting construction in 2013.&nbsp; Five&nbsp;percent of the ultimate total cost of the project could be incurred in 2013 to meet a safe-harbor.&nbsp; Alternatively, if a project did not meet the 5 percent safe-harbor in 2013, it could still be deemed to have started construction in 2013 if &ldquo;physical work of a significant nature&rdquo; was undertaken in 2013 (the &ldquo;Physical Work Test&rdquo;).&nbsp;</p> <p>Notice 2013-29 provided examples of such work that included excavating a foundation, pouring concrete for a foundation, installing anchor bolts, building integral roads and working on a custom-designed step-up transformer (the &ldquo;Examples of Significant Work&rdquo;).&nbsp; However, Notice 2013-29 also included an example in which 20 percent of the turbine site&rsquo;s excavation was completed, concrete was poured and anchor bolts installed.&nbsp; This example created a concern that the Physical Work Test arguably required satisfaction of a 20 percent threshold.</p> <p>Notice 2014-46 puts that concern to rest. It provides that the 20 percent example was &ldquo;not intended to indicate that there is a 20 percent threshold or minimum amount of work required to satisfy the Physical Work Test. Assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.&rdquo; The foregoing statement could appear to raise the question: Although there is no fixed minimum, how does a project owner know that the work done was &ldquo;of a significant nature&rdquo;?</p> <p>Notice 2014-46 provides clear comfort on that issue.&nbsp; With respect to the Examples of Significant Work, it provides &ldquo;Beginning work on any of the activities described above will constitute physical work of a significant nature.&rdquo; The word &ldquo;beginning&rdquo; seems particularly helpful as it makes it clear that the Examples of Significant Work need not have been completed in 2013.</p> <p>II. Transfers of Grandfathered Projects</p> <p>The industry had requested that the IRS clarify that a developer could &ldquo;start construction&rdquo; in 2013 to qualify its project for tax credits and then sell or otherwise transfer the project to another party.<sup><a href="#_ftn2">2</a></sup>&nbsp; The guidance in Notice 2014-46 is more restrictive than what the industry requested.&nbsp;</p> <p>The notice provides that a transfer is permissible, so long as either (a) the transferor or transferee is at least 20 percent related<sup><a href="#_ftn3">3</a></sup>&nbsp;or (b) the property transferred does not consist &ldquo;solely of tangible property (including contractual rights to such property under a binding written contract).&rdquo;&nbsp; Although not expressly referenced, the 20 percent option is similar to the principles of FAQ 23 of Treasury&rsquo;s Begun Construction Cash Grant<sup><a href="#_ftn4">4</a></sup>&nbsp;guidance, while the option to transfer more than merely tangible property is similar to the principles of FAQ 24 of that guidance.<sup><a href="#_ftn5">5</a></sup>&nbsp; However, Notice 2014-46 is far more opaque in this respect than the Treasury FAQs.</p> <p>For instance, FAQ 23 provides that the 20 percent related requirement applies &ldquo;immediately before or immediately after,&rdquo; while the notice is silent as to how long the parties must remain related.&nbsp; Further, FAQ 24 has an example in which safe-harbor equipment is transferred along with &ldquo;permits, a power purchase agreement and an interconnection agreement,&rdquo; and the FAQ confirms that is sufficient, while no example is included in the notice.&nbsp; Nonetheless, it would seem reasonable that transfer of the equipment for a project along with permits, a power purchase agreement and an interconnection should be sufficient for tax credit grandfathering purposes.&nbsp; Further, if the project is intended to be merchant, the power purchase agreement should not be required.</p> <p>In addition, as land rights are not &ldquo;tangible personal property,&rdquo; it should be permissible to transfer the grandfathered equipment along with only title to land for the project, a leasehold interest in land for the project or an option to acquire either of the foregoing.</p> <p>What the government has communicated in its concern with respect to transfers of grandfathered equipment under the Cash Grant program was &ldquo;trafficking&rdquo; in grandfathered equipment, i.e., a financial investor purchasing equipment prior to the tax credit deadline, with little or no intent in actually developing a project, and then selling the equipment for a premium to a buyer seeking to qualify a project for tax credits. The trafficking concern should not be present so long as contracts that require time and expense to acquire, such as interconnection and power purchase agreements, are transferred with the tangible personal property.</p> <p>III. Five Percent Safe-Harbor Clarification</p> <p>Although not requested by the wind industry, the notice clarifies what happens if the amount incurred for a project in 2013 turns out to be less than 5 percent of the ultimate &ldquo;total cost of the project.&rdquo;&nbsp; The notice provides that, if the project is composed &ldquo;of multiple facilities&rdquo; (e.g., multiple wind turbines), the tax credit eligible portion can just be reduced until &ldquo;total cost&rdquo; of the tax credit eligible portion is not in excess of 20 times the amount incurred in 2013. &nbsp;The notice has an example in which only three of five turbines in a wind project are deemed to be tax credit eligible due to the total cost of all five turbines exceeding 20 times the amount incurred in 2013.<sup><a href="#_ftn6">6</a></sup></p> <p>What the notice does not clarify is how to handle the cost of improvements that are used by both the tax credit eligible and the tax credit ineligible portion, such as roads and transformers.&nbsp; Must such common improvements be completely attributed to the tax credit eligible portion? Or can the cost of such common improvements be prorated between the tax credit eligible and the tax credit ineligible portions?&nbsp; Prorating would appear to be the more equitable, but possibly not permissible, as transmission and most roads are &ldquo;integral&rdquo; to the tax credit eligible portion of the project.<sup><a href="#_ftn7">7</a></sup></p> <p>Although the notice is opaque in certain areas it should be welcomed by the wind industry.&nbsp; The notice should result in many wind projects that were on hold moving forward at an expedited pace.&nbsp;</p> <p>Projects will need to be on an accelerated schedule in order to be &ldquo;placed in service&rdquo; by the end of 2015 as is necessary to avoid scrutiny from the IRS regarding whether they were &ldquo;continuously constructed&rdquo; from January 2014 forward.&nbsp; As the notice was released almost three months after it was first previewed by a Treasury lawyer at a bar association meeting,<sup><a href="#_ftn8">8</a></sup>&nbsp;it would have been equitable if notice had also shifted the deadline to avoid continuous construction scrutiny from December 31, 2015, to March 31, 2016.&nbsp; As such a deadline is not statutorily mandated, it would have been in the IRS&rsquo;s discretion to grant such leniency.</p> <div> <div><hr /> <p><sup><a href="#_ftnref1">1</a>&nbsp;</sup>A Treasury lawyer speaking at an American Bar Association conference on May 9 had summarized the industry&rsquo;s requests.&nbsp; A blog post discussing the Treasury lawyer&rsquo;s statements is available&nbsp;<a class="rubycontent-page-link rubycontent-page-7834 target-blank" href="/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-will-issue-further-ptc-start-of-construction-guidance.html">here</a>.<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-will-issue-further-ptc-start-of-construction-guidance.html"><br /></a></p> </div> <div> <p><sup><a href="#_ftnref2">2</a></sup>&nbsp;This issue arises whether &ldquo;start of construction&rdquo; was deemed to occur by satisfying the 5 percent safe-harbor or by meeting the Physical Work Test in 2013.</p> </div> <div> <p><sup><a href="#_ftnref3">3</a></sup>&nbsp;The notice refers to Internal Revenue Code Section 197(f)(9)(C), which provides a 20 percent standard.</p> </div> <div> <p><sup><a href="#_ftnref4">4</a></sup>&nbsp;The Cash Grant is provided for in Section 1603 of division B of the American Recovery and Reinvestment Act, as amended.&nbsp; For wind and solar projects, the Cash Grant is 30 percent of &ldquo;eligible basis.&rdquo;&nbsp; Solar projects have until the end of 2016 to be &ldquo;placed in service&rdquo;; however, a preliminary Cash Grant application must have been filed before the end of 2012.&nbsp; Wind projects must have been placed in service before the end of 2012.</p> </div> <div> <p><sup><a href="#_ftnref5">5</a></sup>&nbsp;The guidance is available&nbsp;<a class="target-blank" href="http://www.treasury.gov/initiatives/recovery/Documents/FAQs%20for%20Begun%20Construction%20web4.pdf">here</a>.</p> </div> <div> <p><sup><a href="#_ftnref6">6</a></sup>&nbsp;The notice has a second example involving a biomass facility that cannot be divided into multiple facilities; thus, the biomass facility, if it missed the 5 percent safe-harbor, is only tax credit eligible if it met the Physical Work Test in 2013.</p> </div> <div> <p><sup><a href="#_ftnref7">7</a></sup>&nbsp;<em>See&nbsp;</em>Section 5.01(1) of Notice 2013-29 (defining &ldquo;total cost&rdquo; as &ldquo;All costs properly included in the depreciable basis of the facility are taken into account to determine whether the Safe Harbor has been met. The total cost of the facility does not include the cost of land or any property not integral to the facility.&rdquo;).&nbsp;</p> </div> <div> <p><sup><a href="#_ftnref8">8</a></sup>&nbsp;<em>See&nbsp;</em>note 1,&nbsp;<em>supra</em>.</p> </div> </div> 8375 Fri, 08 Aug 2014 00:00:00 -0400 CRS Report Takes Negative View on Bonus Depreciation http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/crs-report-takes-negative-view-on-bonus-depreciation.html <p>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.&nbsp; The report is available&nbsp;<a class="target-blank" href="http://cdn.akingump.com/images/content/3/1/v2/31140/Bonus-Depreciation-CRS-Report-July-2014.pdf">here</a>.&nbsp;</p><p>Below are key excerpts from the report.</p> <p>&nbsp;<span style="color: #000000; font-weight: bold;">Excerpts from Report&rsquo;s Executive Summary</span></p> <ul> <li>The Tax Extenders Act of 2013 (S. 1859), which would extend expiring tax provisions for a year, includes bonus depreciation and H.R. 4718 proposes to make bonus depreciation permanent. The temporary provisions enacted in the past for only a year or two and extended multiple times are generally referred to collectively as the "extenders.&rdquo; Historically, bonus depreciation has not been a traditional "extender."</li> <li>Bonus depreciation allows half of equipment investment to be deducted immediately rather than depreciated over a period of time. Bonus depreciation was enacted for a specific, short-term purpose: to provide an economic stimulus during the recession. Most stimulus provisions have expired. Bonus depreciation has been in place six years (2008-2013), contrasted with an earlier use of bonus depreciation in place for three years.</li> <li>A temporary investment subsidy was expected to be more effective than a permanent one for short-term stimulus, encouraging firms to invest while the benefit was in place. Its temporary nature is critical to its effectiveness. However, research suggests that bonus depreciation was not very effective, and probably less effective than the tax cuts or spending increases that have now lapsed</li> <li>Compared to a statutory corporate tax rate of 35%, bonus depreciation lowers the effective tax rate for equipment from an estimated 26% rate to a 15% rate.</li> <li>Moving to permanent bonus depreciation is inconsistent with tax reform proposals made by the Wyden-Coats bill, the Senate Finance Committee Staff discussion draft and Chairman Camp's proposal.&nbsp; All of these proposals would reduce the current accelerated depreciation for equipment.</li> <li>The usual extenders cost a fraction of the cost of permanent provisions in a 10-year budget window, but bonus depreciation is a smaller fraction because it is a timing provision. A one-year extension costs $5 billion for FY2014-FY2024, less than 2% of the cost of $263 billion for a permanent provision.</li> </ul> <p><strong style="color: #000000;">H</strong><span style="color: #000000; font-weight: bold;">istorical Development of Bonus Depreciation</span></p> <ul> <li>When depreciation rules were set in the Tax Reform Act of 1986 (P.L. 99-514), they allowed for accelerated deductions to offset the lack of indexing for inflation, so that the discounted present value of tax depreciation deductions was roughly equal to the discounted present value of economic depreciation.</li> <li>Since that time, inflation has declined and caused the value of tax depreciation to be more beneficial than economic depreciation. For non-residential buildings, the inflation effect has been offset by an increase in tax lives. For equipment, with costs deducted over relatively short periods of time and under accelerated declining balance methods, tax depreciation is more generous than economic depreciation.</li> <li>Bonus depreciation was first enacted in the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) at a 30% rate, for three years, with the purpose of stimulating investment during an economic slowdown. Concerns about the economy had come in the aftermath of the 2001 terrorist attacks.&nbsp; Although the bonus depreciation rate was increased by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27) to 50% in the following year and extended for a year, it expired at the end of 2005.</li> <li>With the financial distress and recession that began in 2007, the Economic Stimulus Act of 2008 (P.L. 110-185) was enacted to stimulate the economy, including a single year of bonus depreciation at 50%. Bonus depreciation was not the centerpiece of the stimulus; the major tax cut, much larger than bonus depreciation, was an individual tax rebate.</li> <li>As the recession continued, a much larger stimulus measure was adopted in 2009 (the American Recovery and Reinvestment Act, P.L. 111-5). It extended bonus depreciation for an additional year, through 2009. Bonus depreciation was only a minor part of a larger package that included a two-year individual tax credit aimed at low-income individuals (the Making Work Pay Credit) and spending increases that were much larger than the tax reductions.</li> <li>Bonus depreciation has continued to be extended. It expired in 2010 but was extended retroactively through 2010 by the Small Business Jobs Act of 2010 (P.L. 111-240), enacted at the end of September 2010.</li> <li>Most of the extension of bonus depreciation was retroactive (three quarters of the year had passed when the bill was adopted). Thus, the extension provided a windfall to firms for that period, rather than a stimulus.</li> <li>The Tax Relief, Unemployment Compensation Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended the Bush tax cuts and the 2009 provisions relating to education, the child credit and the earned income credit for two years and retroactively extended the extenders for two years (through 2011). It increased bonus depreciation to 100% for the period from September 8, 2010, through 2011, and then allowed it at 50% through 2012.</li> <li>The American Taxpayer Relief Act of 2012 (P.L. 112-240), which was adopted in early January 2013, made most of the Bush tax cuts permanent and extended bonus depreciation for another year, among other things.</li> <li>The proposal to include bonus depreciation in a standard extenders bill separates the provision from a fiscal stimulus objective. This inclusion creates uncertainty about the expected future of bonus depreciation and suggests an analysis of it either as a temporary stimulus or a permanent provision.</li> </ul> <h3>Effectiveness as a Temporary Fiscal Stimulus</h3> <ul> <li>Some evidence suggests that the temporary bonus depreciation enacted in 2002 had little or no effect on business investment. A study of the effect of temporary expensing by Cohen and Cummins at the Federal Reserve Board found little support for a significant effect.&nbsp; They suggested several potential reasons for a small effect. One possibility was that firms without taxable income could not benefit from the timing advantage. In a Treasury study, Knittel confirmed that firms did not elect bonus depreciation for about 40% of eligible investment, and speculated that the existence of losses and loss carry-overs may have made the investment subsidy ineffective for many firms, although there were clearly some firms that were profitable that did not use the provision.</li> <li>Cohen and Cummins also suggested that the incentive effect was quite small (largely because depreciation already occurs relatively quickly for most equipment), reducing the user cost of capital by only about 3%,&nbsp; and that planning periods may have been too long to adjust investment across time. Knittel also suggests that firms may have found the provision costly to comply with, particularly because most states did not allow bonus depreciation.</li> <li>Cohen and Cummins also reported the results of several surveys of firms, which showed that between two-thirds and more than 90% of respondents indicated bonus depreciation had no effect on the timing of investment spending.</li> <li>Forecasters vary in the multipliers they assign different tax and spending provisions.&nbsp; (A multiplier estimates the amount of economic output resulting from a certain amount of stimulus.) For example, the Congressional Budget Office, during discussion of the fiscal cliff, indicated a multiplier of 0.15 for business tax cuts in general, and a multiplier of 0.6 for expensing. The latter suggests a dollar of budgetary cost spending induces a 60-cent increase in output. The dollar of cost was measured as the present value of bonus depreciation. This multiplier was among the smaller ones, with payroll taxes having a multiplier of 0.9 and unemployment insurance a multiplier of 1.1. Zandi had similar multipliers for these latter provisions but assigned a multiplier of 0.2 for bonus depreciation, measuring the provision as the first-year tax saving (a larger number than present value).</li> <li>Overall, bonus depreciation did not appear to be very effective in providing short-term economic stimulus compared to alternatives.</li> <li>There are also concerns about the effectiveness of bonus depreciation when the extension is retroactive.&nbsp; When bonus depreciation is extended retroactively, the benefit is a windfall which cannot affect investment.</li> </ul> <h3>Bonus Depreciation as a Permanent Provision</h3> <ul> <li>If bonus depreciation is permanent, it affects the size and allocation of the capital stock. In particular, it lowers the tax rate on equipment relative to other depreciable assets.</li> </ul> <h3>Effective Tax Rates</h3> <p>[Editor&rsquo;s note:&nbsp; When CRS refers to &ldquo;effective tax rates&rdquo; it does not use the term in the financial accounting sense.&nbsp; Specifically, CRS considers bonus depreciation to reduce the present value of tax liabilities and thus a factor in CRS&rsquo;s effective rate calculations.&nbsp; In contrast, a financial statement preparer would consider bonus depreciation to have no effective tax rate benefit as it is only a more accelerated cost recovery for tax purposes than is available for financial accounting purposes (i.e., a mere &ldquo;timing&rdquo; benefit that results in a &ldquo;deferred tax liability&rdquo;).]</p> <ul> <li>If bonus depreciation is permanent, estimates of U.S. effective tax rates reflecting concerns that the U.S. rate is higher than that of other countries overstate the effective U.S. corporate tax rate; U.S. effective tax rates on equipment would be significantly lower than the Organization for Economic Cooperation and Development average.&nbsp;</li> <li>[P]rominent tax reform proposals would reduce accelerated depreciation. Making bonus depreciation a permanent provision would significantly increase its budgetary cost.</li> <li>If tax depreciation is equal to economic depreciation in present value, the effective tax rate for the firm (the difference between the before-tax rate of return on the investment and the firm's after-tax return, divided by the before-tax return) is equal to the statutory rate for an equity investment. (Rates are higher for equity investment when shareholder taxes are imposed, but may be negative for debt-financed investment.)&nbsp; If depreciation has a greater present value than economic depreciation the effective tax rate falls below the statutory rate for firm-level taxes on equity investment; if all of the cost is immediately deducted the effective tax rate is zero.</li> <li>The standard way to measure the effect of depreciation rules on tax burdens is to consider the influence of the provision on the required return to a new investment. This approach requires an estimate of the required internal pre-tax rate of return for an investment to break even (i.e., the pre-tax rate of return needed to earn a required after-tax return).&nbsp; The effective tax rate is measured as the pre-tax return minus the after-tax return, divided by the pre-tax return. In other words, it measures the share of the investments earnings that is paid in tax.</li> <li>Because nominal interest is deducted, however, effective tax rates with debt finance can be negative. For equity assets taxed at an effective rate of 35%, the effective tax rate on debt-financed investment is a negative 5%. The rate on equipment without bonus depreciation is minus 19%; with bonus depreciation it is minus 37%.</li> <li>Equipment assets generally have favorable tax depreciation rules, even without bonus depreciation, with effective tax rates falling as low as 17% but generally around the mid-twenties, well below the 35% statutory rate. Public utility structures and farm structures are treated as equipment in the Tax Code and also have lower tax rates. Non-residential buildings (commercial, industrial and other) tend to be taxed at or above the statutory rate.&nbsp; Residential buildings, not shown, are taxed at around 32%. Bonus depreciation benefits equipment, already favored by the Tax Code, producing effective tax rates that range from 9% to 21%, with most around the mid-teens.</li> </ul> <h3>Bonus Depreciation and Revenues</h3> <ul> <li>Some have suggested that the traditional extenders have been repeatedly enacted on a temporary basis because the revenue cost is much smaller for a single years extension compared to a permanent extension with the 10-year budget horizon.&nbsp; Without growth, one would expect a standard provision to cost only 10% of the permanent 10-year cost; with growth it would be somewhat less because each years cost would be slightly larger than the year before.</li> <li>Bonus depreciation and Section 179 expensing cost even less compared to their cost in the 10-year budget horizon because most of the initial revenue loss is recovered during the budget horizon.</li> </ul> 8326 Thu, 31 Jul 2014 00:00:00 -0400 PTC “Start of Construction” Clarifying Guidance Expected in a Week or Two http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/ptc-start-of-construction-clarifying-guidance-expected-in-a-week-1.html <p>General Electric (GE) stated on its quarterly earnings call today that it expected that the clarification to the Internal Revenue Service&rsquo;s (IRS) production tax credit (PTC) &ldquo;start of construction&rdquo; guidance would be released in the next week or two. The guidance will clarify the rules with respect to what is required for a project to be deemed to have started construction in 2013 in order to be eligible for the PTC that lapsed at the end of 2013. A discussion of the existing guidance is available&nbsp;<a class="target-blank" href="http:// http://www.akingump.com/en/news-publications/guidance-client-alert.html">here</a>.</p> <p>Here is the pertinent remark from Jeffrey Bornstein, CFO&nbsp;of GE:</p> <p style="margin-left: 30px;">[W]e had 400 or 500 wind units that moved out of the quarter, really just awaiting clarification from the Treasury department on what constitutes start of construction to be eligible for PTC. And these are projects that involve bank financing and tax equity investors. So very tough to move those projects along until they're absolutely certain that they're going to qualify for the PTC and we expect that clarification to come from the Treasury in the next week or two. And we've seen that clarification, and we think it's helpful.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p><p>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 percent safe harbor, to be deemed to have started construction in 2013 as is necessary for PTC 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 percent safe harbor?</p> <p>Release of the clarifying guidance in the next week or two would be good news for the wind industry. It is already late in 2014 for projects to have time to raise the financing necessary to complete construction in order to be in placed in service by the end of 2015 as the safe harbor for PTC eligibility requires.</p> <p>One can only hope that the government lawyers who have principal responsibility for the clarifying guidance have lined up the required approvals from their colleagues at Treasury and the IRS. Otherwise, summer vacation schedules of one or more senior tax officials could delay the guidance beyond the next week or two. Due to vacation schedules, July and August are traditionally slow periods for the issuance of tax guidance.</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;Bloomberg GE Earnings Call Transcript (Jul. 18, 2013).</p> </div> </div> 8249 Fri, 18 Jul 2014 00:00:00 -0400 SolarCity and Sunrun File Suit Challenging Arizona Property Tax on Leased Solar Systems http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solar-city-and-sunrun-file-suit-challenging-arizona-property-tax.html <p class="BodyText1">SolarCity Corporation and Sunrun Inc. (collectively, the &ldquo;Companies&rdquo;) filed suit on June 30, 2014 challenging the Arizona Department of Revenue&rsquo;s (ADOR) position that certain solar systems owned by the Companies (the &ldquo;Systems&rdquo;) are subject to property tax.&nbsp; The ADOR&rsquo;s interpretation of the relevant statutes, if upheld, could result in millions of dollars in property taxes.&nbsp;<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p class="BodyText1">The property taxes challenged in the complaint, which can be found&nbsp;<a class="target-blank" href="http://cdn.akingump.com/images/content/3/0/v2/30800/AZ-Property-Tax-Complaint-SolarCity-SunRun-2014-2d-paragraph-lin.pdf">here</a>, are with respect to leased solar equipment.&nbsp; The Companies pay the upfront costs of the Systems and are responsible for installing and maintaining them at the customers&rsquo; properties.&nbsp; The rent that the customers pay for the use of the Systems is less than what they would otherwise pay for electricity &ndash; a savings of approximately $30 per month in the case of a three-bedroom home.&nbsp; 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.&nbsp;</p><p class="BodyText1">The Companies disagree with the ADOR&rsquo;s interpretation of two state statutes governing the valuation of solar energy equipment for purposes of property tax assessment.&nbsp; Under A.R.S. &sect; 42-11054(C)(2) (the &ldquo;Zero Value Rule&rdquo;), equipment that is &ldquo;designed for the production of solar energy primarily for on-site consumption&rdquo; is considered to not have any separate value and to not add any value to the property on which it is installed.&nbsp; Accordingly, property tax is not assessed on the value of such &ldquo;on-site&rdquo; solar equipment.&nbsp; Solar systems that do not generate energy primarily for on-site consumption, however, are subject to property tax and, under A.R.S. &sect; 42-14155 (the &ldquo;20 Percent Value Rule&rdquo;), are treated as having a value equal to 20 percent of the equipment&rsquo;s depreciated cost for property tax purposes.</p> <p class="BodyText1">The Companies&rsquo; position is that the Systems qualify as equipment that produces energy for on-site consumption and therefore have no value for property tax purposes.&nbsp; The ADOR, however, has interpreted the Zero Value Rule as only applying if the homeowner owns the solar equipment.&nbsp; Where, as is the case here, the homeowner leases the solar equipment from the equipment owner and pays the owner for the power produced. The solar equipment is valued under the 20 Percent Rule.&nbsp;</p> <p>It will be interesting to hear the court&rsquo;s views, as the ADOR&rsquo;s position does not appear to be valid based on the plain language of the Zero-Value Rule.&nbsp; On its face, the statute does not require ownership of the equipment and would seem to apply so long as the equipment produces solar energy that is used at the location at which the equipment is installed.&nbsp; The ADOR, however, claims that on-site consumption means more than that &ndash; the energy must be produced for &ldquo;self-consumption,&rdquo; which is not the case when the user does not own the equipment.&nbsp; This interpretation was set forth by the ADOR in a 2013 memorandum, which can be found <a class="target-blank" href="http://cdn.akingump.com/images/content/3/0/v2/30795/AZ-ADOR-Solar-Property-Tax-Memo-2014-5th-paragraph.pdf">here</a>&nbsp;(the &ldquo;ADOR Memo&rdquo;)<sup>.&nbsp;<a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;Thus, the ADOR Memo concludes that the Zero Value Rule does not apply to equipment installed at a customer&rsquo;s premises if the customer obtains the power either through a lease of the equipment or under a power purchase agreement (PPA). &nbsp; &nbsp;</p> <p class="BodyText1">The ADOR&rsquo;s position is also difficult to understand as a policy matter.&nbsp; The cost of these taxes will be significant and will ultimately translate to less cost savings on energy for the customer.&nbsp; It is a typical equipment leasing practice to pass through the property tax to the customer.&nbsp; And even if there is no direct pass-through, the Companies are likely to pass on the cost through higher pricing for future Arizona customers.&nbsp; It is also difficult to justify this different property tax treatment of a homeowner who finances the cost of the equipment through a lease arrangement from one who obtains financing under a bank loan.&nbsp;</p> <p class="BodyText1">It remains to be determined whether a positive outcome in this case will also prevent the ADOR from assessing property tax on solar equipment if the customer pays for the power generated by the equipment under a PPA.&nbsp; One of the Companies&rsquo; arguments is that they do not &ldquo;sell&rdquo; energy to the ultimate users.&nbsp; Depending on the court&rsquo;s rationale, this could be a distinguishing factor that enables the interpretation in the ADOR Memo to stand with respect to PPAs.</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;<em>See</em> Henry J. Reske, &nbsp;<em>Solar Companies Sue Arizona DOR Over Property Tax Memo</em>, 2014 State Tax Today 128-1 (Jul. 3, 2014). &nbsp; &nbsp;</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a>&nbsp;</sup>Memorandum of the ADOR, Property Tax Division and Centrally Valued Properties Unit (Apr. 14, 2013).&nbsp;</p> </div> </div> 8161 Tue, 08 Jul 2014 00:00:00 -0400 Sound Bites from REFF Wall Street http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/sound-bites-from-reff-wall-street-1.html <p>The Renewable Energy Finance Forum Wall Street was held on June 25 and 26.&nbsp; Below are selected sound bites about YieldCos, tax equity and the capital markets opportunities for renewables.&nbsp; This post was prepared without the benefit of a recording or transcript. If there are any misquotes please contact the author for a correction.</p> <p style="text-align: center;"><em>YieldCos</em></p> <p>&ldquo;Developers are waiting for YieldCos to show up and have a cost of capital equivalent to their dividend yield.&nbsp; That&rsquo;s a perception issue on the developer side.&rdquo;</p> <p style="margin-left: 30px;">- David Giordano, Managing Director, <em>BlackRock Alternatives &ndash; Infrastructure Investment Group-Renewable Power</em></p><p>&ldquo;YieldCo is a total return vehicle with yield and growth.&nbsp; A large portion of the total return is growth.&rdquo;</p> <p style="margin-left: 30px;">- Jerry Hanrahan, Managing Director, John Hancock &ndash; Power &amp; Infrastructure Team</p> <p>&ldquo;YieldCo is a new term but not a new structure.&rdquo;</p> <p style="margin-left: 30px;"><span style="background-color: initial;">- John Eber, Managing Director &ndash; Energy Investments, J.P. Morgan</span></p> <p>&ldquo;We&rsquo;re going to see more YieldCos participating in partnership flip transactions [in the role of developer].&rdquo;</p> <p style="margin-left: 30px;">- Katherine Breaks, Tax Managing Director, KPMG</p> <p>&ldquo;I&rsquo;m going to leave it to somebody else to solve the problem of YieldCos with tax equity [in the same project].&rdquo;</p> <p style="margin-left: 30px;">- Lyndon Rive, Chief Executive Officer, SolarCity</p> <p>&ldquo;YieldCos aren&rsquo;t going to have enough taxable income for quite some time to use tax credits efficiently.&rdquo;</p> <p style="margin-left: 30px;">- Darren&nbsp; Van&rsquo;t Hof, Business Development, U.S. Bank</p> <p>&ldquo;If a YieldCo has 12-years of tax deferral, it would need to come with some fancy financial engineering to outbid a current taxpayer.&rdquo;</p> <p style="margin-left: 30px;">- Ray Wood, Director-Head of US Power &amp; Renewables, Bank of America Merrill Lynch</p> <p>&ldquo;Very few YieldCos will [have enough taxable income to efficiently] self-shelter [using tax credits and depreciation from their projects].&nbsp; You have to have a lot of taxable income to do that efficiently.&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p>&ldquo;Since we are a passive investor, if we are going to partner with YieldCo it needs to have employees or be appropriately married to a sponsor that has employees.&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p><em>&nbsp;</em></p> <p style="text-align: center;"><em>Tax Equity Market</em></p> <p>&ldquo;Since 2009 tax equity has been a constraint.&nbsp; The solar industry has been growing 50 percent year-over-year, so unless tax equity grows at that rate there will be a mismatch of supply and demand.&nbsp; So we&rsquo;ve been focused on bringing in more tax equity investors.&rdquo;</p> <p style="margin-left: 30px;">- Lyndon Rive</p> <p>&nbsp;&ldquo;Try to find a risk adjusted return that beats tax equity.&nbsp; Tax equity is a good business.&rdquo;</p> <p style="margin-left: 30px;">- Lyndon Rive</p> <p>&ldquo;All we see is continued growth and opportunity for tax equity.&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p>&ldquo;A corporate investor usually needs a strategic reason to go into tax equity because returns are lower than their core business.&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p>&ldquo;Financial institutions are a natural home for tax equity.&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p>&ldquo;The first time I talked to Google about tax equity, I said they needed to project tax appetite for the 10-year production tax credit period.&nbsp; They said, &lsquo;We haven&rsquo;t been in business for 10 years.&rsquo;&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p>&ldquo;Nine out of 10 times, [GAAP] accounting is the killer for a new corporate investor.&rdquo;</p> <p style="margin-left: 30px;">- Lyndon Rive</p> <p>&ldquo;Hypothetical liquidation at book value (HLBV) [GAAP] accounting is just a killer [for tax equity partnership investments].&nbsp; The Financial Accounting Standards Board (FASB) gave favorable treatment to low income housing tax credits; that market is off to the races with the above the line benefits.&rdquo;</p> <p style="margin-left: 30px;">- Katherine Breaks</p> <p>&ldquo;The GAAP accounting for earnings is much better in an inverted lease [than a partnership flip].&rdquo;</p> <p style="margin-left: 30px;">- Lyndon Rive</p> <p>&ldquo;It is a 12 to 18 month education process for a corporate investor.&nbsp; [A new corporate investor needs to grasp] that a tax equity investment has no opportunity cost: you&rsquo;re going to be paying your taxes. Would you rather earn a return on [that cash by investing in tax equity]?&rdquo;</p> <p style="margin-left: 30px;">- Lyndon Rive</p> <p>&ldquo;We didn&rsquo;t design the pre-tax/after-tax partnership structure (PAPS), [in which the developer is distributed all of the available cash until it recovers its investment and then the tax equity investor is distributed all of the cash until it achieves its after-tax internal rate of return;] the developers did. We can easily change the cash distribution percentages.&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p>&ldquo;In 2013, almost 50 percent of the volume in tax equity was solar.&rdquo;</p> <p style="margin-left: 30px;">- John Eber</p> <p>&nbsp;</p> <p style="text-align: center;"><em>Renewable Energy Capital Markets</em></p> <p>&ldquo;Renewables are no longer a niche specialty play.&nbsp; It is just a category under the broad heading of infrastructure.&rdquo;</p> <p style="margin-left: 30px;">- David Giordano</p> <p>&ldquo;To get to 40% [of electricity coming from renewables] by 2040, we&rsquo;d have to do 400 GW a year [of new renewable energy capacity] starting today.&nbsp; The industry needs every source of capital available&rdquo;</p> <p style="margin-left: 30px;"><span>-&nbsp;</span>Lyndon Rive</p> <p>&ldquo;Another source of funding is private funding.&nbsp; I think that has a lot of potential.&nbsp; In the spring, we will be coming out with our first private funding offering.&rdquo;</p> <p style="margin-left: 30px;"><span>-&nbsp;</span>Lyndon Rive</p> <p>&ldquo;Our institution lends all the time to widget makers who haven&rsquo;t pre-sold their output.&nbsp; So why do we saddle energy projects that don&rsquo;t have a power purchase agreement with the label &lsquo;merchant&rsquo;?&nbsp; There must be some level of debt that could be lent to a merchant project.&rdquo;</p> <p style="margin-left: 30px;"><span>-&nbsp;</span>Andrew Redinger, Managing Director, Group Head Utilities, Power &amp; Renewable Energy, KeyBanc Capital Markets</p> 8133 Tue, 01 Jul 2014 00:00:00 -0400 SolarCity Discovery Motion Details Treasury’s Cash Grant Processes and Treasury’s Communications with SolarCity http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-discovery-motion-details-treasury-s-cash-grant.html <p>On June 23, 2014, Covington &amp; Burling (C&amp;B), on behalf of affiliates of SolarCity Corporation (&ldquo;SolarCity&rdquo;) filed a motion in the Court of Federal Claims to compel Treasury to produce documents related to the setting of benchmark values for determining appropriate Cash Grant<sup>&nbsp;<a href="#_ftn1">1</a></sup>&nbsp;awards. The motion is available&nbsp;<a class="target-blank" href="http://cdn.akingump.com/images/content/3/0/v2/30470/Burton-COFC-13-139-35.pdf">here</a>. A prior post discussing this litigation and providing background is available&nbsp;<a class="target-blank" href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-cash-grant-case-survives-doj-s-motion-to-dismiss.html ">here</a>. The essential substantive issue in the case is that SolarCity&rsquo;s affiliates have brought an action claiming that Treasury miscalculated their eligible tax basis and accordingly made Cash Grant awards that were less than those to which they were entitled.</p> <p>The discovery motion is quite persuasive. It seems likely that the court will compel Treasury to comply with all (or at least most) of the discovery demands from SolarCity&rsquo;s affiliates.&nbsp;</p> <p>The Department of Justice (DOJ), on behalf of Treasury, asserts that only documents directly related to the Cash Grant applications in question should have to be produced; therefore, documents relating to the Cash Grant program generally should not have to be produced.&nbsp;</p><p>DOJ&rsquo;s rationale is as follows: the Cash Grant program is intended to &ldquo;mimic&rdquo; the investment tax credit. When Internal Revenue Service (IRS) determinations are litigated, the IRS&rsquo;s factual findings are reviewed by the court <em>de novo</em>. Because a <em>de novo</em> review requires the court to reach its own factual conclusions, the factual conclusions (and the process for developing such conclusions) of Treasury with respect to the Cash Grant program are not relevant.&nbsp;</p> <p>In response, C&amp;B cites cases that hold that, when litigating with the government a matter that will be subject to <em>de novo </em>review, the government can be compelled to produce information if the plaintiff can demonstrate that the information would be relevant to its claims. When the primary issue in the case is whether an arm&rsquo;s-length price was paid for the solar systems, it does not appear tenable for DOJ to assert that documents related to Treasury&rsquo;s determination of benchmark arm&rsquo;s-length prices are not relevant to SolarCity&rsquo;s claim.</p> <p>The motion documents how Treasury evolved from a benchmark price for residential solar in California of $7/watt in June 2012 to $6/watt in December 2012. However, the change was not announced publicly; SolarCity was informed in a private email. Shortly after that informal change, Treasury stopped communicating its benchmarks even to large applicants like SolarCity and admitted that &ldquo;continuing to publish benchmarks is not useful.&rdquo;&nbsp; Testimony of Ellen Neubauer, the Treasury lawyer who administers the Cash Grant program, is recounted as providing that Treasury replaced <strong>benchmarks </strong>&ldquo;with threshold amounts that served the same essential purpose.&rdquo;</p> <p>Here are interesting excerpts from the motion:</p> <ul> <li>Of the 4,024 applications at issue in this litigation, 4,144 of them were for residential solar energy properties in California or Arizona that were placed in service after October 1, 2012. Each of those applications claimed a cost basis higher than the values identified in Ms. Neuabuer&rsquo;s December 5, 2012, email, and, for each, Treasury reduced the cost basis amount for purposes of a Cash Grant award to an amount equal to the amounts in that email. Thus, the revised benchmark amounts clearly serve as <em>de facto</em> ceilings on the amount Treasury paid on nearly 99 percent of Plaintiff&rsquo;s applications at issue. They are therefore obvious, substantial relevance to Treasury&rsquo;s determination of the cash grant awards, and discovery regarding them is highly relevant. (p. 16)</li> </ul> <p>In discovery, Plaintiffs have requested the following documents and information that specifically relate to those issues:</p> <ul> <li>Documents relating to Treasury&rsquo;s calculation and use of &ldquo;Benchmarks&rdquo; in the valuation of Section 1603 applications, and the identification of all information used to update those amounts. Applications that claimed a cost basis higher than Treasury&rsquo;s &ldquo;Benchmark&rdquo; amounts were routinely subjected to significantly delayed, and generally reduced, Cash Grant payments. The information requested here is relevant for at least four reasons:</li> </ul> <ol style="list-style-type: lower-alpha;"> <li style="list-style-type: none;"><ol style="list-style-type: lower-alpha;"> <li>The Benchmarks influenced Treasury&rsquo;s payment determinations;</li> <li>Treasury&rsquo;s Benchmarks were artificial ceilings that compelled Section 1603 applicants to claim cost bases that were lower than the Benchmark amounts, regardless of the actual value of their subject properties, just to get paid, which, in turn, skewed market data against which future applications would be compared;</li> <li>Plaintiffs are entitled to obtain evidence to show that Treasury&rsquo;s own original June 2011 Benchmarks better reflected the value of the properties than the lower amounts that Treasury retroactively adopted in December 2012; and</li> <li>Plaintiffs are entitled to know what methodologies and evidence Treasury considered and deemed sufficiently reliable to use in developing and revising the Benchmarks in the first place, and to impeach Treasury should it try to disavow those methodologies and that evidence in litigating this case. (p. 3)</li> </ol></li> </ol> <ul> <li>Documents relating to Treasury&rsquo;s application of the Cost, Market and Income approaches to valuation for purposes of the Section 1603 Program. Treasury purported to apply these valuation approaches in reviewing and adjusting Plaintiffs&rsquo; applications. This evidence is relevant to determine whether:</li> </ul> <ol style="list-style-type: lower-alpha;"> <li style="list-style-type: none;"><ol style="list-style-type: lower-alpha;"> <li>Treasury undervalued Plaintiffs&rsquo; applications because it misapplied these methodologies; and</li> <li>In its internal application of these methodologies, Treasury accepted concepts, assumptions or the accuracy of data that supports Plaintiffs&rsquo; contentions as to value. (p. 3)</li> </ol></li> </ol> <ul> <li>Documents relating to the valuation of solar energy properties for purposes of the Investment Tax Credit (ITC). These documents are necessary because the Section 1603 program was intended by Congress to &ldquo;mimic&rdquo; the ITC; they will demonstrate that Treasury&rsquo;s evaluation of the applications at issue was inconsistent with ITC valuation principles, further demonstrating the errors in Treasury&rsquo;s determination of Plaintiffs&rsquo; applications. (p. 3)</li> <li>Specific information related to third-party Section 1603 applications for which Treasury concluded that the cost basis for the property was less than that identified on the application. Treasury received and paid tens of thousands of applications for Section 1603 grants. By its own admission, Treasury compared Plaintiffs&rsquo; applications at issue to &ldquo;thousands&rdquo; of other Section 1603 applications. Thus, the requested information is relevant because:</li> </ul> <ol style="list-style-type: lower-alpha;"> <li style="list-style-type: none;"><ol style="list-style-type: lower-alpha;"> <li>Plaintiffs contend that Treasury improperly reduced the claimed cost basis on other Section 1603 applications, which skewed the set of market data against which Plaintiffs&rsquo; applications were compared, and which data Treasury may seek to use in its defense in this case. (p. 3-4)</li> </ol></li> </ol> <ul> <li>Defendant has spent the last five years evaluating Section 1603 applications, discussing valuation approaches with industry participants, reviewing and applying methods for valuing solar energy properties, assessing claimed cost bases for solar energy properties, applying valuation standards to tens of thousands of solar energy properties, and developing and publishing valuation benchmarks to direct the market. Nonetheless, Defendant&rsquo;s position is that any examination of what it has said and done over those five years is off limits&mdash;even if it would corroborate Plaintiff&rsquo;s arguments and evidence, and even if it would directly contradict the arguments and evidence that Defendant offers now. (p. 8)</li> <li>Income Approach.&nbsp; SolarCity finances the construction of solar energy systems by forming limited liability companies, such as the Plaintiffs here, with third-party tax equity investors. Those limited liability companies purchase or lease solar energy systems from SolarCity as an investment. &nbsp;Treasury has refused to accept the price that the limited liability company paid for the property as the cost basis. Moreover, from time to time, although not always, Treasury has taken the position that a specific third party investor&rsquo;s rate of return on its contribution to a specific partnership establishes the appropriate discount rate for purposes of the Income Approach to valuation for that partnership&rsquo;s solar energy properties. Treasury&rsquo;s position violates generally accepted and industry-standard valuation methodologies, which recognize that a discount rate is properly calculated by weighting proportionally the cost of debt and equity used to finance a certain class of asset to calculate a weighted-average cost of capital. (p. 19)</li> <li>Defendant cannot simultaneously admit that its conduct is governed by the ITC standard and then refuse to produce any documents in its possession that speak to what that standard requires, and whether Treasury has, in fact, satisfied it. The information requested here is relevant and should be produced. (p. 22)</li> <li>Treasury&rsquo;s &ldquo;Evaluating Cost Basis&rdquo; document explains that the &ldquo;Market Approach&rdquo; to valuation is &ldquo;[b]ased on sales of comparable properties.&rdquo; &nbsp;Also, Treasury has confirmed that it relied on &ldquo;thousands&rdquo; of Section 1603 applications submitted by other applicants in making its determination upon Plaintiffs&rsquo; applications at issue here. However, by improperly reducing the cost basis of comparable solar energy properties identified in other Section 1603 applications, as Plaintiffs allege Treasury did, the &ldquo;thousands&rdquo; of other applications that Treasury used as part of its evaluation of Plaintiffs&rsquo; applications here represented a distorted market where the valuations of comparable properties were too low. As a result, Treasury&rsquo;s determination of the valuation of properties in Plaintiffs&rsquo; applications, to the extent based upon comparisons to those properties, was also improperly low. (p. 24)</li> <li>Moreover, Treasury has argued that it is allowed to disregard the purchase price of a solar energy property, and apply a lower cost basis, if Treasury concludes that the purchase is accompanied by &ldquo;unusual circumstances.&rdquo; &nbsp;Leaving aside the fact that Treasury misapplies this narrow legal principle, the data that Plaintiffs seek is relevant to show that Treasury simply invokes its &ldquo;unusual circumstances&rdquo; rule any time the claimed cost basis exceeds Treasury&rsquo;s arbitrary Benchmarks. &nbsp;In addition, this data is relevant to show that the Benchmarks did, in fact, operate as <em>de facto</em> ceilings on grant amounts. (p. 24)</li> </ul> <p>Finally, somewhat disturbing is the statement at the end of the motion:</p> <p style="margin-left: 30px;">Treasury routinely communicated directly with SolarCity and its outside tax counsel about the valuations of SolarCity&rsquo;s solar energy properties and SolarCity-related 1603 applications.&hellip; These communications included representations by Treasury that it agreed that the particular valuation method, data or other supporting evidence was reliable, reasonable, or otherwise appropriate. (p. 26)</p> <p>This communication seems to have provided SolarCity with an advantage over solar developers who were before Treasury less often.&nbsp; Did Treasury realize that its practices gave an edge to SolarCity with respect to evaluating the cost of solar projects and negotiating Cash Grant indemnity levels with investors? Why should one participant in the market have had this information, while smaller developers did not?</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;The Cash Grant is provided for in Section 1603 of division B of the American Recovery and Reinvestment Act, as amended.&nbsp; For wind and solar projects, the Cash Grant is 30 percent of &ldquo;eligible basis.&rdquo;&nbsp; Solar projects have until the end of 2016 to be &ldquo;placed in service&rdquo;; however, a preliminary Cash Grant application must have been filed before the end of 2012.&nbsp; Wind projects must have been placed in service before the end of 2012.</p> </div> </div> 8090 Wed, 25 Jun 2014 00:00:00 -0400 IRS Creates Narrow Distributed Generation Wind Opportunity for REITs http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-creates-narrow-distributed-generation-wind-opportunity-for.html <p>The IRS has opened the door a crack for real estate investment trusts (REITs) to be the lessors of wind projects.&nbsp;</p> <p>To qualify as a REIT, a corporation must satisfy a series of complicated tests that require the corporation to own certain percentages of &ldquo;real estate assets&rdquo; and certain percentages of its gross income to be related to certain specified real estate activities.&nbsp;</p> <p>Regulations proposed in May create an opportunity for REITs to invest in distributed generation solar and have the solar system count as a &ldquo;real estate asset&rdquo; and the rents attributable to the system count as &ldquo;rents from real property.&rdquo;&nbsp; The proposed regulations are discussed in a client alert available&nbsp;<a class="target-blank" href="http://www.akingump.com/en/news-publications/treasury-proposes-reit-solar-regulations-but-excludes-most.html">here</a>.&nbsp; The proposed regulations are available&nbsp;<a class="target-blank" href="https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-11115.pdf">here</a>.</p><p>The proposed regulations require that the REIT own the distributed generation solar system, the REIT own the building, the solar system provides most of its electricity to the REIT&rsquo;s building, and the REIT lease the solar system and the building to a single tenant.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>At a District of Columbia Bar Association meeting, an IRS lawyer said that the principles in proposed REIT regulations for solar could be extended to wind.&nbsp; But she made it clear that the extension of the proposed regulations to wind was subject to the same conditions that applied to solar:<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;the REIT would have to own the wind project and the building, the wind project would have to supply most of the electricity it generated to the building, and the wind project and the building would have to be leased to a single tenant.</p> <p>At the meeting, the IRS was pressed to agree that a REIT could also own a utility scale wind project that was not associated with a building, so long as the REIT leased the project to an operator and the operator sold the electricity.&nbsp; The lease is intended to make the REIT a passive owner because REITs are not supposed to be operating businesses.&nbsp; The IRS attorney declined to bite at this bait.&nbsp; The IRS attorney&rsquo;s rationale was that the REIT solar example only worked because the solar system provided electricity to the REIT&rsquo;s tenant, and that would not be the case for a utility scale wind project.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup></p> <p>The statements from the IRS lawyer regarding wind projects create a narrow opportunity for a REIT to own distributed generation wind assets that serve the REIT&rsquo;s building.&nbsp; However, the REIT does not need the tax credits or depreciation generated by such assets because a REIT, unlike other publicly traded corporations, receives a tax deduction for merely paying a dividend.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup>&nbsp; Further, it does not appear that REIT could enter into a tax equity transaction to have a third party monetize the tax benefits because the proposed regulations require the REIT to &ldquo;own&rdquo; the project.&nbsp; Thus, the distributed generation wind (or solar) project would have to be economically attractive to the REIT without the benefit of the tax subsidies available to other renewable energy investors.&nbsp; It will be interesting to see if any REITs see the proposed regulations as creating a viable commercial opportunity for investing in distributed generation renewable energy projects.</p> <p>It is important to note that statements by IRS employees at bar association or industry meetings are not binding on the IRS.&nbsp; However, the statements do suggest a willingness on the part of the IRS to potentially issue a private letter ruling.&nbsp; Further, the proposed REIT regulations are not effective until published in their final form in the Federal Register, but they also suggest a willingness on the part of the IRS to potentially issue a private letter ruling.&nbsp;</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;Prop. Reg. &sect; 1.856-10(g), Ex. 9.</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;Amy Elliot, <em>Solar REIT Real Property Guidance can be Extended to Wind</em>, 2014 Tax Notes Today 118-3 (Jun. 19, 2014) (statements attributed to Julanne Allen, assistant to branch 3 chief, IRS Office of Associate Chief Counsel (Financial Institutions and Products)).</p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;<em>Id.</em></p> </div> <div> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;I.R.C. &sect; 857(b)(2)(B), (3)(A)(ii).</p> </div> </div> 8078 Mon, 23 Jun 2014 00:00:00 -0400 Abengoa Yield plc Highlights From IPO http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/abengoa-yield-plc-highlights-from-ipo-1.html <p>Abengoa Yield plc began trading on the NASDAQ on June 13<sup>th</sup>.&nbsp; The Form F-1 (the equivalent of a form S-1 for a foreign issuer) is available&nbsp;<a class="target-blank" href="http://cdn.akingump.com/images/content/3/0/v2/30175/ABY-prospectus-Jun-02-2014.pdf">here</a>. The IPO was priced at $29 a share.&nbsp; This was above the expected range of $25 to $27. Abengoa sold 29 percent of Abengoa Yield plc and raised $721 million. Below are some highlights from the prospectus.</p> <p><strong>Corporate Details:</strong>&nbsp;Abengoa Yield is a public limited company organized under English law. Its corporate headquarters is in the United Kingdom (U.K.).&nbsp;</p> <p><strong>Investment Profile:</strong>&nbsp;&ldquo;[R]enewable energy, conventional power, electric transmission and water in the U.S., Canada, Mexico, Chile, Peru, Uruguay, Brazil, Colombia and the European Union.&rdquo; Its initial portfolio does not include projects in all of those jurisdictions or water projects.</p> <p><strong>Asset Diversification:</strong>&nbsp;Abengoa Yield, like the very successful NRG Yield, has a diversity of technology.&nbsp; Its initial portfolio includes concentrating solar power (CSP), wind, conventional energy projects and transmission.&nbsp; Currently, the only assets in the United States are two CSP projects. The only asset in Spain is a CSP project and the only other renewables project is a wind farm in Uruguay.&nbsp;</p><p><strong>Dividend Policy:&nbsp;</strong>Abengoa Yield plans to distribute 90 percent of its available cash flow to its shareholders.&nbsp;</p> <p><strong>Right of First Offer (ROFO):</strong>&nbsp;Abengoa, S.A. has provided Abengoa Yield a ROFO for assets that it is interested in selling that are within Abengoa Yield&rsquo;s investment profile guidelines with respect to geography and type of technology. NRG Yield has a similar contractual arrangement with NRG.</p> <p>One of the financial motivations for the ROFO is that it provides Abengoa Yield with a pipeline of projects so it can keep growing and generating new tax attributes to shield income generated by its older projects from tax.</p> <p><strong>Tax Rate Lower than the U.S. Rate:</strong>&nbsp;In calculating its tax expense for financial statement purposes, Abengoa Yield uses a 30 percent &ldquo;regulatory tax rate.&rdquo; This is higher than the 21 percent U.K. corporate income tax rate but still more favorable than the U.S. corporate income tax rate of 35 percent.</p> <p><strong>Structured to Avoid U.S. Taxes:&nbsp;</strong>The selection of a U.K. company appears to have been carefully planned to avoid U.S. tax rules that impose tax on worldwide income: &ldquo;[D]ue to the fact that we are a U.K. resident company we should benefit from a more favorable treatment than would apply if we were a corporation in the United States when receiving dividends from our subsidiaries that hold our international assets because they should generally be exempt from U.K. taxation.&rdquo;</p> <p><strong>Ten Years of Net Operating Losses</strong>: Abengoa Yield anticipates having tax benefits to shield its cash tax liability for a long time: &ldquo;Based on our current portfolio of assets and current tax regulations in the U.K. and our key operating jurisdictions, including the U.S., Mexico, Peru and Spain, we expect not to pay significant income taxes for at least the next ten years due to the fact that we expect to be able to utilize certain tax assets, including net operating losses.&rdquo;</p> <p><strong>Tax Equity Transactions:</strong>&nbsp; The only project included in a tax equity financing is Solana CSP: &ldquo;The increase in long-term trade payables was primarily due to the investment from Liberty Interactive Corporation made on October 2, 2013, for an amount of USD 300 million. The investment was made in class A shares of Arizona Solar Holding, the holding of Solana CSP plant in the United States. Such investment was made in a tax equity partnership which permits the partners to have certain tax benefits, such as accelerated depreciation and Investment Tax Credits (ITC).&rdquo;</p> <p>Abengoa Yield is accounting for tax equity investments as a &ldquo;trade payable&rdquo; (i.e., debt).&nbsp; This has generally been the practice of companies that are subject to International Financial Reporting Standards. &nbsp;&nbsp;</p> <p>The prospectus contains no discussion of the details of tax equity partnerships or the risk that the tax equity investor may not achieve its after-tax yield within the expected time frame and sweeps all or a substantial portion of the cash from the project. It can only be surmised that either Liberty&rsquo;s investment in the Solana tax equity partnership was structured with a flip on a date certain (rather than based on after-tax yield) or, alternatively, it was determined that the business risks associated with a single tax equity transaction were not&nbsp;<em>material</em>.</p> <p><strong>Investment Tax Credits: &nbsp;</strong>The prospectus includes an endorsement of the legislation to change the 30 percent ITC sunset from &ldquo;placed in service&rdquo; by the end of 2016 to &ldquo;commence construction&rdquo; by the end of 2016: &ldquo;CSP plants require multi-year development timelines and for the ITC to be of further practical use, Congress would need to replace the &lsquo;placed in service&rsquo; requirement with a &lsquo;commence construction&rsquo; requirement. The &lsquo;placed in service&rsquo; requirement means that any solar project needs to be complete and capable of generating power substantially equal to its capacity by December 31, 2016, in order to be eligible for the ITC. A &lsquo;commence construction&rsquo; requirement would allow projects that start construction prior to the December 31, 2016, deadline to take advantage of the ITC when such projects were placed into service, even if they were placed in service after the December 31, 2016 deadline.&rdquo;</p> <p><strong>MLPs and REITs:&nbsp;</strong>&ldquo;There is also legislative discussion regarding the inclusion of renewable energy projects as qualified assets for Real Estate Investment Trusts and Master Limited Partnerships, which may offer a new financing approach and capital leverage.&rdquo; The MLP legislation is Sen. Chris Coons&rsquo; (D-Del.) MLP Parity Act. A prior blog post discussing that bill is available&nbsp;<a class="rubycontent-page-link rubycontent-page-7019 target-blank" href="/en/experience/practices/global-project-finance/tax-equity-telegraph/mlp-renewables-bill-scored-at-a-modest-1-3-billion.html">here</a>. It is unclear what REIT legislation or REIT legislative discussions the prospectus is referring to.</p> <p><strong>Cash Grant Process:</strong>&nbsp;&ldquo;1603 Cash Grant application for Solana was filed on November 14, 2013 with additional information being provided to the U.S. Treasury on an ongoing basis.&rdquo; So similar to what other projects have experienced, the Solana Cash Grant award from Treasury is five months, and counting, beyond the statutory deadline of 60 days from submission of the final application.</p> 8054 Wed, 18 Jun 2014 00:00:00 -0400 IRS Issues Notice on the Cash Grant Sequestration and Tax Attributes http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-issues-notice-on-the-cash-grant-sequestration-and-tax-1.html <p>Yesterday, the IRS issued a notice confirming the effects of the Cash Grant sequestration with respect to the tax attributes associated with the renewable energy projects that received the Cash Grant.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp; Notice 2014-39 is available <a class="rubycontent-asset rubycontent-asset-29863" href="https://ruby.akingump.com/images/content/2/9/29863.pdf">here</a>.</p> <p>Sequestration became effective due to the inability of Congress and the president to effectuate the reduction in the federal deficit required by the Budget Control Act of 2011 (BCA).&nbsp; The BCA reflected a legislative compromise in 2011 to increase the debt ceiling while imposing automatic future budgets cuts (<em>i.e.</em>, sequestration) if deficit reduction targets were not achieved.&nbsp; The targets were missed and another legislative compromise was unable to reached, so the automatic budget cuts went into effect on January 2, 2013.</p><p>From January 2, 2013 to September 30, 2013, sequestration was 8.7 percent of the Cash Grant awards.&nbsp; Cash Grants awarded from October 1, 2013 to September 30, 2014 are subject to a 7.2 percent sequestration.&nbsp; The sequester percentage will be re-set as of October 1, 2014 when the federal government&rsquo;s 2015 fiscal year starts. The sequester percentage is based on the size of the deficit relative to the targets provided for in the BCA.&nbsp; As tax collections have been exceeding targets, the sequester percentage is likely to decline slightly for fiscal year 2015 but that could change between now and then.</p> <p>Notice 2014-39 addresses how sequestration affects the tax attributes of the renewable energy projects that received Cash Grants.&nbsp; First, Notice 2014-39 confirms that a taxpayer that receives a Cash Grant subject to reduction as a result of sequestration may not make itself whole by claiming the investment tax credit (ITC) on the sequestered portion.&nbsp; Further, the taxpayer may not claim the production tax credit (PTC) with respect to energy produced by the project that received a Cash Grant.</p> <p>The notice&rsquo;s conclusions with respect to the tax credits respect is not surprising.&nbsp; Members of Congress had requested that the Treasury publish guidance enabling taxpayers to claim the ITC with respect to a portion of the Cash Grant &ldquo;eligible basis&rdquo; attributable to the sequester.&nbsp; Treasury&rsquo;s letter in response to that request provided the owner of a renewable energy project by applying for and receiving a Cash Grant was precluded from claiming the ITC with respect to any portion of that same project.&nbsp; Treasury&rsquo;s letter is available <a class="rubycontent-asset rubycontent-asset-29864" href="https://ruby.akingump.com/images/content/2/9/29864.pdf">here</a>, and the letter&rsquo;s substance is in this respect comparable to the Notice.</p> <p>Second, Notice 2013-39 confirms that the 50 percent basis adjustment associated with the Cash Grant only applies to the extent of the Cash Grant actually paid.&nbsp; For instance, if a renewable energy project has an &ldquo;eligible basis&rdquo; of $100, so the pre-sequester Cash Grant would be $30, but the actual Cash Grant paid is $27.84 after the 7.2% percent sequestration, then the 50 percent basis reduction is $13.92 (rather than $15).&nbsp; Fortunately, the IRS did not take the position that the basis was reduced by the pre-sequester gross Cash Grant award.</p> <p>If a Cash Grant applicant wants to avoid the sequester haircut and has not yet received its Cash Grant, it may terminate its application and claim the ITC.&nbsp; Since non-refundable tax credits, like the ITC, are outside the scope of the automatic cuts in the BCA, the ITC is not reduced by sequestration.&nbsp; Of course, an economic benefit from the ITC requires a tax liability that can be reduced by the tax credit.&nbsp; If an applicant does not have sufficient tax liability, it leads to the question of what has a greater cost: (a) 7.2 percent sequestration; or (b) receiving the full ITC but having the time value drag of carrying the tax credit to a future year in which the taxpayer has sufficient tax liability.&nbsp; Further, in the case of individuals, the &ldquo;passive activity loss&rdquo; and &ldquo;at risk&rdquo; rules must also be factored into that calculation.</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;The cash grant is provided for in Section 1603 of division B of the American Recovery and Reinvestment Act, as amended (Cash Grant).&nbsp; For wind and solar projects, the Cash Grant is 30 percent of &ldquo;eligible basis.&rdquo;&nbsp; Solar projects have until the end of 2016 to be &ldquo;placed in service&rdquo;; however, a preliminary cash grant application must have been filed before the end of 2012.&nbsp; Wind projects must have been placed in service before the end of 2012.</p> 8021 Wed, 11 Jun 2014 00:00:00 -0400 Justice Scalia Says Tax Advisor Training Could Take Only Six Months http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/justice-scalia-says-tax-advisor-training-could-take-only-six.html <p>Justice Scalia, speaking at the William &amp; Mary Law School 2014 commencement on the topic of the reform of legal education, said: &ldquo;One can practice various aspects of law without knowing much about the whole field. I expect that someone could be taught to be an expert real-estate conveyancer in six weeks, or a tax advisor in six months.&rdquo;<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>I was surprised to see Justice Scalia using tax law in this example given its reputation for being a technical field where practitioners takes years to develop competency.&nbsp; For instance, Justice Scalia previously said that if members of the public watched Supreme Court proceedings on television they would realize the Court is &ldquo;not usually contemplating our navel, should there be a right to this or that? Should there be a right to abortion? [T]hat&rsquo;s not usually what we&rsquo;re doing. We&rsquo;re usually dealing with the [I]nternal [R]evenue [C]ode, with ERISA, with patent law, with all sorts of dull stuff that only a lawyer could understand and perhaps get interested in.&rdquo;<sup><a name="_ftnref2" href="#_ftn2">2</a></sup></p><p>So is tax law similar to &ldquo;patent law&rdquo; and &ldquo;dull stuff that only a lawyer could understand&rdquo; or is it a discipline that one can advise on after six months of study?&nbsp;</p> <p>&nbsp;Here&rsquo;s what the esteemed Judge Learned Hand of the Second Circuit said about tax law:</p> <p>the words of such an act as the Income Tax, for example, merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception-couched in abstract terms that offer no handle to seize hold of-leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup></p> <p>Justice Scalia has referred to Judge Hand in 235 opinions (including dissents).<sup><a name="_ftnref4" href="#_ftn4">4</a></sup>&nbsp; If Judge Hand required &ldquo;the most inordinate expenditure of time&rdquo; to interpret a single provision of tax law, is it realistic for Justice Scalia to characterize being a tax advisor as something that could be achieved in six months of study?</p> <p>The title tax advisor is not bestowed on a professional lightly.&nbsp; For instance, &ldquo;tax advisor&rdquo; is the title the Treasury Department assigns to non-lawyer accountants and economists who work in its Office of Tax Policy.<sup><a name="_ftnref5" href="#_ftn5">5</a></sup>&nbsp;</p> <p>Justice Scalia has said: &ldquo;Words have meaning. And their meaning doesn&rsquo;t change.&rdquo;<sup><a name="_ftnref6" href="#_ftn6">6</a></sup>&nbsp; I think it is unreasonable to associate the meaning of the term &ldquo;tax advisor&rdquo; with one who has studied tax law for six months. The tax law does have the status of &ldquo;enrolled agent.&rdquo;&nbsp; An enrolled agent must pass an exam.&nbsp; It is likely true that many a college graduates with six months of diligent study could pass the enrolled agent exam.&nbsp; However, few tax professionals would attach the term &ldquo;tax advisor&rdquo; to a newly-minted enrolled agent, and few taxpayers would turn to such a person for much more than tax return preparation.&nbsp; As &ldquo;words have meaning,&rdquo; perhaps Justice Scalia should have referred to &ldquo;enrolled agent&rdquo; or &ldquo;tax return preparer&rdquo; in his commencement speech.</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a>&nbsp;</sup>Antonin Scalia, <em>Reflections on the Future of the Legal Academy</em>, May 11, 2014.</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;http://www.politico.com/blogs/under-the-radar/2012/07/scalia-cameras-in-supreme-court-would-miseducate-americans-130246.html</p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;Learned Hand, Eulogy of Thomas Walter Swan, 57 Yale L. J. 167, 169 (1947), quoted in <em>Welder v. United States</em>, 329 F. Supp. at 741-42 (S. D. Tex. 1971).</p> </div> <div> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;Lexis search of the Supreme Court database on May 25, 2014 for opinions by Justice Scalia that refer to &ldquo;Learned Hand.&rdquo;</p> </div> <div> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup>&nbsp;<em>See, e.g., Hillsboro Nat&rsquo;l Bank v. Commissioner</em>, 460 U.S. 370, 394 (1983) (referring to the &ldquo;statement of Dr. T. S. Adams, tax advisor, Treasury Department&rdquo;).</p> </div> <div> <p><sup><a name="_ftn6" href="#_ftnref6">6</a></sup>&nbsp;<a href="http://languagelog.ldc.upenn.edu/nll/?p=7674">http://languagelog.ldc.upenn.edu/nll/?p=7674</a>&nbsp; (Jennifer Senior, <em>In Conversation: Antonin Scalia</em> (Oct. 6, 2013)).</p> </div> </div> 7942 Mon, 02 Jun 2014 00:00:00 -0400 IRS Will Issue Further PTC Start of Construction Guidance http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-will-issue-further-ptc-start-of-construction-guidance.html <p>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.&nbsp; Kelley&rsquo;s comments were made in at an American Bar Association Section of Taxation meeting in Washington, DC.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>The guidance is in response to requests from the wind industry for further clarification as to two issues.&nbsp; 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?&nbsp; 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?</p><p>Kelley did not provide a date on which the guidance would be released, but stated that the government would &ldquo;like to move pretty quickly.&rdquo;<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp; Prompt action would be helpful as the industry is concerned that if the guidance comes too late in the year that some projects may not be able to arranging financing to fund construction costs in order to meet the<em> de facto</em> deadline of being placed in service by the end of 2015 in order to avoid application of the &ldquo;continuous construction&rdquo; standard.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup>&nbsp; Kelley suggested that the guidance may take the form of questions and answers.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup></p> <div><br /><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;Matthew R. Madara, <em>IRS to Release Additional Production Tax Credit Guidance</em>, 2014 TNT 91-23 (May 12, 2014).</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;<em>Id.</em></p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;<em>See </em>Notice 2013-60, 2013-44 IRB 431.</p> </div> <div> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;Madara, <em>supra </em>note 1.</p> </div> </div> 7834 Mon, 12 May 2014 00:00:00 -0400 MLPs, REITs and YieldCos Poster from WindPower http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/mlp-reits-and-yieldcos-poster-from-windpower-1.html <p><a class="rubycontent-asset rubycontent-asset-28613" href="https://ruby.akingump.com/images/content/2/8/28613.pdf">Here</a>&rsquo;s the link to the poster that I presented at WindPower on master limited partnerships (MLPs), real estate investment trusts (REITs) and YieldCos.</p> <p>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.</p> 7816 Thu, 08 May 2014 00:00:00 -0400 US Pref Analyzes Benefits of Policies Supporting Renewables http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/us-pref-analyzes-benefits-of-policies-supporting-renewables-1.html <p>On April 24, the US Partnership for Renewable Energy Finance (USPREF) which is affiliated with American Council on Renewable Energy published an analysis of the effect of favorable governmental policies on the deployment of renewable energy in the United States.</p> <p>The analysis points to tangible data that demonstrates how favorable policies have spurred deployment of renewable energy projects, which has spurred cost reductions and improvements in efficiency. The analysis is available <a href="http://www.uspref.org/images/docs/Renewable_Energy_Market_Overview_April_2014.pdf">here</a>.</p><p>Below are some key excerpts:</p> <ul> <li>Over $300 billion was invested in the U.S. renewable energy sector from 2004-2013.</li> <li>In 2013 alone, $36 billion was invested in U.S. renewable energy.</li> <li>Thanks to policies that have driven investment, and therefore industry growth, both wind and solar PV have reduced their respective equipment costs over the past 4 years by ~43 percent and ~80 percent respectively.</li> <li>The solar industry experienced a nearly 20 percent growth in employment.</li> <li>Deployment and innovation in the wind industry, largely due to the PTC, has allowed for a 90 percent reduction in the cost of wind.</li> <li>Current projections indicate new wind build increases to 6.5 GW in 2014 and 8.5 GW in 2015. With the PTC expiring, new installations are forecasted to fall to 2.5 GW in 2016.</li> <li>January 2013 legislation revised the credit by (a) replacing &ldquo;placed in service&rdquo; deadlines with &ldquo;commence construction&rdquo; deadline, and (b) extending deadline for wind energy facilities by one year, through December 31, 2013.</li> <li>Late extension of the PTC contributed to a 92% reduction in new wind installations in the U.S. in 2013. <ul> <li>Only 1.6 MW were installed in Q1 2013 and 0 MW were installed in Q2 2013.</li> </ul> </li> <li>However, more than 12,000 MW entered construction in the final quarter of 2013.</li> <li>A change in the language to a commence construction standard provides certainty and flexibility to utility-scale solar projects.</li> <li>With 12 large-scale solar projects expected to come online in 2016, a September 2013 analysis from SEIA reveals that the median time from the early steps of development to commencement of construction is just over three years. <ul> <li>SEIA predicts that a change in the language to reflect commence construction would yield an additional 4,000 MW of electric generation capacity in 2017 and 2018.</li> </ul> </li> <li>To-date, RPS has driven creation of 1/3 of current U.S. non-hydro renewable electricity.</li> <li>Renewable energy MLP status would be a very important policy addition that, when combined with existing tax driven policies, would not only support, but also accelerate growth in renewables.</li> <li>The MLP Parity Act, as currently drafted, could help raise this additional capital from institutional MLP investors against already operating projects, making available to renewable energy private investors and developers approximately 40 percent of the $500 billion MLP capital market. <ul> <li>With applicability to renewable energy, this investment base is likely to grow with investors attracted to renewable energy&rsquo;s typical profile as a stable, long-term cash generator via secure power purchase agreements with credit-worthy counterparties (utilities).</li> </ul> </li> <li>More than 37 percent of all new U.S. power generation capacity in 2013 came from renewable energy sources.</li> </ul> 7771 Wed, 30 Apr 2014 00:00:00 -0400 CRS Analyzes the Production Tax Credit and Related Policies http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/crs-analyzes-the-production-tax-credit-and-related-policies.html <p>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,&nbsp;<em>The Renewable Energy Production Tax Credit: In Brief</em>. The report is available&nbsp;<a href="http://cdn.akingump.com/images/content/2/8/v2/28468/CRS-PTC-Report-of-April-7-2014.pdf">here</a>.</p> <p>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.</p><p>The report also notes, based on the IRS tax return data, that few tax equity investors are subject to the alternative minimum tax (AMT); however, for those that are the AMT&rsquo;s limitation on PTCs can have a significant economic cost. This is because under the AMT regime, PTCs can only offset AMT tax liability if the PTCs accrued in the first four years of the project&rsquo;s operations. So if a taxpayer is in AMT and accrues PTCs from a five-year-old project, the taxpayer must wait to use the PTCs from that year for that project until it exits AMT. The taxpayer has to hope that will be within the next 20 years as unused PTCs expire after 20 years.</p> <p>Below are key excerpts from the report:</p> <ul> <li>The PTC for wind and closed-loop biomass was first enacted in 1992. When first enacted, the PTC was scheduled to expire on July 1, 1999. Since 1999, the PTC has been extended eight times. On three occasions, the PTC was allowed to lapse before being retroactively extended.&nbsp; Including the present expiration, the PTC has been allowed to lapse four times.</li> <li>In addition to being extended, the PTC has also been expanded over time to include additional qualifying resources. In 2013, wind, closed-loop biomass, and geothermal technologies qualified for the full credit amount of 2.3 cents per kWh. Other technologies (open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower, marine and hydrokinetic) qualify for a half-credit amount, or 1.1 cents per kWh in 2013. Credit amounts are adjusted annually for inflation.</li> <li>The Joint Committee on Taxation (JCT) estimates that in 2013, foregone revenues (or &ldquo;tax expenditures&rdquo;) for the PTC were $1.7 billion. Between 2013 and 2017, the JCT estimates that foregone revenues associated with the PTC for renewable electricity will total $9.2 billion. Because these estimates are based on current law, any policy that extends or expands the PTC will increase the amount of foregone revenue.</li> <li>Tax incentives for renewables, however, may not be the most economically efficient way to correct for distortions in energy markets or to deliver federal financial support to the renewable energy sector. Tax subsidies reduce the average cost of electricity, increasing demand for electricity overall, countering energy efficiency and emissions reduction objectives.&nbsp; Subsidies delivered as non-refundable tax incentives often require those wishing to use the credit find &ldquo;tax-equity&rdquo; partners to provide equity investments in exchange for tax credits. The use of tax-equity reduces the amount of the incentive that flows directly to the renewable energy sector.&nbsp;</li> <li>Several policy options for the PTC have been proposed in the 113th Congress. These include (1) allowing the PTC to remain expired (current law); (2) temporarily extending the PTC (as proposed in the Tax Extenders Act of 2013 (S. 1859); (3) temporarily extending the PTC but providing some form of phase-out (the PTC Certainty and Phaseout Act of 2013 (H.R. 2987)); (4) eliminating the inflation adjustment factor to phase out the PTC then repealing, (the Tax Reform Act of 2014); (5) permanently extending the PTC and making it refundable (the President&rsquo;s FY2015 Budget); or (6) fundamentally reforming the PTC to provide a &ldquo;technology neutral&rdquo; incentive (the Baucus Energy Tax Reform discussion draft).</li> <li>Under current law, only facilities for which construction began before January 1, 2014, can qualify for the PTC. Before 2013, the PTC expiration date was a placed-in-service deadline, meaning that the electricity producing property had to be ready and available for use before the credit&rsquo;s expiration date.</li> <li>The amount that may be claimed for the PTC is set to phase out once the market price of electricity exceeds threshold levels. Since the PTC was enacted, market prices of electricity have never exceeded the threshold level and the PTC has not been phased out, nor is the PTC likely to be phased out under current law.</li> <li>The ability to claim the PTC may also be limited by the corporate AMT. Currently, the PTC is available for taxpayers subject to the AMT for the first four years of the credit. While the PTC cannot be claimed against the corporate AMT, unused credits may be carried forward to offset future regular tax liability. While few firms are subject to the corporate AMT, this limitation may be significant for those affected.</li> <li>In 2010, 246 taxpayers claimed the PTC. Most of the credits claimed were for production of renewable electricity, with only a few claims being made for refined coal, Indian coal or steel industry fuel. In total, in 2010, taxpayers claimed PTCs of $1.7 billion. Because the PTC is paid out for 10 years, most PTCs awarded in any given year are the result of previous year investments. Some taxpayers may not be able to use all of their tax credits to offset taxable income in a given tax year. In this case, taxpayers may carry forward unused credits to offset tax liability in a future tax year. In 2010, nearly $1.2 billion in PTC was carried forward from previous tax years.</li> <li>While the number of taxpayers claiming the PTC increased between 2008 and 2009, this number decreased between 2009 and 2010. With the Section 1603 grant option available, fewer taxpayers claimed the PTC. From 2009 through 2013, $14.3 billion was awarded in Section 1603 grants to recipients that might have otherwise claimed the PTC had the grant option not been available. This figure is not directly comparable to the costs of the PTC over four years, because Section 1603 grants are a one-time payment, while projects can claim the PTC for 10 years of production.</li> <li>The amount of PTCs being carried forward more than doubled between 2008 and 2009, then doubled again between 2009 and 2010. During the economic downturn, taxpayers had less net income to offset with tax credits. Further, weakness in tax equity markets made it harder for renewable energy project developers to establish partnerships to monetize tax credits.</li> <li>Between 2013 and 2017, estimated revenue losses associated with the PTC are $9.4 billion. Most of these revenue losses, $7.7 billion, are due to the PTC for wind energy. An estimated $1.5 billion is for PTCs for electricity produced using open-loop biomass. An estimated $0.5 billion is attributable to other renewable resources, including closed-loop biomass, geothermal, qualified hydropower, small irrigation power, and municipal solid waste. Over the same five-year period, the estimated revenue losses associated with the production credits for refined coal and Indian coal are $0.1 billion each. JCT&rsquo;s tax expenditure estimates are based on current law.&nbsp; Thus, any policy that extends the PTC would increase these tax expenditure estimates.</li> <li>Extending the PTC through 2015, as proposed in the EXPIRE Act would cost an estimated $13.3 billion over the 2014 to 2024 budget window.&nbsp; In September 2013, the JCT estimated a one-year extension of the PTC for wind only, not extending the PTC for other technologies, had an estimated revenue cost of $6.2 billion over the 2014 to 2023 budget window, while a five-year extension had an estimated revenue cost of $18.5 billion over the same time frame.</li> <li>The President&rsquo;s FY2015 budget proposes to permanently extend the PTC, add solar to the list of qualifying technologies, and make the credit refundable. The Treasury estimates that the permanent PTC extension proposed by the president would reduce revenues by $19.3 billion between 2015 and 2024. &nbsp;In analysis of the President&rsquo;s FY2014 budget, the JCT estimated enacting this policy would cost $24.7 billion between 2014 and 2023.21 The Congressional Budget Office estimates that a permanent PTC (or a PTC extended through the budget horizon) would cost $28.4 billion between 2014 and 2024.</li> <li>Recent extensions of the PTC reflect a belief that the tax incentives contribute to the development of renewable energy infrastructure, which advances environmental and energy policy goals.</li> <li>Research suggests that the PTC has driven investment and contributed to growth in the wind industry.&nbsp; While further extension of the PTC may lead to further investment and growth in wind infrastructure, this potential is limited in the case of short-term extensions. Further, retroactive extensions provide what are often characterized as windfall benefits, rewarding taxpayers that made investments absent tax incentives.</li> <li>A common rationale for government intervention in energy markets is the presence of &ldquo;externalities,&rdquo; which result in &ldquo;market failures.&rdquo;&nbsp; Pollution resulting from the production and consumption of energy creates a negative externality, as the costs of pollution are borne by society as a whole, not just energy producers and consumers. Because producers and consumers of polluting energy resources do not bear the full cost of their production (or consumption) choices, too much energy is produced (or consumed), resulting in a market outcome that is economically inefficient.</li> <li>A more direct and economically efficient approach to addressing pollution and environmental concerns in the energy sector would be a direct tax on pollution or emissions, such as a carbon tax.&nbsp; This option would generate revenues that could be used to offset other distortionary taxes, achieve distributional goals or reduce the deficit. A carbon tax approach would also be &ldquo;technology neutral,&rdquo; not requiring Congress to select which technologies to subsidize.&nbsp;</li> <li>Tax incentives are also not the most efficient mechanism for delivering federal financial support directly to renewable energy developers and investors. Stand-alone projects often have limited tax liability.&nbsp; Thus, project developers often seek outside investors to &ldquo;monetize&rdquo; tax benefits using &ldquo;tax-equity&rdquo; financing arrangements.&nbsp; The use of tax equity investors, often major financial institutions, reduces the amount of federal financial support for renewable energy that is delivered directly to the renewable energy sector.</li> </ul> 7727 Wed, 23 Apr 2014 00:00:00 -0400 NREL Analyzes Production Tax Credit Extension Implications for U.S. Manufacturing http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/nrel-analyzes-production-tax-credit-extension-implications-for-u.html <p>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&nbsp;<a href="http://www.nrel.gov/docs/fy14osti/61663.pdf">here</a>.</p> <p>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.</p><p>The report notes that U.S. manufacturing of wind components was motivated by the high cost of importing such large parts from abroad. That same factor makes it difficult for U.S. factories to shift from the domestic market to exports. Thus, more wind component factories are likely to close, resulting in the loss of manufacturing jobs, if there is not a meaningful extension of the PTC.</p> <p>The report makes the insightful observation that a refundable PTC (i.e., one that can be converted to cash without regard to tax liability), as the President has proposed, would have the same cost to the Treasury as the traditional PTC, while providing more benefit to wind developers. This is because a refundable PTC would eliminate the need for costly tax equity transactions with banks and corporations with tax appetite. Unfortunately, this observation appears lost on Congress which has a negative knee-jerk reaction to refundable tax credits.&nbsp;</p> <p>Key excerpts from the report are below:</p> <ul> <li>Through 2012, more than 60 gigawatts (GW) of land-based wind generation capacity have been installed nationally, including an average of 8.7 GW per year from 2008 through 2012. To meet recent growth in demand for wind capacity, the wind industry has invested heavily in U.S.-based manufacturing facilities. In 2012, an estimated 550 U.S.-based manufacturing facilities produced turbines, blades, towers, and their components. Of these, over 60 were dedicated suppliers to the wind industry. Due to growth in U.S. manufacturing capacity, the estimated import fraction for new plant installations has steadily declined from 75% of total turbine costs in 2006-2007 to less than 30 percent in 2012.</li> <li>Current and near-term state renewable portfolio standard (RPS) targets have largely been met and are not expected to support more than 1&ndash;3 GW per year of new wind construction through 2020. Abundant new sources of low-priced natural gas have altered the competitive landscape in the power sector, and the modest economic recovery, coupled with successful energy efficiency investments, has limited growth in demand for new electricity generation of all types.</li> <li>Under a scenario in which the PTC is not extended and all other policies remain unchanged, wind capacity additions are projected to be between 3 GW and 5 GW per year from 2013&ndash;2020.</li> <li>U.S. wind power manufacturing production generally aligns with average annual wind power capacity additions from 2008 to 2012. In the absence of U.S. domestic demand for new wind capacity, global markets are unlikely to offer many opportunities for U.S.- based manufacturers. Given the limited export market, a reduction in domestic wind power deployment is likely to have a direct and negative effect on U.S.-based wind turbine manufacturing production and employment.</li> <li>In the current low-priced natural gas regime, modeling results indicate that future wind deployment will be relatively low unless additional incentives are provided that result in wind being cost competitive with existing gas-fired generation.</li> <li>U.S. wind capacity is estimated to supply approximately 4.4 percent of the nation&rsquo;s electricity demand.&nbsp; Utility-scale wind capacity has been installed and is operating in 39 states; in 9 of these states wind generation exceeds 12 percent of in-state electricity demand, and in 3 of these states&mdash;Iowa, South Dakota, and Kansas&mdash;wind is estimated to supply more than 20 percent of electricity.&nbsp; Moreover, in 2012, wind power was the largest single source of new electric power generating capacity, constituting more than 40 percent of total U.S. additions.&nbsp; Installations in 2012 represented approximately $25 billion in new investment.</li> <li>In 2012, an estimated 550 U.S.-based manufacturing facilities produced turbines, blades, towers, and their components. Of these, more than 60 were dedicated suppliers to the wind industry. Due to growth in the U.S. manufacturing capacity, the estimated import fraction for new plant installations has steadily declined from 75 percent of total turbine costs in 2006&ndash;2007 to less than 30 percent in 2012. The American Wind Energy Association estimates that employment from manufacturing has also grown over time. Approximately 25,500 individuals were employed in U.S.-based wind turbine component and equipment manufacturing facilities, and total U.S. wind industry employment&mdash;including manufacturing and facility installation, operation, and maintenance&mdash;was estimated at approximately 80,000 in 2012.</li> <li>Current and near-term state renewable portfolio standard targets have largely been met and are not expected to support more than 1&ndash;3 GW per year of new wind construction through 2020. Abundant new sources of low-priced natural gas, resulting largely from advancements in production techniques for shale reservoirs, have altered the competitive landscape in the power sector. And, the modest economic recovery, coupled with successful energy efficiency investments, has limited growth in demand for new electricity generation of all types.</li> <li>The PTC has provided substantial assistance to the U.S. wind industry. The presence of the PTC enables wind power project developers to reduce the price at which their electricity can be sold, effectively making them less costly for power purchasers and ultimately consumers. Current estimates indicate that the PTC reduces contracted prices for wind power by approximately $20/MWh (2012 dollars) or roughly 25 percent &ndash;50 percent.</li> <li>The on-again, off-again historical policy environment has created substantial uncertainty and deployment volatility. Past PTC expirations have resulted in reductions in yearon- year installations between 73 percent and 93 percent. The impact of such boom and bust cycles is diverse. Most notably, short-term planning timeframes associated with PTC uncertainty can discourage investments in domestic manufacturing capacity, deployment capability, component orders, and private sector research and development.</li> <li>In its most recent assessment, which includes the PTC extension through year-end 2013, the Joint Committee estimates forward-looking tax expenditures associated with credits for wind energy to be approximately $7.7 billion cumulatively for fiscal years 2013&ndash;2017.</li> <li>Twenty-nine states and the District of Columbia have mandated that a certain amount or percentage of generation capacity come from renewable energy sources. Historically, state RPSs have been a critical driver for wind capacity. While it remains difficult to discern precisely how much wind capacity is a direct result of RPS policies, 83 percent of wind installations in 2012 occurred in states with an RPS.</li> <li>Under certain conditions, wind power is directly competitive with other electricity generation sources and procured based on immediate or projected cost savings. To date, the PTC and other federal tax incentives (e.g., accelerated depreciation) have boosted wind power&rsquo;s economic position relative to alternative generation sources, enabling wind to be lower cost than other generation technologies in some regions (e.g., Texas). Wind is also sometimes credited as a hedge against potential natural gas price escalation.</li> <li>Utilities, corporations, and others can make investments in wind power to supply voluntary green pricing programs because of a preference for wind or non-emitting energy sources or for various other reasons. This demand driver is not considered in the analytical modeling work conducted here.</li> <li>State tax and other incentives and state or regional carbon markets have also supported wind installations in the past but are generally considered to be secondary drivers.</li> <li>Trade flows of wind products are generally limited in the global industry due to relatively high shipping costs for major turbine components. As a result, foreign direct investment in regions with strong demand for wind products is common as the cost structure of the industry favors regional manufacturing hubs. In the United States, the factory gate prices for components like blades, which are labor-intensive to produce, also tend to be higher than the prices of the same goods manufactured in many other regions, further limiting export opportunities from U.S.-based facilities.</li> <li>Given the limited export market, a reduction in domestic wind power deployment is likely to have a direct and negative effect on U.S.-based wind turbine manufacturing production and employment.</li> <li>The effects of reduced demand for 2013 equipment deliveries became evident as early as 2012 as year-over-year employment in wind manufacturing fell by nearly 5,000 workers, and 12 facilities exited the U.S. wind market.</li> <li>Under nearly all conditions analyzed, a PTC that expires or ramps down prior to 2022 is unlikely to generate levels of wind deployment consistent with the 2008&ndash;2012 5-year average.</li> <li>At the same time, stable wind deployment is only one of many objectives that might be served by a PTC extension. Other factors, although not explored in this study, could also be considered as objectives and include: <ul> <li>Greater certainty for foreign and domestic investment in U.S. industry</li> <li>Sustained conditions for continued technology innovation</li> <li>Reduced electric sector greenhouse gas emissions, air pollution, and water use</li> <li>Greater diversity of electric generation sources &bull; Reduced electric sector demand for natural gas, potentially enabling reduced pipeline congestion in critical regions, lower gas prices, or increased exports</li> <li>Maintained or improved global competitiveness of U.S.-based manufacturing</li> <li>Maintained or reduced cost of generation as a key economic input to U.S. economic competitiveness.</li> </ul> </li> <li>Chiefly, the PTC, in its current form, is widely recognized as costly to monetize due to lack of financial market fungibility and constraints to tax equity supply. In contrast, a refundable form of the credit would obviate the need for project sponsors lacking tax appetite to rely on third-party tax equity, with its associated transaction costs. As such, this refundable form could result in a higher level of wind deployment for the same cost to the federal government. Alternative policies, such as opening public capital vehicles (e.g., master limited partnerships) to wind power technologies or federal carbon standards, also offer the opportunity to support wind deployment and provide associated manufacturing and installation-related employment support at potentially lower total cost.</li> <li>Modeled PTC extension options that ramp down and cease support by year-end 2022 appear to be generally insufficient to support deployment close to recent levels and therefore may be insufficient to sustain the current industry domestic manufacturing and supply chain through 2020.</li> </ul> 7704 Thu, 17 Apr 2014 00:00:00 -0400 Developers Turn to Tax Opinion Insurance to Solve the “Starting Physical Work of a Significant Nature” PTC Eligibility Issue http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/developers-turn-to-tax-opinion-insurance-to-solve-the-starting.html <p>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 (&ldquo;PTC&rdquo;) eligible.&nbsp; 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 &ldquo;starting physical work of a significant nature&rdquo;<sup>&nbsp;<a href="#_ftn1">1</a></sup>&nbsp;in 2013 and the PTC eligibility risk certain cautious tax equity investors are prepared to bear.</p> <p>Below is a description of tax opinion insurance generally followed by background with respect to the PTC eligibility issue in question.</p><p><span style="color: #000000; font-weight: bold;">Tax Opinion Insurance</span></p> <p>Tax opinion insurance has been offered for years.&nbsp; Typically, it had been used to insure that a spinoff or merger was tax-free.&nbsp; Now, it is becoming more common in tax credit transactions.</p> <p>For the insurance policy to be issued, the insurance underwriter requires a &ldquo;should&rdquo; opinion from a law firm with a national reputation for tax expertise or a major accounting firm.&nbsp; Rather than engaging its own counsel to render this opinion, the insurer will typically accept an opinion from the insured&rsquo;s tax advisor.&nbsp; The insurer will typically engage its own counsel to review the opinion. For the PTC start of construction issue, the insurer will also review the independent engineer&rsquo;s report that documents what work was completed in 2013.</p> <p>The conventional wisdom is that although the tax opinion is shared with the insurer (<em>i.e.</em>, a party who is not the law firm&rsquo;s client) which is an apparent waiver of the attorney-client privilege, the opinion is still protected from disclosure to the IRS by the work-product doctrine.</p> <p>The typical tax opinion insurance policy size is $100 to $400 million; however, insurers will consider polices under $100 million.&nbsp; For policies over $400 million, the premiums increase materially due to difficulties in forming an underwriting syndicate of sufficient size. Market observers estimate the total appetite for insurance companies with respect to PTC start of construction risk is $3 billion.&nbsp; Last year, over $1 billion of various types of tax equity transactions were insured for various tax issues.</p> <p>If the transaction is audited, the taxpayer/insured controls the audit.&nbsp; The insurance policy contains certain safeguards to prevent the taxpayer from &ldquo;horse trading&rdquo; an IRS settlement of an insured issue in exchange for leniency from the IRS with respect to an uninsured issue.</p> <p>Generally, the tax opinion insurance policy&rsquo;s only <em>exclusion</em> from coverage is if the insured did not believe one or more of the representations in the tax opinion to be true at the time the opinion was rendered.&nbsp;</p> <p>The policy will cover lost (i) PTCs, (ii) a tax gross-up due to the fact the insurance proceeds are taxable while the PTCs they replace would not have been subject to tax, (iii) IRS interest and penalties, and (iv) out-of-pocket audit defense costs.&nbsp; However, in all events the total payment is subject to cap provided for in the policy.&nbsp;</p> <p>Premiums are negotiable and vary based on a number of factors, such as the size of the deductible and the coverage amount.&nbsp; However, the premiums are relatively high, so it is an infrequent issue for which tax opinion insurance is the solution.</p> <p>Insurance policies are available for tax issues unrelated to income taxes, such as real estate transfer taxes and sales tax.&nbsp; Industry estimates are that with many billions in policies written there has only been approximately $50 million in payouts.</p> <h3>Start of Construction PTC Eligibility Issue</h3> <p>To be eligible for PTCs, a project developer prior to the end of 2013 either had to (i) &ldquo;incur&rdquo; 5 percent of the ultimate cost of the project for eligible costs or (ii) undertake &ldquo;physical work&rdquo; of a &ldquo;significant nature.&rdquo;<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp; Many project owners lacked the capital to incur the 5 percent in 2013, so they were left with the physical work route.</p> <p>An IRS notice (prior client alerts discussing the notice and subsequent clarification of other issues available here: April 16 and here: April 26) provides that starting excavations of sites for turbine foundation in 2013 was sufficient to achieve PTC eligibility.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup>&nbsp; Thus, starting excavation of a turbine site in 2013 should be sufficient; however, the only example with respect to this issue in the notice provided that PTC eligibility was achieved by completing excavation of the foundations for 20 percent of turbine sites, pouring the concrete pads for those turbine sites and installing bolts for the sites in 2013.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup>&nbsp; The meaning of the rules was further clouded by reports of conflicting informal conversations with lawyers at the IRS&rsquo;s National Office regarding the appropriate interpretation of these rules.<sup><a name="_ftnref5" href="#_ftn5">5</a>&nbsp;</sup> &nbsp; &nbsp;&nbsp;</p> <p>When developers who did less than the notice&rsquo;s example suggested sought to raise tax equity, they in some instances found the tax equity investor unwilling to take risk millions of dollars of PTCs risk with respect to to how the IRS would apply the notice in audits that would not arise for a number of years. &nbsp;Often, the developer would then inquire to the IRS about the possibility of a private letter ruling; this path was foreclosed when IRS lawyers suggested the question was too factual for such a ruling.</p> <p>Some developer would then offer the potential tax equity investor 100 percent of the project&rsquo;s distributable cash flow, if IRS determined the project not to be PTC eligible.&nbsp; However, certain tax equity investors concluded that even that would not provide an acceptable after-tax return over a reasonable period of time, if PTCs were not available.</p> <p>At this point in the negotiations, the developers that have opted for insurance either did not (i) have a sufficient balance sheet to provide a meaningful indemnity for this issue or (ii) want to expose their balance sheets to this size of risk.&nbsp; Thus, tax opinion insurance was the only means to induce the tax equity investor to commit to invest in the project.&nbsp; Fortunately for the wind industry, insurance companies are prepared to bridge the gap between what the developers&rsquo; law firms are prepared to render &ldquo;should&rdquo; opinion with respect to and the cautious investing criteria imposed by tax equity providers.</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;<em>See</em> IRS Notice 2013-29.</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;IRS Notice 2013-29.</p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;<em>Id. </em>at &sect; 4.02 (&ldquo;For example, in the case of a facility for the production of electricity from a wind turbine, on-site physical work of a significant nature begins with the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation.&rdquo;&nbsp; This sentence is a little odd as it item of work is couched as &ldquo;or;&rdquo; however, from a practical perspective setting of anchor bolts requires the pouring concrete pads of the foundation which requires excavation of the foundation.&nbsp; It is an unanswered question as to why the sentence did not merely provide that the excavation for the foundation was sufficient.)</p> </div> <div> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;<em>Id.</em> at &sect; 4.04(3).</p> </div> <div> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup>&nbsp;<em>See, e.g., </em><a href="http://www.chadbourne.com/files/Publication/5731f0f7-ec72-4938-8554-5340e1589f0b/Presentation/PublicationAttachment/0c57b87e-070d-4dd1-87b4-37488821b00e/pfn0214.pdf"><em>http://www.chadbourne.com/files/Publication/5731f0f7-ec72-4938-8554-5340e1589f0b/Presentation/PublicationAttachment/0c57b87e-070d-4dd1-87b4-37488821b00e/pfn0214.pdf</em></a><em> </em>at p. 3.</p> </div> </div> 7649 Mon, 07 Apr 2014 00:00:00 -0400 Senate Finance Committee Approves PTC Extension Through 2015 http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/senate-finance-committee-approves-ptc-extension-through-2015.html <p>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.&nbsp;</p> <p>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.&nbsp;</p> <p>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.</p> 7632 Thu, 03 Apr 2014 00:00:00 -0400 Wyden’s Extenders Bill Due March 31 - PTC Advocates Muster for the Fight http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/wyden-s-extenders-bill-due-march-31-ptc-advocates-muster-for-the.html <p>Senator Wyden (D-OR), chairman of the Senate Finance Committee, stated that he will release his &ldquo;extenders&rdquo; bill on March 31 and that the included provisions will be renewed through the end of 2015.&nbsp; Senator Rockefeller (D-WV) stated that Wyden&rsquo;s bill will not include &ldquo;offsets&rdquo; for the cost of the extenders.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>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 &ldquo;start of construction&rdquo; approach from the last extension or revert to the customary &ldquo;placed-in-service&rdquo; 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.</p><p>Another question for the industry is if the start of construction standard is included, whether the bill or its legislative history will include a requirement that the developer &ldquo;continuously construct&rdquo; the project from the end of 2015 through completion. Under current law, the Internal Revenue Service has not imposed the continuous construction standard so long as the project is complete by the end of 2015 (i.e., two years from the last PTC extension).<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;However, Representative Dave Camp (R-MI), chairman of the Ways and Means Committee, tax reform proposal would have repealed this generosity from the IRS.</p> <p>Given Wyden&rsquo;s support of the wind industry, I would expect the bill to include the option for a project to claim a 2.3&cent;/KwH production tax credit or a 30 percent investment tax credit. Further, I would expect no alteration to the annual inflation adjustment (i.e., the production tax credit is increased annually by IRS in a manner that tracks inflation).<sup><a name="_ftnref3" href="#_ftn3">3</a></sup>&nbsp;</p> <p>Unfortunately, the fate of the inflation adjustment in the Ways and Means Committee is less clear. In his tax reform proposal, Camp proposed repealing the inflation adjustment for existing wind projects (e.g<em>.</em>, a project placed in service in <em>2010</em>). So, if his Camp&rsquo;s extenders bill includes the production tax credit, it may be without the inflation adjustment. This could take several forms. First, Camp could propose extending the PTC at the current 2.3&cent;/KwH without future inflation adjustments. Alternatively, he could take the PTC back down to its original 1.5&cent;/KwH. The background documents provided with Camp&rsquo;s tax reform proposal indicated that unnamed wind industry advocates had shared with him that 1.5&cent;/KwH was sufficient support for wind projects.</p> <p>The wind industry has recognized that now is the time to muster its advocates on Capitol Hill.&nbsp; The wind industry appears to be doing a good job of that. Identical letters were sent by dozens of members of Congress to House and Senate leadership on March 21. The bipartisan House letter to Speaker Boehner was led by Steve King (R-IA) and Dave Loesback (D-IA) and was signed by 116 other members. The bipartisan Senate letter to Senators Wyden and Hatch was led by Chuck Grassley (R-IA) and Mark Udall (D-CO) and was signed by 24 other senators. The letters advocated for both the extension of the production tax credit and the investment tax credit election for wind projects.</p> <p>The letters are available <a href="http://cdn.akingump.com/images/content/2/7/v2/27870/House-wind-ptc-itc-extension-letter-final-3.21.2014.pdf">here</a> and <a href="http://cdn.akingump.com/images/content/2/7/v2/27876/Senators-Letter-supporting-PTC-extension-of-3-21-14.pdf">here</a>. Here are some highlights from the identical letters:</p> <ul> <li>The wind industry employs 80,000 Americans in all 50 states.</li> <li>The wind industry is responsible for $105 billion in investment in the United States since 2005.</li> <li>The cost of wind power has declined 43 percent in the last four years.</li> </ul> <p>Five days later, a group of 29 senators sent another letter to Senators Wyden and Hatch. This letter had only Democrats as signatories and is available <a href="http://cdn.akingump.com/images/content/2/7/v2/27871/Senate-energy-tax-extenders-letter-of-3-26-14.pdf">here</a>. The wind production tax credit was first on a long list of clean-energy-related tax provisions that were requested to be extended. The others were wide-ranging and covered topics from transportation fringe benefits for employees who use public transit and carpools to tax credits for homeowners who install energy efficient windows. Personally, I would rather see these 29 senators focus their efforts on the production tax credit extension.</p> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;Lindsey McPherson, <em>Wyden Planning to Release Tax Extenders Bill</em>, 2014 TNT 59-3 (Mar. 27, 2014).</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;<em>See</em> &sect; 3.02 of IRS Notice 2013-60.</p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;<em>See</em> I.R.C.&nbsp; &sect; 45(b)(2).</p> </div> </div> 7589 Thu, 27 Mar 2014 00:00:00 -0400 Project Perspectives Winter 2014 Edition http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/project-perspectives-winter-2014-edition.html <p>Akin Gump is pleased to announce our winter 2014 edition of the Project Perspectives Newsletter. Please click <a href="http://cdn.akingump.com/images/content/2/7/v2/27663/Project-Perspectives-Newsletter-Final.pdf">here</a> to read Project Perspectives.</p> <h3>Contents</h3> <table style="width: 540px;" border="0" cellspacing="0"> <tbody> <tr> <td style="width: 90%;" valign="top">Oil and Gas Industry Discussion.</td> <td style="width: 10%;" valign="top">1</td> </tr> <tr> <td style="width: 90%;" valign="top">The False Claims Act: The Government&rsquo;s Sword in Cash Grant Audits</td> <td style="width: 10%;" valign="top">7</td> </tr> <tr> <td style="width: 90%;" valign="top">Is a 50 Percent Renewables Portfolio Standard in California&rsquo;s Future?</td> <td style="width: 10%;" valign="top">9</td> </tr> <tr> <td style="width: 90%;" valign="top">State Tax Update: A Summary of Recent State Renewable Energy Tax Law Developments</td> <td style="width: 10%;" valign="top">11</td> </tr> <tr> <td style="width: 90%;" valign="top">Why End-Users Are Investing (Big) In Distributed Generation</td> <td style="width: 10%;" valign="top">13</td> </tr> <tr> <td style="width: 90%;" valign="top">An Analysis of U.S. Energy Policy Objectives: Green and Brown Power Options Examined</td> <td style="width: 10%;" valign="top">18</td> </tr> <tr> <td style="width: 90%;" valign="top">U.S. Solar M&amp;A Market Update</td> <td style="width: 10%;" valign="top">21</td> </tr> <tr> <td style="width: 90%;" valign="top">Will Residential Solar Debt Financing Eclipse The Third-Party Ownership Model?</td> <td style="width: 10%;" valign="top">23</td> </tr> </tbody> </table> <p>&nbsp;</p> <p>&nbsp;</p> 7567 Mon, 24 Mar 2014 00:00:00 -0400 Obama’s Plan to Ax the Solar Investment Tax Credit http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/obama-s-plan-to-ax-the-solar-investment-tax-credit.html <p>In President Obama&rsquo;s 2014 State of the Union address, he said: &ldquo;Every four minutes, another American home or business goes solar; every panel pounded into place by a worker whose job can&rsquo;t be outsourced.&nbsp;Let&rsquo;s continue that progress with a smarter tax policy that stops giving $4 billion a year to fossil fuel industries that don&rsquo;t need it, so that we can invest more in fuels of the future that do.&rdquo;&nbsp;</p> <p>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&rsquo;s fiscal year 2015 budget proposal was released and included a proposal to completely repeal the solar investment tax credit after 2016.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p><p>How could the President go from singing the praises of the growth of the solar industry to five weeks later proposing the repeal of the very tax incentive that drove that growth? Unfortunately, the legislative history included with the president&rsquo;s budget proposal is silent as to the rationale.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup></p> <p>One could speculate that the Treasury&rsquo;s experience administering the cash grant program that was enacted in 2009 in the American Recovery and Reinvestment Act and &ldquo;mimics&rdquo; the investment tax credit could be the reason for the assault on the solar investment tax credit.&nbsp; Possibly, Treasury has been surprised by the size of the cash grant awards requested and the structuring techniques deployed to maximize them and decided the issue was best addressed by removing the solar investment tax credit from the Internal Revenue Code.</p> <p>It has become the ordinary course for Treasury to <em>haircut</em> cash grant awards based on its conclusion that the eligible basis of solar projects is overstated. These haircuts have led to litigation in the Court of Federal Claims. My blog post discussing one of the more prominent disputes is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-cash-grant-case-survives-doj-s-motion-to-dismiss.html">here</a>.</p> <p>Treasury may be concerned that as investment tax credits are merely claimed on a tax return, and unlike the cash grant program are not subject to an application process, taxpayers will run amuck in their investment tax credit tax reporting. If this is the rationale for the assault on the solar investment tax credit, it would be consistent with a Treasury Inspector General&rsquo;s report that found purported errors in a sampling of tax returns and expressed concerns about structuring techniques an IRS attorney apparently learned about at a solar conference. My blog post critiquing the Inspector General&rsquo;s report is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/treasury-inspector-general-report-on-1603-cash-grant-seems-off.html">here</a>.</p> <p>To be fair, the President&rsquo;s budget proposal is not intended to leave the solar industry high and dry. Rather, it proposes to shift the industry to a production tax credit of 2.3&cent; per KWh of electricity generated. In recent years, this tax credit has been available to the wind industry which has used it successfully.<sup><a name="_ftnref3" href="#_ftn3">3</a>&nbsp;</sup>The production tax credit has currently lapsed, and the President proposes to make it permanent and refundable (i.e., making a cash refund from the IRS available to taxpayers that have tax liabilities that are less than the production tax credits they are entitled to). A permanent tax credit would provide stability to the renewable energy industry and eliminate the boom/bust cycle caused by temporary tax credits. A refundable tax credit would reduce the industry&rsquo;s reliance on tax equity investors who right now have an upper hand in negotiating pricing and terms and conditions of renewable energy financings. However, the administration may not have fully considered the ramifications of shifting the solar industry to the production tax credit.</p> <p>What distinguishes solar from other forms of renewable energy is that it is relatively easy to install on homes. Much of the solar equipment installed on homes is financed through leases to homeowners in which the lessor receives a significant portion of its return from the investment tax credit. However, the production tax credit rules require the electricity be &ldquo;sold by the taxpayer to an unrelated person,&rdquo;<sup><a name="_ftnref4" href="#_ftn4">4</a></sup>&nbsp;which prohibits leasing as in a lease the taxpayer/lessor is being paid for allowing the lessee to use its property (rather, than being paid for the sale of electricity).&nbsp;</p> <p>There is no explanation in the 1992 legislative history for the leasing prohibition, but apparently the exclusion of production tax credits from lease transactions was the result of a policy judgment by the Conference Committee that abuses could arise if production tax credits were available to lessors.<sup><a name="_ftnref5" href="#_ftn5">5</a></sup>&nbsp;Does the administration plan to make an exception to that policy concern for solar? Alternatively, is it the administration&rsquo;s intent to prohibit leases as a means of financing all the solar panels that have led to the thousands of &ldquo;job[s] that can&rsquo;t be outsourced&rdquo;? Leasing has become so ingrained in residential solar that such a prohibition would be similar to telling General Motors that it cannot lease cars.</p> <p>Open-loop biomass facilities have garnered an exception to the production tax credit leasing prohibition.<sup><a name="_ftnref6" href="#_ftn6">6</a></sup>&nbsp;However, the biomass exception works in the wrong direction: permitting the lessee to claim the production tax credit. The lessee in the residential solar lease is the homeowner who would not be able to claim a tax credit for equipment used for its personal (rather than business) use.</p> <p>If the production tax credit rules were amended to permit a solar lessor to claim the investment tax credit, it would also create an administrative burden for the lessor for the ten-year production tax credit period. For that period for each project in its portfolio, the lessor would have to track and then report on its tax return the energy production of numerous residential solar projects.&nbsp; Residential solar is already the renewable energy segment with the highest demand for and least supply of tax equity. The ten year administrative burden of tracking and reporting production for numerous residential solar projects is not going to encourage more tax equity investors to enter that market.</p> <p>The production tax credit as the single credit available for all renewable energy technologies has the appeal of simplification; however, the Administration needs to carefully consider if the production tax credit is the appropriate incentive for solar. The production tax credit has been successful in wind; however, wind has lower upfront costs and higher on-going maintenance costs than solar; therefore, a ten-year credit better matches the expense pattern of wind. Thus, the production tax credit may not be as suited for solar as it is for wind.</p> <p><em>What Should the Administration Do?</em></p> <p>Although I believe Treasury&rsquo;s apparent concerns regarding taxpayer&rsquo;s application of the investment tax credit rules is significantly overstated, it seems questionable as to whether the solar industry will be able to persuade Treasury of that. Rather than eliminating the solar investment tax credit, I suggest that Treasury take other steps to clarify and drive consistency in the application of the investment tax credit rules.</p> <p>First, Treasury should follow through on its June 30, 2011, memorandum that discussed determining the basis of solar projects.<sup><a name="_ftnref7" href="#_ftn7">7</a></sup>&nbsp;That memorandum included dollar-per-watt guidance for solar projects that the industry generally followed. That memorandum provided that the market values &ldquo;are continuously updated,&rdquo; however, the values in that memorandum have not been updated since it was published almost three years ago. Treasury and the IRS could publish updated values and require taxpayers claiming solar investment tax credits in excess of those values to file a special disclosure on their tax returns to flag the return for audit. That would discourage taxpayers from claiming amounts in excess of the published values without a good explanation.</p> <p>Second, the Solar Energy Industry Association has published a thoughtful paper principally authored by the accounting firm CohnReznick that discusses the determination of the fair market value for income tax purposes of solar projects. My post on the white paper (including a link to the white paper) is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/seia-publishes-white-paper-on-fair-market-value-for-income-tax.html.">here</a>. Treasury or the IRS could review that paper and communicate with the industry as to what aspects it concurs with and what aspects give it pause. Such a candid discussion would provide valuable information to the industry that I suspect most taxpayers would abide by.</p> <p>Finally, Treasury could propose a repeal of the investment tax credit pass-through election in Section 50(d)(5). I know some in the solar industry would be displeased with the loss of that election, but it seems a worthwhile sacrifice if it results in retention of the solar investment tax credit. This election permits a lessee to claim the investment tax credit. In the first instance, it is contrary to the fundamental tax principle that tax benefits accrue to the owner of the property.<sup><a name="_ftnref8" href="#_ftn8">8</a></sup>&nbsp; Second, it permits the lessee to claim the investment tax credit based on the notional fair market value of the property. This amount neither corresponds to what the lessor paid for the property nor to what the lessee pays in rent; thus, the election invites confusion and possibly abuse.&nbsp; Finally, it adds complexity to the Code.&nbsp;</p> <p>It is worth noting that individuals at Treasury who appear concerned about structuring practices associated with the investment tax credit do not appear to be speaking with the team of IRS and Treasury tax practitioners that worked on Revenue Procedure 2014-12, which is discussed in my blog post <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-revises-historic-tax-credit-revenue-procedure.html">here</a>. Revenue Procedure 2014-12 promulgated a complicated safe harbor for historic rehabilitation investment tax credits under Section 47 that is based on the pass-through election in Section 50(d)(5), discussed above.&nbsp;</p> <p>The solar and rehabilitation investment tax credit rules are fundamentally the same in terms of calculating basis, special elections, etc. It is unclear to me as to how Treasury could have simultaneously (i) approved that complicated safe harbor for rehabilitation investment tax credit structures in Revenue Procedure 2014-12 while (ii) drafting a repeal of the solar investment tax credit apparently due to concerns about taxpayer&rsquo;s application of those same investment tax credit structuring principles.</p> <div><hr size="1" /> <div> <p><sup> <a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;The President&rsquo;s fiscal year 2014 budget proposal did not propose extending the 30% investment tax credit for solar.&nbsp; <a href="http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf%20at%2020.The">http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf at 20.The</a> solar industry thought that was merely because as the solar investment tax credit applied to projects placed in service through 2016 that the President was merely prioritizing making the expiring production tax permanent.&nbsp; Thus, the 2014 budget proposal was not perceived as an assault on the solar investment tax credit. Unlike the 2015 budget proposal, the 2014 proposal did not include a repeal of the 10 percent investment tax credit that applies to solar projects placed in service after 2016. <a href="http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf%20at%2017">http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf at 17</a>.&nbsp;</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;<a href="http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf">http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf</a> at 16-17.</p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;Since 2009 wind projects have had the option of claiming either the production tax credit or the investment tax credit (or as applicable a cash grant equal to the investment tax credit).&nbsp; Since the lapse of the cash grant for wind in 2012, the production tax credit has been the more common choice for wind projects; however, a material number have opted for the investment tax credit.</p> </div> <div> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;&sect; 45(a)(2)(B).&nbsp; The statute does not refer to ownership of the facility; however, the legislative history confirms that ownership and operation must be by the same taxpayer: the conference agreement makes two clarifications. First, in order to claim the credit, a taxpayer must own the facility and sell the electricity produced by that facility to an unrelated party.&rdquo; Conf. Rept. &para; 451.15, Energy Policy Act of 1992, P.L. 102-486.</p> </div> <div> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup>&nbsp;<em>See </em>Conf. Rept. &para; 451.15, Energy Policy Act of 1992, P.L. 102-486.</p> </div> <div> <p><sup><a name="_ftn6" href="#_ftnref6">6</a></sup>&nbsp;&sect; 45(d)(2)(C).</p> </div> <div> <p><sup><a name="_ftn7" href="#_ftnref7">7</a></sup>&nbsp;<a href="http://www.treasury.gov/initiatives/recovery/Documents/N%20Evaluating_Cost_Basis_for_Solar_PV_Properties%20final.pdf">http://www.treasury.gov/initiatives/recovery/Documents/N%20Evaluating_Cost_Basis_for_Solar_PV_Properties%20final.pdf</a></p> </div> <div> <p><sup> <a name="_ftn8" href="#_ftnref8">8</a></sup>&nbsp;Nonetheless, the election is absolutely legal as it is provided for in a statutory provision. <em>See </em>&sect; 50(d)(5).<em></em></p> </div> </div> 7544 Mon, 17 Mar 2014 00:00:00 -0400 Obama’s Proposals for Renewable Energy Tax Incentives Compared to Camp’s http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/obama-s-proposals-for-renewable-energy-tax-incentives-compared-1.html <p><a class="target-blank" href="http://cdn.akingump.com/images/content/2/7/v2/27573/Obama-v-Camp-on-Energy-Tax-Chart-3-5-14.pdf">Here&rsquo;s</a> a chart&nbsp;that compares how Pres. Obama&rsquo;s fiscal year 2015 budget proposal addresses renewable energy to how Rep. Camp&rsquo;s (R-MI) proposal for fundamental tax reform addresses renewable energy.&nbsp; Camp is chairman of the Ways and Means Committee.&nbsp;</p> <p>A prior&nbsp;<a class="rubycontent-page-link rubycontent-page-7170 target-blank" href="/en/experience/practices/global-project-finance/tax-equity-telegraph/baucus-post-2016-proposal-no-change-to-ptc-itc-reduced-to-20-1.html">blog post</a>&nbsp;addressed former Sen. Baucus&rsquo;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.&nbsp; This has left his proposal without a champion.</p> 7492 Wed, 05 Mar 2014 00:00:00 -0500 Tax Court Penalizes Salesman for Aggressive Placed in Service Interpretation http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/tax-court-penalizes-salesman-for-aggressive-placed-in-service.html <p><a class="rubycontent-asset rubycontent-asset-27523" href="https://ruby.akingump.com/images/content/2/7/27523.pdf">Here&rsquo;s</a>&nbsp;an article that I recently published in Tax Notes Today.&nbsp; It discusses the 2013 case <em>Brown v. Commissioner</em> in which the Tax Court did not accept an insurance salesman&rsquo;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.&nbsp; 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.</p> 7487 Wed, 05 Mar 2014 00:00:00 -0500 Fierce Energy Interview: Tax Credits, MACRS and MLPs for Renewables http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/fierce-energy-interview-tax-credits-macrs-and-mlps-for.html <p>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.</p> <p>In that theme, click <a href="http://www.fierceenergy.com/story/blowing-wind-mlps-macrs-and-ptc/2014-02-18">here</a> for a link to Fierce Energy&rsquo;s interview. The focus of the interview was what tax credits, MARCS and the possibility of MLP status for renewables means for utilities.</p> 7440 Tue, 25 Feb 2014 00:00:00 -0500 Letter to The Washington Post Defending the PTC http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/letter-to-the-washington-post-defending-the-ptc.html <p><em>The Washington Post</em>&nbsp;in an editorial of January 20 described the extension of the production tax credit (PTC) for wind as &ldquo;wasteful.&rdquo;&nbsp;<em>The Post&rsquo;s</em>&nbsp;editorial is available&nbsp;<a href="http://m.washingtonpost.com/opinions/congress-needs-a-fiscally-responsible-tax-extenders-bill/2014/01/20/ed881552-7fb8-11e3-9556-4a4bf7bcbd84_story.html">here</a>. &nbsp;</p> <p>However,&nbsp;<em>The Post&rsquo;s</em>&nbsp;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.&nbsp;</p><p>To the Editor:</p> <p>I am writing to compliment the Editorial Board for its nine editorials over the past 11 months addressing climate change. The editorials have cogently explained the risk of climate change and the fact that carbon emissions have been lowered in the U.S. through the use of renewable energy and natural gas but as natural gas emits carbon it is a questionable long term solution to the climate change challenge. Further, the editorials have shown a sophisticated understanding of the issue in the United States by acknowledging that in the current political environment that a broad based policy change, like a carbon tax, is not feasible.</p> <p>In light of the sophistication that the board&rsquo;s prior editorials have demonstrated with respect to these issues, I was surprised to see the reference to &ldquo;wasteful wind energy subsidies&rdquo; in its editorial of January 20. This is a reference to efforts to have Congress PTC for wind energy that lapsed at the end of last year.</p> <p>The PTC is not wasteful in that it provides significant economic benefits to the U.S. economy.&nbsp; Econometric studies have shown that tax revenue created by the construction and operation of large wind projects more than offset the cost of the tax credit. Much of this revenue comes from tax on the salaries of the U.S. workers who manufacture the parts and build and maintain the wind farms. Every time the PTC lapses, we see factories closed in the U.S. This history suggests that if the PTC is not extended that the prior tax expenditures to create American wind industry jobs will be wasted as those jobs will move back off shore.</p> <p>Second, the PTC is arguably the tax credit that best aligns the interests of the taxpayer with the interests of the government. The tax credit is 2.3 cents per Kilowatt hour of electricity actually produced and sold in the first ten years. Therefore, the tax benefit only accrues when green energy is produced.&nbsp;</p> <p>Third, the U.S. lacks a coherent federal energy policy. Without the PTC, there is no material federal incentive for clean wind over natural gas.</p> <p>An incentive outside of the tax code may provide greater efficiency than the PTC. However, as you wrote on November 7, &ldquo;that would require [a] commitment to addressing climate change &hellip; and a willingness to pass well-designed laws that the political system usually can&rsquo;t muster.&rdquo; Thus, we are left with the tried and true PTC which has effectively reduced carbon emissions and created American jobs. Given the board&rsquo;s views on climate change, it is a program it should support rather than labeling as &ldquo;wasteful.&rdquo;</p> 7383 Mon, 10 Feb 2014 00:00:00 -0500 Treasury Inspector General Report on 1603 Cash Grant Seems Off the Mark http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/treasury-inspector-general-report-on-1603-cash-grant-seems-off.html <p>On December 17, the Treasury Inspector General for Tax Administration released&nbsp;<em>Review of Section 1603 Grants in Lieu of Energy Investment Tax Credit&nbsp;</em>which is available&nbsp;<a href="http://www.treasury.gov/tigta/iereports/2014reports/2014IER006fr.pdf">here</a>. Either there is some confusion associated with the report or the 1603 grant samples included in the study referenced in the report were unusual.</p> <p>The summary of the report is:</p> <p>"The IRS is currently conducting a Compliance Initiative Project on taxpayers that received Section 1603 grants primarily in 2009. .&nbsp; .&nbsp; . The Large Business and International Division selected and examined 16 taxpayers and reportedly identified significant issues in eight.&nbsp; Similarly, the Small Business/Self-Employed Division selected 83 taxpayers for examination and identified changes in 51."</p><p>The report does not tell us what these &ldquo;changes&rdquo; are, or if the taxpayer or the IRS appeals functions has agreed with them.&nbsp;</p> <p>Without any information about the &ldquo;changes,&rdquo; we have no idea of the validity or materiality of the changes. Further, in an audit of 1603 grant applications performed by the office of the Inspector General itself (as opposed to this Compliance Initiative Project performed by the IRS), the results of which were released in 2011, found very little in terms of shortcomings. Client Alert discussing that audit is available <a href="http://cdn.akingump.com/images/content/7/6/v4/7642/111109-Lessons-Learned-From-OIG-Audit-Reports-of-Section-1603-Ca.pdf">here</a>. The apparent divergent results of the Inspector General&rsquo;s own audit and the IRS Compliance Initiative Project would appear to be cause to proceed with caution in drawing any conclusions based on the results of the Compliance Initiative Project.</p> <p>The report goes on to make a recommendation that seems misguided:</p> <p>"We recommend that the [IRS] evaluate the feasibility of establishing an indicator on taxpayer accounts that received [Section 1603 grants]. .&nbsp; .&nbsp; . This indicator would provide a permanent notice on the IRS files that the taxpayer has received a Section 1603 grant and therefore caution should be taken in processing any amended returns that claim an investment tax credit."</p> <p>Such an indicator would result in many &ldquo;false positives.&rdquo; For example, a taxpayer may claim a 1603 grant for one project and an investment tax credit (ITC) on another project. The taxpayer may even claim a 1603 grant one phase of a project and an ITC on another phase.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp;Thus, merely the same taxpayer claiming a 1603 grant and an ITC, on different properties, could become relatively common, and the IRS would be chasing shadows if it used that as an audit indicator.</p> <p>Finally, the report provides, &ldquo;Anecdotes from the IRS staff attending industry and practitioners&rsquo; discussions suggest that some practitioners are encouraging the use of leasing transactions because that allows fair market value to be overstated to increase the grant amount.&rdquo; I think the IRS may be misunderstanding discussions of pass-through and inverted leases.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;</p> <p>In a pass-through or an inverted lease, the lessee (i.e., a party who does not acquire ownership of the asset) is entitled to an ITC (or as applicable as a 1603 grant) based on the asset&rsquo;s &ldquo;fair market value.&rdquo; Thus, there is an apparent element of windfall in that the ITC/grant basis<sup><a name="_ftnref3" href="#_ftn3">3</a></sup>&nbsp;is stepped up to fair market value without anyone having to pay tax on the sale of the asset. However, the use of the fair market value, for calculating ITC or 1603 grant amounts, that was not paid by any party in a lease transaction is sanctioned by Congress is section 50(d)(5) of the Internal Revenue Code, which cross-references to&nbsp;<em>old</em>&nbsp;section 48(d), which was repealed by Congress but effectively reinstated by the cross-reference.&nbsp;<em>Old </em>section 48(d) provided: &ldquo;A person . . . who is a lessor of property may elect with respect to any new [investment tax credit eligible] property&nbsp;<em>to treat the lessee as having acquired</em>&nbsp;such property for an amount equal to . . . the&nbsp;<em>fair market value</em>&nbsp;of such property&rdquo; (emphasis added).&nbsp; Therefore, using a notional fair market value to determine the ITC or grant basis is fully consistent with the statutory provision.</p> <p>In this era of budgetary sequester with limited dollars for the IRS audit function, the IRS and the Inspector General should be sure they are not allocating valuable audit resources to address a purported problem that is actually a result of certain IRS staff misunderstanding practitioners&rsquo; references to archaic and highly technical statutory rules.</p> <div><br /><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;<em>See</em> Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009, Office of the Fiscal Assistant Secretary, U.S. Treasury Department (July 2009/Revised March 2010/Revised April 2011) at IV.D.</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;In Revenue Procedure 2014-12, the IRS promulgated a safe harbor for section 47 rehabilitation ITC (i.e., historic tax credit) inverted lease transactions.&nbsp; That safe harbor is discussed here: <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-guidance-for-historic-tax-credit-transactions-partnership.html">http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-guidance-for-historic-tax-credit-transactions-partnership.html</a>].</p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;Note, the actual basis for depreciation (i.e., MACRS) purposes is not stepped up to fair market value and is based on what the lessor actually paid for the asset.</p> </div> </div> 7366 Fri, 07 Feb 2014 00:00:00 -0500 Congressional Research Service on PTC and Other Tax Extenders http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/congressional-research-service-on-ptc-and-other-tax-extenders.html <p>The Congressional Research Service (CRS) published a whitepaper addressing the tax provisions that lapsed at the end of 2013. The whitepaper is available <a href="http://www.fas.org/sgp/crs/misc/R43124.pdf">here</a>. 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.&nbsp;</p> <p>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&rsquo;s tax reform proposal for energy. That proposal is discussed in my blog post available&nbsp;<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/baucus-post-2016-proposal-no-change-to-ptc-itc-reduced-to-20-1.html">here</a>. &nbsp;</p><p>Below are some key excerpts from the whitepaper:</p> <ul> <li>Dozens of temporary tax provisions are scheduled to expire at the end of 2013 under current law. Most of the provisions set to expire in 2013 have been part of past temporary tax extension legislation. &nbsp;&hellip; &nbsp;Collectively, temporary tax provisions that are regularly extended by Congress&mdash;often for one to two years&mdash;rather than being allowed to expire as scheduled are often referred to as &ldquo;tax extenders.&rdquo;</li> <li>The President&rsquo;s FY2014 Budget identifies several expiring provisions that should be permanently extended (and in some cases substantially modified), including the research and experimentation tax credit, enhanced expensing for small businesses, the renewable energy PTC, the NMTC, the work opportunity tax credit, the deduction for state and local sales taxes, the exclusion of discharge of principal residence indebtedness, and the tax deduction for energy efficient commercial buildings.&nbsp;</li> <li>There are several reasons why Congress may choose to enact tax provisions on a temporary basis.&nbsp; Enacting provisions on a temporary basis provides legislators with an opportunity to evaluate the effectiveness of tax policies prior to expiration or extension.&nbsp; Temporary tax provisions may also be used to provide temporary economic stimulus or disaster relief. Congress may also choose to enact tax provisions on a temporary rather than permanent basis due to budgetary considerations, as the foregone revenue from a temporary provision will generally be less than if it was permanent.&nbsp;&nbsp;</li> <li>The renewable energy PTC is set to expire at the end of 2013, along with a number of other incentives for energy efficiency and renewable and alternative fuels. The new markets tax credit, a community assistance program, is also scheduled to expire at the end of 2013.&nbsp;</li> <li>Moving forward, Congress may choose to address expiring tax provisions as part of tax reform, deciding at that time which temporary provisions should become a permanent part of the tax code. &nbsp;Alternatively, Congress may choose to develop a tax extender package, extending some or all of the provisions that have previously been extended in &ldquo;tax extender&rdquo; legislation. &nbsp;S. 1859, introduced by Senator Reid on December 19, 2013, would provide a one-year extension for nearly all of the provisions scheduled to expire at the end of 2013.&nbsp;</li> <li>Enacting provisions on a temporary basis provides an opportunity to evaluate effectiveness before expiration or extension.&nbsp; However, this rationale for enacting temporary tax provisions is undermined if expiring provisions are regularly extended without systematic review, as is the case in practice.&nbsp;</li> <li>For example, tax incentives for alcohol fuels (e.g., ethanol), which can be traced back to policies first enacted in 1978, were not extended beyond 2011.&nbsp; The Government Accountability Office had previously found that with the renewable fuel standard mandate, tax credits for ethanol were duplicative and did not increase consumption.&nbsp;</li> <li>Recent examples of other temporary provisions that have been enacted to address special economic circumstances include the exclusion of mortgage forgiveness from taxable income during the recent housing crisis, the payroll tax cut, and the Section 1603 grants in lieu of tax credits to compensate for weak tax-equity markets during the economic downturn.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp; It has been argued that provisions that were enacted to address a temporary situation should be allowed to expire once the situation is resolved.&nbsp;</li> <li>Congress may also choose to enact tax policies on a temporary basis for budgetary reasons. If policymakers decide that legislation that reduces revenues must be paid for, it is easier to find resources to offset short-term extensions rather than long-term or permanent extensions.&nbsp; Additionally, by definition the Congressional Budget Office (CBO) assumes under the current law baseline that temporary tax cuts expire as scheduled. Thus, the current law baseline does not assume that temporary tax provisions are regularly extended.&nbsp; Hence, if temporary expiring tax provisions are routinely extended in practice, the CBO current law baseline would tend to overstate projected revenues, making the long-term revenue outlook stronger. Thus, by making tax provisions temporary rather than permanent, these provisions have a smaller effect on the long-term fiscal outlook.&nbsp;</li> <li>Like all tax benefits, economic theory suggests every extender can be evaluated by looking at the impact on economic efficiency, equity, and simplicity.&nbsp; Temporary tax provisions may be efficient and effective in accomplishing their intended purpose, though not equitable. Alternatively, an extender may be equitable but not efficient. Policymakers may have to choose the economic objectives that matter most.</li> <li>Extenders often provide subsidies to encourage more of an activity than would otherwise be undertaken. &nbsp;According to economic theory, in most cases an economy best satisfies the wants and needs of its participants if markets allocate resources free of distortions from taxes and other factors.&nbsp; Market failures, however, may occur in some instances, and economic efficiency may actually be improved by tax distortions.&nbsp; Thus, the ability of extenders to improve economic welfare depends in part on whether or not the extender is remedying a market failure.&nbsp; According to theory, a tax extender reduces economic efficiency if it is not addressing a specific market failure.&nbsp;</li> <li>An extender is also considered relatively effective if it stimulates the desired activity better than a direct subsidy.&nbsp; Direct spending programs, however, can often be more successful at targeting resources than indirect subsidies made through the tax system such as tax extenders.</li> <li>Most extenders are considered inequitable because they benefit those who have a greater ability to pay taxes. &nbsp;Those individuals with relatively less income and thus a reduced ability to pay taxes may not have the same opportunity to benefit from extenders as those with higher income. &nbsp;</li> <li>Extenders contribute to the complexity of the tax code and raise the cost of administering the tax system.&nbsp; Those costs, which can be difficult to isolate and measure, are rarely included in the cost benefit analysis of temporary tax provisions.</li> <li>The longest-standing energy-related provision set to expire in 2013 is the renewable energy PTC.&nbsp; This provision was first enacted in 1992.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp; Several of the temporary energy-related tax provisions that are scheduled to expire at the end of 2011 were first enacted as part of the Energy Policy Act of 2005 (EPACT05; P.L. 109-58). These include the credit for construction of energy efficient new homes, the credit for energy efficient appliances, the deduction for energy-efficient commercial buildings, and the credit for nonbusiness energy property (also known as the tax credit for energy efficiency improvements for existing homes).&nbsp; Certain tax incentives for alternative technology vehicles and alternative fuel vehicle refueling property were also first included in EPACT05.&nbsp;</li> <li>Several provisions that might have been considered &ldquo;traditional extenders&rdquo;&mdash;that is, they had been extended multiple times in the past&mdash;were not extended under ATRA. &nbsp;&hellip; &nbsp;Energy-related provisions, including the suspension of 100%-of-net- income limitation on percentage depletion for oil and gas from marginal wells, first enacted in 1997, and the production tax credit for refined coal, first enacted in 2004, were also allowed to expire. Tax incentives for ethanol, which were first enacted in 1978, were also not extended in ATRA, nor were provisions first enacted in 1997 that allowed for expensing of &ldquo;brownfield&rdquo; environmental remediation costs.&nbsp;</li> <li>A number of other provisions were allowed to expire at the end of 2012.&nbsp; Some of these provisions, such as the Section 1603 grants in lieu of tax credits program and 100% bonus depreciation, might have been classified as having been temporary stimulus measures.&nbsp;</li> </ul> <div><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a>&nbsp;</sup> For more information, see CRS Report R41635, <em>ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options</em>, by Phillip Brown and Molly F. Sherlock.</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp; When first enacted, the PTC was only available for wind and closed-loop biomass technologies.&nbsp; Over time, Congress has expanded the list of qualifying technologies.&nbsp;</p> </div> </div> 7325 Tue, 28 Jan 2014 00:00:00 -0500 IRS Revises Historic Tax Credit Revenue Procedure http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-revises-historic-tax-credit-revenue-procedure.html <p>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. &nbsp;The revised revenue procedure is available <a href="http://cdn.akingump.com/images/content/2/6/v2/26727/rp-14-12.pdf">here</a> and a redline comparison against the prior version is available <a href="http://cdn.akingump.com/images/content/2/6/v2/26726/Redline-Old-Rev-Proc-14-12-and-rp-14-12.pdf">here</a>.&nbsp; 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 <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-guidance-for-historic-tax-credit-transactions-partnership.html">here</a> and <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/informal-clarification-of-historic-tax-credit-safe-harbor.html">here</a>.</p> <p>The revenue procedure provides that a tax equity investor may have the benefit of a &ldquo;put&rdquo; option; provided, the option price is the fair market value of the tax equity investor&rsquo;s interest as determined at the time of the exercise of the option.&nbsp; The original revenue procedure required that in determining the fair market value of the tax equity investor&rsquo;s partnership interest that contracts between related parties were not to be considered.&nbsp; As discussed in the blog post <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-guidance-for-historic-tax-credit-transactions-partnership.html">here</a> it was unclear as to how the tax equity investor&rsquo;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.&nbsp; A diagram of the master tenant partnership structure is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-guidance-for-historic-tax-credit-transactions-partnership.html">here</a>.</p> <p>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&rsquo;s length terms and with economics consistent with arrangements in real estate development projects that do not qualify for historic tax credits.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp;</p><p>Second, the section of the revenue procedure that addresses the allocation of the tax credits was revised.&nbsp; This change is extremely technical.&nbsp; The revised provision provides that a master tenant&rsquo;s partnership&rsquo;s allocation to its partners of the inclusion of phantom income that results from the election to pass through the tax credit to the lessee<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;(i.e., the master tenant) is not taken into account for purposes of determining whether or not the allocations meet the revenue procedure&rsquo;s mandated compliance with Section 704(b) (i.e., the &ldquo;substantial economic effect&rdquo; rules) of the Internal Revenue Code.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup>&nbsp; The IRS did not provide a rationale for this change.&nbsp;</p> <p>The rationale for this change appears to be that the phantom income inclusion is intended to create revenue for the Treasury to offset a portion of the cost to the Treasury of the investment tax credit; it is a substitute for the investment tax credit rule&rsquo;s standard reduction in the basis of the asset generating the credit; the phantom income inclusion is necessary because the lessee that claims the investment tax credit as a the result of the pass through election does not own the asset and accordingly does not have a basis to reduce.&nbsp; However, under Section 704(b), when income is allocated to a partner, the income allocation is supposed to result in a corresponding increase to the partner&rsquo;s tax basis in its partnership interest (i.e., the partner&rsquo;s &ldquo;outside&rdquo; tax basis).&nbsp; However, such an increase in outside basis would be inconsistent the objective of the phantom income being a revenue source for the Treasury and is unnecessary as the phantom income by its nature generates no cash to be distributed to the partners.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup>&nbsp; The change to the revenue procedure appears to possibly be intended to preclude taxpayers from asserting that an increase to the partners&rsquo; outside tax bases from the phantom income (i.e., an unintended tax benefit) is mandated by the revenue procedure.</p> <p>Many tax practitioners hope that light is shed on the other ambiguities in the revenue procedure when government lawyers speak about the revenue procedure at tax conference in the coming weeks.</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;&sect; 4.06(3) (referencing &sect; 4.02(2)(c)).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;&sect; 50(d)(5) (referencing old &sect; 48(d)(5)).&nbsp; In a Section 47 tax credit transaction, the lessee&rsquo;s income inclusion is recognized straight line over rehabilitated asset&rsquo;s applicable depreciation recovery period (i.e., 39 years for nonresidential real property and 27.5 years for residential real property).&nbsp; The income inclusion in total is equal to the amount of the rehabilitation investment tax credit (i.e., pursuant to Section 47(a) 20 percent of eligible amounts for a certified historic building and ten percent for a building built before 1936 that is not certified as historic).&nbsp; This is in contrast to an energy investment tax credit transaction (e.g., a solar project).&nbsp; For energy investment tax credits, the inclusion period is five years (i.e., the depreciation recovery period for renewable energy assets eligible for the credit), and Congress generously required only 50 percent of the tax credit, which is 30 percent of eligible amounts, to be recognized as taxable income.</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;&sect; 4.07.</p> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;William S. McKee, et al., Fed. Taxation of Partnerships and Partners, &para;11.02 at fn. 211.</p> 7270 Tue, 14 Jan 2014 00:00:00 -0500 Informal Clarification of Historic Tax Credit Safe Harbor http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/informal-clarification-of-historic-tax-credit-safe-harbor.html <p>Informal conversations with the drafters of Revenue Procedure 2012-14 (the &ldquo;Revenue Procedure&rdquo;) have clarified the safe harbor&rsquo;s pretax economics requirements. The Revenue Procedure is available <a class="target-blank" href="http://www.irs.gov/pub/irs-drop/rp-14-12.pdf">here</a>.</p> <h3>The Value Requirement</h3> <p>The Revenue Procedure includes the requirement that&nbsp; the tax equity investor&rsquo;s &ldquo;interest must [have] a reasonably anticipated value commensurate with the [tax equity investor&rsquo;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&rdquo; (the &ldquo;Value Requirement&rdquo;).<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp;</p><p>As discussed in the blog post&nbsp;<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-guidance-for-historic-tax-credit-transactions-partnership.html">below</a>, there may be uncertainty as to the meaning of the Value Requirement.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp; Informal conversations with the drafters of the Revenue Procedure have provided some insight into how to apply the Value Requirement.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup></p> <p>First, the Revenue Procedure does not stipulate any minimum requirements for the tax equity investor&rsquo;s equity contribution.&nbsp; The only requirements included in the Revenue Procedure with respect to this equity contribution are that the tax equity investor must contribute at least 20 percent of its investment prior to the building being placed in service and that the amount of the equity contribution cannot be more than 25 percent contingent.&nbsp; &nbsp;The Revenue Procedure also does not include any express relational requirement between the size of the equity contribution (or the tax equity investor&rsquo;s purchase price if it acquires its interest from another party) and the associated tax benefits.&nbsp; Rather, the Value Requirement looks at the value of the tax equity&rsquo;s &ldquo;overall percentage interest in the Partnership,&rdquo; without regard to tax benefits, as compared to the &ldquo;reasonably anticipated value&rdquo; of that interest.&nbsp;</p> <p>Second, the phrase &ldquo;reasonably anticipated value&rdquo; implies that the issue is value at a point in time after the funding of the transaction, further indicating that the Value Requirement does not go to the size or value of the tax equity&rsquo;s initial equity contribution.&nbsp; How one determines whether the tax equity&rsquo;s interest in the partnership is commensurate with the anticipated value of that interest remains unclear.&nbsp; This is partly due to the fact that the Revenue Procedure provides no guidance on the meaning of the phrase &ldquo;overall percentage interest in the Partnership.&rdquo; &nbsp;&nbsp;The informal conversations provided only a slight insight into this issue.&nbsp; It was indicated that the phrase is intended to be descriptive, rather than a term of art that has an ascertainable meaning under the tax laws.&nbsp; The drafters apparently did not base it on a concept from any prior precedent, and it does not necessarily refer to the initial allocation of income and loss (<em>i.e.</em>, tax attributes).</p> <p>Informally it was indicated that the Value Requirement was intended to be a backstop to the requirement in section 4.02(2)(c) that the tax equity investor&rsquo;s &ldquo;Partnership interest may not be reduced through fees &hellip;, lease terms, or other arrangements that are unreasonable as compared to fees, lease terms or other arrangements for a real estate development that does not qualify for&rdquo; historic tax credits.&nbsp; Thus, the Value Requirement is effectively an admonition to not execute transactions with artificial features.</p> <p>The first example of the Revenue Procedure provides that one way to meet the Value Requirement is to structure a transaction in which the income allocations and the cash distributions percentages are the same.&nbsp; The informal conversation suggested that the Revenue Procedure intended to provide more flexibility than that.&nbsp; The following appears to be a potential means to ensure the legitimacy of a transaction in which (i) the allocation of income and loss and (ii) the sharing of cash distributions are at times in different percentages:<sup><a name="_ftnref4" href="#_ftn4">4</a></sup></p> <ol> <li>Ensure that anytime the tax equity investor is entitled to cause a sale of its interest that the sale right provides for an amount at least equal to its capital account balance (as the capital account will reflect its right to income that has been accrued but not yet matched by a cash distribution).</li> <li>Ensure that the overall transaction does not include any artificial features (e.g., non-arm&rsquo;s length fees) the effect of which is to reduce the tax equity investor&rsquo;s share of the pretax economics.</li> </ol> <p>These two requirements are, obviously, in addition to the general requirements for partnership allocations to be deemed to have &ldquo;economic effect&rdquo; under the subchapter K regulations: maintain capital accounts, avoid <em>impermissibly </em>negative capital account balances and liquidate in accordance with positive capital account balances.<sup><a name="_ftnref5" href="#_ftn5">5</a></sup></p> <h3>Master Tenant Partnership Structuring Issues</h3> <p>When asked about the lack of specific guidance in regards to the master tenant partnership (<em>i.e.</em>, an inverted lease) transaction with respect to (i) how much of an indirect interest the tax equity investor may have in the head lessor and (ii) by how much must the term of the head lease exceed the term of the sublease, the drafters informally noted that the Revenue Procedure addresses only partnership allocations.&nbsp; These questions appear to raise true lease issues governed by true lease precedent (<em>e.g.,</em> Revenue Procedure 2001-28,<sup><a name="_ftnref6" href="#_ftn6">6</a></sup> and the associated case law and rulings).&nbsp; Unfortunately, there is scant precedent on head lease/sublease arrangements, other than the negative lease-in/lease-out ruling and cases.<sup><a name="_ftnref7" href="#_ftn7">7</a></sup>&nbsp; As the ruling holds and every case ultimately held against the defeased lease-in/lease-out transactions, it is difficult to divine much from them that is of use in structuring a transaction such as the master tenant partnership that the IRS has purported to bless.</p> <p>In the informal conversation, it sounded as if it may have been suggested to the drafters, while they were preparing the Revenue Procedure, that in master tenant partnership transactions involving historic tax credits that the tax equity investor typically has a ten percent indirect interest in the head lessor.&nbsp; Ten percent is far less than what has been commonly used in this structure.<sup><a name="_ftnref8" href="#_ftn8">8</a></sup> &nbsp;It remains to be seen where transactions will settle on this point after the Revenue Procedure.&nbsp; It could be an interesting topic of discussion when government lawyers participate in panels at tax conferences addressing the Revenue Procedure.</p> <p>With respect to the question of how much the term of the head lease must exceed the term of the sublease, the drafters generally alluded to in the requirement in the Revenue Procedure that the &ldquo;anticipated value is contingent upon the Partnership&rsquo;s net income, gain, and loss, and is not substantially fixed.&rdquo;<sup><a name="_ftnref9" href="#_ftn9">9</a></sup>&nbsp; If the head lease and sublease are each net leases with equal terms, then the tax equity investor&rsquo;s return is likely to be &ldquo;substantially fixed&rdquo;.</p> <p>These informal clarifications are certainly welcome; however, the processes of rendering tax opinions and determining the necessity for financial statement reserves for uncertain positions under FIN 48<sup><a name="_ftnref10" href="#_ftn10">10</a></sup>&nbsp;would benefit from further formal guidance.&nbsp;</p> <hr size="1" /> <p><sup> <a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;&sect; 4.02(2)(b).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;<em>See</em> Amy Elliot, <em>IRS Provides Rehab Tax Credit Following Historic Boardwalk</em>, 2014 TNT 1-2 (Jan. 2, 2014) (&ldquo;All of these concepts that are in section 4.02(2)(b) in &hellip; may give the IRS a lot of wiggle room down the road.&nbsp; [T]he concepts may hard to administer because they are not defined.&rdquo; (quoting Timothy Jacobs of Hunton &amp; Williams)); Diane Freda, <em>IRS Safe Harbor on Historic Rehabilitation Tax Credit Misses Mark, Practitioner Says, </em>BNA Daily Tax Rep. G-2 (Jan. 3, 2014).</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;<em>See also </em><a href="http://www.taxlawroundup.com/">http://www.taxlawroundup.com/</a> (Dec. 31, 2013).</p> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;<em>See, e.g., </em>Ex. 1 of &sect; 5.01 of Rev. Proc. 2007-65 for such a factual scenario.</p> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup>&nbsp;<em>See</em> Treas. Reg. &sect; 1.704-1(b)(2)(ii).</p> <p><sup><a name="_ftn6" href="#_ftnref6">6</a></sup>&nbsp;2001-1 C.B. 1156.</p> <p><sup><a name="_ftn7" href="#_ftnref7">7</a></sup>&nbsp;<em>See</em> Rev. Rul., 2002-69, 2002-2 C.B. 670 (superseding Rev. Rul. 99-14, 1999-1 C.B. 853 (which was the IRS&rsquo;s first attempt at a negative lease-in/lease-out ruling)); <em>see, e.g., </em>&nbsp;BB&amp;T v. United States, 523 F.3d 461 (4<sup>th</sup> Cir. 2008) and Consol. Edison Co. of N.Y., Inc. v. United States, 703 F.3d 1367 (Fed. Cir. 2013), <em>reversing</em> 90 Fed. Cl. 228 (2009).</p> <p><sup><a name="_ftn8" href="#_ftnref8">8</a></sup>&nbsp;<em>See</em>, <em>e.g., </em><em><a class="target-blank" href="http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Energy_us_er/us_er_StrctrngMdlngInvestTaxPrspc_AE_Prsntn_2011.pdf ">http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Energy_us_er/us_er_Strctrng MdlngInvestTaxPrspc_AE_Prsntn_2011.pdf</a>&nbsp;(</em><em>page</em><em> 14) (49 percent indirect interest) and </em><a href="http://www.novoco.com/energy/resource_files/reports/sbt_finalpreso_102609.pdf"><em>http://www.novoco.com/energy/resource_files/reports/sbt_finalpreso_102609.pdf</em></a><em> (page 116) (up to a 49 percent indirect interest). Both of these presentations address energy tax credit transactions, while the Revenue Procedure on its face is limited to historic tax credits.</em></p> <p><sup><a name="_ftn9" href="#_ftnref9">9</a></sup>&nbsp;&sect; 4.02(2)(b).</p> <p><sup><a name="_ftn10" href="#_ftnref10">10</a></sup>&nbsp;Now codified as ASC 740-10.</p> 7241 Mon, 06 Jan 2014 00:00:00 -0500 IRS Guidance for Historic Tax Credit Transactions: Partnership Flips and Inverted Leases http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-guidance-for-historic-tax-credit-transactions-partnership.html <p>The IRS released Revenue Procedure 2014-12 on December 30.&nbsp; It is available&nbsp;<a href="http://www.irs.gov/pub/irs-drop/rp-14-12.pdf">here</a>.&nbsp; 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 &ldquo;Code&rdquo;)).&nbsp; It is similar in scope to Revenue Procedure 2007-65,<sup>&nbsp;<a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp;which addresses the structuring of production tax credit partnership transactions involving wind farms. &nbsp;</p> <p>Revenue Procedure 2014-12 provides a safe harbor for only a partnership&rsquo;s allocation of tax credits. It does not address any other issues (e.g., economic substance or tax ownership).&nbsp; Thus, the actual safe harbor is rather narrow.&nbsp; 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.&nbsp;</p><p>The revenue procedure was requested by the historic tax credit community following the Third Circuit&rsquo;s opinion in favor of the government in <em>Historic Boardwalk Hall, LLC v. Commissioner</em>, <sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;which chilled the market for historic tax credit transactions.&nbsp; <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/supreme-court-denies-certiorari-in-historic-boardwalk-hall.html">Here</a> is a blog post discussing that case and the Supreme Court&rsquo;s denial of certiorari.&nbsp; Following the Third Circuit&rsquo;s decision, members of Congress wrote the Treasury requesting the revenue procedure in the hope that it would provide tax equity investors with comfort to resume investing in historic tax credit transactions.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup></p> <p>The revenue procedure blesses two structures: (i) a &ldquo;flip&rdquo; partnership and (ii) an &ldquo;inverted&rdquo; lease.&nbsp; The revenue procedure refers to the flip partnership as a &ldquo;Developer Partnership&rdquo; and an inverted lease as a &ldquo;Master Tenant Partnership.&rdquo;&nbsp;</p> <p>The government spent months debating the inverted lease structure, and some tax practitioners may be surprised to see it included in the safe harbor.&nbsp; It appears an argument could be made that the historic tax credit community, by insisting on an inverted lease safe harbor, forced the IRS and the Treasury to include vague, or in some instances, difficult standards, particularly regarding pretax economics and call options.</p> <p><strong>&ldquo;Developer Partnership&rdquo; Safe Harbor</strong></p> <p>The mathematical standards articulated for the Developer Partnership are very similar to those in Revenue Procedure 2007-65. &nbsp;<a href="http://cdn.akingump.com/images/content/2/6/v2/26892/Developer-Partnership.pdf">Here</a> is the diagram for the Developer Partnership.&nbsp; It looks much like the wind partnership provided for in Revenue Procedure 2007-65.&nbsp;</p> <p>The tax equity investor can be allocated up to 99 percent of the tax items, but, after achieving its flip rate (i.e., internal rate of return), must have an interest equal to at least five percent of its greatest allocation of any material partnership item (as opposed to items of income and gain as provide for in the wind revenue procedure).&nbsp; Further, the tax equity investor must contribute 20 percent of its equity investment prior to the building being placed in service.&nbsp; Finally, the tax equity investor&rsquo;s investment can be only 25 percent contingent or <strong>pay go</strong> (i.e., the obligation to make 75 percent of the equity investment must be fixed).</p> <p>However, Revenue Procedure 2014-12 appears to arguably provide for a more onerous requirement with respect to the tax equity investor&rsquo;s right to cash distributions than does the wind revenue procedure.&nbsp; Specifically, the first example in the wind revenue procedure provides that the tax equity investor in the initial period of the transaction can be entitled to zero cash distributions.&nbsp; No comparable comfort is provided in Revenue Procedure 2014-12.&nbsp;</p> <p>Further, Revenue Procedure 2014-12 includes the following cryptic and potentially troubling reference to the tax equity investor&rsquo;s pretax economics: the tax equity investor&rsquo;s &ldquo;interest must [have] a reasonably anticipated value commensurate with the [tax equity investor&rsquo;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.&rdquo;<sup><a name="_ftnref4" href="#_ftn4">4</a></sup></p> <p>The concern about the tax equity investor&rsquo;s pretax economics is heightened by the first example in Revenue Procedure 2014-12: The tax equity investor &ldquo;has a right to receive a <strong>pro rata share of all distributions</strong> commensurate with [its] <strong>share of the Partnership profits</strong>. [Its] percentage interest has a reasonably anticipated value commensurate with [its] overall percentage interest . . . , separate [from the tax attributes].&rdquo;&nbsp; [Emphasis added.]&nbsp; Thus, if the tax equity investor is to be allocated 99 percent of the investment tax credit and other tax attributes for the first five years, in order to maximize the historic tax credit and avoid recapture, it appears it also is to receive 99 percent of the cash distributions during those five years.&nbsp;</p> <p>It would have been helpful if the example had explained how the anticipated value of the equity investment is determined, apparently without regard to tax benefits, and had included guidelines for testing whether that value is &ldquo;commensurate&rdquo; with the investor&rsquo;s overall percentage interest in the partnership.&nbsp; Do the IRS and the Treasury naively expect the tax equity investor&rsquo;s equity contribution to be determined without regard to the historic tax credits? It is hard to fathom such an expectation because it could potentially nullify much of the utility of the safe harbor; however, how else is the &ldquo;commensurate value&rdquo; requirement to be applied?&nbsp; In addition, the revenue procedure uses &ldquo;overall percentage interest in the partnership&rdquo; as if it is a term of art; however, neither a definition nor a cross-reference is provided to assist taxpayers in divining the meaning of the phrase.&nbsp; Further clarification of these points would be helpful.</p> <p><strong>&ldquo;Master Tenant&rdquo; (Inverted Lease) Safe Harbor</strong></p> <p>In the inverted lease as described in the revenue procedure, a lessor has two partners: a developer and the master tenant partnership.&nbsp; The lessor then enters into a head lease of the building with the master tenant partnership (which is also a partner in the lessor), and the lessor elects for the master tenant partnership to claim the investment tax credit.&nbsp; The master tenant has two partners: a principal (also known as a sponsor) and the tax equity investor.&nbsp; The master tenant then subleases the building to the ultimate user. <a href="http://cdn.akingump.com/images/content/2/6/v3/26497/Master-Tenant-Partnership.pptx">Here</a> is a diagram of the inverted lease structure.</p> <p>In the inverted lease, the mathematical standards referred to above and the vague language about the pretax economics are applied at the master tenant level (i.e., the entity in which the tax equity investor is a partner).&nbsp; After that, the safe harbor provides little in terms of objective guidelines.&nbsp;</p> <p>The revenue procedure provides that the tax equity investor may have no direct ownership in the lessor, but may have an indirect interest through being a partner in the master tenant, which is a partner in the lessor.&nbsp; However, no guideline is provided as to how much of an indirect interest the tax equity investor may have in the lessor.&nbsp; This is a fundamental question in inverted lease transactions, and tax practitioners are left guessing.&nbsp;</p> <p>The revenue procedure sensibly provides that the term of the head lease must be longer than the term of the sublease.&nbsp; This is sensible because it provides the master tenant with real exposure to the asset to justify it being viewed as having a leasehold for tax purposes. &nbsp;However, the revenue procedure does not state how much longer the head lease term must be than the sublease term.&nbsp; Is one day enough, or should it be some percentage longer than the sublease term?</p> <p><strong>Put/Call Rights</strong></p> <p>Section 4.06 of Revenue Procedure 2014-12 also takes a novel approach to put/call rights.&nbsp; The tax equity investor may have the benefit of a right to &ldquo;put&rdquo; its interest to the sponsor, provided that the put price is not in excess of the fair market value of the tax equity investor&rsquo;s interest as determined at the time of the exercise of the put.&nbsp; In contrast, Revenue Procedure 2007-65 prohibits the tax equity investor from having any put right.</p> <p>Section 4.06(1) of Revenue Procedure 2014-12 prohibits all call options.&nbsp; This is more conservative than even the initial iteration of Revenue Procedure 2007-65, which permitted call options only at the then determined fair market value.&nbsp; The IRS, two years after issuing Revenue Procedure 2007-65, succumbed to industry requests and revised it to permit a sponsor call right at a fixed price &ldquo;the parties reasonably believe, based on all facts and circumstances at the time price is determined, will not be less than the fair market value.&rdquo;<sup><a name="_ftnref5" href="#_ftn5">5</a></sup>&nbsp;We will see if similar requests are made with respect to Revenue Procedure 2014-12.</p> <p>Section 4.06(3) of Revenue Procedure 2014-12 also adds an odd gloss to the determination of fair market value of the tax equity investor&rsquo;s interest by requiring that it &ldquo;may take into account only those contracts or other arrangements creating rights or obligations that are entered into in the ordinary course of the Partnership&rsquo;s business and that are negotiated at arm&rsquo;s length with parties not related to the Partnership or&rdquo; the tax equity investor.&nbsp; In an inverted lease, this would appear to prohibit consideration of the head lease, due to its related-party nature, when determining the fair market value of the tax equity investor&rsquo;s interest.&nbsp; However, since the head lease is central to the tax equity investor&rsquo;s economics, it would appear impossible to value the tax equity investor&rsquo;s interest without taking it into account.&nbsp; If the goal of this fair market value language is to prohibit put options in inverted leases, the IRS could have more readily effectuated that goal by merely stating that.</p> <p>Tax Indemnity Protections</p> <p>Revenue Procedure 2007-65 provides that no &ldquo;person may guarantee or otherwise insure the [tax equity investor] the right to any allocation&rdquo; of production tax credits.&nbsp; Revenue Procedure 2014-12 goes far beyond this prohibition:</p> <p>(a)&nbsp;&nbsp;&nbsp; No person involved in any part of the [historic tax credit transaction] may directly or indirectly guarantee or otherwise ensure the [tax equity investor&rsquo;s] ability to claim [historic tax credits], the cash equivalent of the credits, or the repayment of any portion of the [tax equity investor&rsquo;s] contribution due to the inability to claim the [historic tax credits] in the event the Service challenges all or a portion of the transactional structure of the Partnership.&nbsp;.&nbsp;.</p> <p>(b)&nbsp;&nbsp; No person involved in any part of the [historic tax credit transaction] may pay the [tax equity investor&rsquo;s] costs or indemnify the [tax equity investor] for [its] costs if the Service challenges [its] claim of [the historic tax] credits.<sup><a name="_ftnref6" href="#_ftn6">6</a></sup></p> <p>The tax equity investor may be protected by guarantees that the other parties to the transaction (i) will take the steps necessary to claim the historic tax credit and (ii) will not cause the historic tax credit to be recaptured.<sup><a name="_ftnref7" href="#_ftn7">7</a></sup></p> <p>It seems a bit excessive in paragraph (b) to provide that the tax equity investor must bear its own legal costs in defending an IRS audit, particularly as there is no exception for audits triggered by an act or omission that is covered by a permissible guarantee.</p> <p><strong>Other Protections</strong></p> <p>The tax equity investor may be protected by &ldquo;completion guarantees, operating deficit guarantees, environmental indemnities and financial covenants.&rdquo;&nbsp; However, neither these protections nor the limited guarantees about the historic tax credits may be funded<em>.&nbsp; </em>That is, the tax equity investor must be exposed to the financial wherewithal of the guarantor.&nbsp; Further, although financial covenants are permissible, the guarantor may not agree to maintain a minimum net worth.<sup><a name="_ftnref8" href="#_ftn8">8</a></sup></p> <p>Letters of credit are a customary means to ensure payment of commercial obligations.&nbsp; The revenue procedure is silent as to whether a letter of credit is permissible.&nbsp; This is despite the fact that section&nbsp;470(d)(1)(A) of the Code, which also addresses funded obligations, permits a letter of credit so long as it is not collateralized by a deposit. &nbsp;</p> <p>A permissible type of financial protection is a reserve &ldquo;in an amount less than or equal to the Partnership&rsquo;s reasonably projected operating expenses for a twelve-month period.&rdquo;<sup><a name="_ftnref9" href="#_ftn9">9</a></sup></p> <p><strong>Implications for Renewable Energy Investment Tax Credit Transactions</strong></p> <p>The revenue procedure provides that it applies to only historic tax credits.&nbsp; Nonetheless, historic tax credits are an &ldquo;investment tax credit&rdquo;; thus, the question arises as to what the revenue procedure means for structuring solar projects or wind projects (or other production-tax-credit-eligible projects) that elect the investment tax credit in lieu of the production tax credit.</p> <p>On the positive side, the revenue procedure could be interpreted to imply endorsement for inverted leases in all investment tax credit transactions; the inverted lease is a powerful tax structuring tool that, in some circumstances, delivers the most attractive after-tax economics.&nbsp; However, if one takes that view, would one also have to adopt the revenue procedure&rsquo;s pretax economic parameters and prohibitions on call options in renewable energy investment tax credit transactions?&nbsp; That may not be a trade that renewable energy tax credit investors are willing to make.</p> <p><strong>Conclusion</strong></p> <p>When the IRS issued Notice 2013-29 addressing the 2013 start-of-construction requirement for wind farms to qualify for production tax credits, glitches were identified that were promptly addressed.<sup><a name="_ftnref10" href="#_ftn10">10</a></sup>&nbsp; One can only hope that the IRS and the Treasury are similarly proactive in clarifying Revenue Procedure 2014-12&rsquo;s pretax economics standard and other ambiguities described above.</p> <div><br /><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup>&nbsp;2007-45 I.R.B. 967.</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup>&nbsp;694 F.3d 425 (3d Cir. 2012), <em>cert. denied</em>, U.S. No. 12-901 (May 28, 2013).</p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp;<em>See, e.g.,</em> Letter from Rep. Niki Tsongas (D-MA) to Jack Lew, Secretary of the Treas. (Apr. 26, 2013) (<em>available at</em> TNT DOC 2013-11090).</p> </div> <div> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup>&nbsp;&sect; 4.02(b); <em>see </em>Amy Elliot, <em>IRS Provides Rehab Tax Credit Following </em>Historic Boardwalk, 2014 TNT 1-2 (Jan. 2, 2014).</p> </div> <div> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup>&nbsp;Ann. 2009-69, 2009-40 I.R.B. 475 (revising Rev. Proc. 2007-65, 2007-45 I.R.B. 967).</p> </div> <div> <p><sup><a name="_ftn6" href="#_ftnref6">6</a></sup>&nbsp;&sect;&nbsp;4.05(2).</p> </div> <div> <p><sup><a name="_ftn7" href="#_ftnref7">7</a></sup>&nbsp;&sect;&nbsp;4.05(1)(a)(ii)</p> </div> <div> <p><sup><a name="_ftn08" href="#_ftnref8">8</a></sup>&nbsp;&sect;&nbsp;4.05(1)(b), (c)</p> </div> <div> <p><sup><a name="_ftn9" href="#_ftnref9">9</a></sup> &sect;&nbsp;4.05(1)(c)</p> </div> <div> <p><sup><a name="_ftn10" href="#_ftnref10">10</a></sup>&nbsp;<em>See, e.g., </em>Notice 2013-60.</p> </div> </div> 7221 Thu, 02 Jan 2014 00:00:00 -0500 Baucus Post-2016 Proposal: No Change to PTC & ITC Reduced to 20 Percent http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/baucus-post-2016-proposal-no-change-to-ptc-itc-reduced-to-20-1.html <p>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 <a href="http://cdn.akingump.com/images/content/2/6/v2/26302/Energy-Tax-Reform-Discussion-Draft-One-Pager.pdf">one page summary</a>, an <a href="http://cdn.akingump.com/images/content/2/6/v2/26307/Energy-Tax-Reform-Discussion-Draft-Summary.pdf">eight page summary</a>, a <a href="http://cdn.akingump.com/images/content/2/6/v2/26312/JCT-Technical-Explanation-of-Energy-Tax-Reform-Discussion-Draft..pdf">30 page legislative history</a> and <a href="http://cdn.akingump.com/images/content/2/6/v2/26297/Energy-Tax-Reform-Discussion-Draft-Language.pdf">the statutory language</a>.</p><p><em>What the Proposal Would Mean for Solar?</em></p> <p>Solar projects placed in service prior to 2017 would remain eligible for a 30 percent investment tax credit. Solar projects placed in service in 2017 and later would be eligible for either (i) a 20 percent investment tax credit (ITC) or (ii) a 2.3 cents per KWh production tax credit (PTC) for ten years. The proposed PTC is the same as the PTC available to wind projects under current law and would continue to be adjusted for inflation.</p> <p><em>What the Proposal Would Mean for Wind?</em></p> <p>The current PTC would be extended for projects placed in service prior to 2017. Further, the option to elect ITC would also be extended for projects placed in service prior to 2017. Wind and other PTC eligible projects under current law that &ldquo;started construction&rdquo; prior to 2014 would have to be placed in service prior to 2017; effectively, the &ldquo;start of construction&rdquo; rules would have no bearing on any projects&rsquo; tax credits eligibility.</p> <p>Wind projects placed in service in 2017 and later would be eligible for either (i) a 20 percent investment tax credit (ITC) or (ii) a 2.3 cents per KWh PTC for ten years with the inflation adjustment continuing. This is the same as solar.</p> <p><em>Universal Technological Standard</em></p> <p>The PTC and ITC are available to any electricity generation facility that emits, with respect to greenhouse gases, between one and 372 grams of equivalent carbon dioxide per kilowatt-hour (CO2e per KWh).&nbsp; As a project&rsquo;s emissions approach 372 grams, the credit rate is reduced linearly. Technologies like wind and solar have zero emissions, so the linear reduction is moot for them. In addition, the Joint Committee&rsquo;s report provides that nuclear power has zero emissions, so new nuclear power plants would also escape the linear reduction.</p> <p>This universally applicable standard for tax credits is a critical change because as technologies evolve it will not be necessary to try to shoehorn them into decades old statutory definitions.&nbsp; Rather, it will be merely a question of the emissions from the facilities using the technology. For instance, the staff of the Joint Committee on Taxation believes that a plant burning 100 percent wood waste would generate 48 grams of emissions and would be entitled to a 2 cent per KWh PTC or a 17 percent ITC.&nbsp; Even a bituminous coal project using 40 percent biomass that is projected to emit 308 grams would qualify for a 0.4 cent per KWh PTC or a 3 percent ITC.</p> <p>If the actual emissions from a project that claimed the ITC were significantly worse than the anticipated emissions, then the investment tax credit would be subject to recapture. This would not be an issue for wind, solar or nuclear projects as those projects have zero emissions.</p> <p><em>Proposed Phaseout Standard for all Technologies </em></p> <p>Once the Treasury Department (after consultation with the Department of Energy and the Environmental Protection Agency) certifies that the annual average greenhouse gas emissions rate for electrical production facilities in the United States is equal to or less than 372 grams of CO2e per KWh, the tax credits start to phase out for projects placed in service starting in the year following the certification.</p> <p>The ITC is reduced 25 percent for projects placed in service the first year following Treasury&rsquo;s certification, 50 percent in the second year following the certification, and 75 percent in the third year following the certification. No investment credit is allowed thereafter.</p> <p>PTC projects placed in service prior to the certification date are unaffected by the phaseout.&nbsp; PTC projects placed in service after the phaseout would have their PTCs reduced based on which year they are placed in service following the certification: 25 percent for facilities placed in service the first year, 50 percent the second year, and 75 percent the third year. Facilities placed in service thereafter would not be eligible for the PTC.</p> <p><em>Why is the ITC Reduced to 20 percent? </em></p> <p>The ITC would be reduced to 30 percent from 20 percent, while the PTC remains at its current levels with the inflation adjustments. There is no explanation for the disparate treatment of the two credits.&nbsp; On a conference call, congressional staff noted they had estimated that a 20 percent ITC was equivalent to a 2.3 cent PTC. It is not clear what the math was that resulted in that conclusion.</p> <p><em>What about ITC Recapture?</em></p> <p>The current recapture rules that apply to sales and transfers in the first five years of an ITC project&rsquo;s life would continue to apply. As noted above, the recapture rules would be expanded to also apply to ITC projects that have higher emissions than anticipated.</p> <p><em>What about Depreciation?</em></p> <p>This proposal does not address depreciation. It is expected that depreciable basis will continue to be reduced by 50 percent of the ITC.&nbsp;</p> <p>In addition, Chairman Baucus on November 21 released a separate proposal addressing cost recovery generally. The proposed legislative history for the cost recovery proposal is available [<a href="http://cdn.akingump.com/images/content/2/6/v2/26322/JCT-Technical-Explanation-of-the-Chairman-s-Staff-Discussion-Dra.pdf">here</a>]. Under that proposal, accelerated depreciation would be repealed. Therefore, the five-year double-declining depreciation (referred to as &ldquo;MACRS&rdquo;) for renewable energy projects would be eliminated. Instead, renewables would be subject to depreciation of 5 percent a year on a declining balance.&nbsp; Therefore, if the asset pool has a balance of $1 million, the depreciation in the first year would be $50,000 (<em>i.e.</em>, 5 percent of $1 million).&nbsp; If no assets eligible for the pool are acquired or purchased in the next year, then depreciation for the second year would be $47,500 (<em>i.e., </em>5 percent of $950,000).&nbsp;Assets would be &ldquo;pooled,&rdquo; which means that if an asset was sold the pool would go down while the purchase of an asset would increase the pool. To some extent, pooling is like a tax-free exchange without the hassle of the like-kind exchange rules.</p> <p>The Chairman&rsquo;s depreciation proposals are not specific to renewables. All assets would be subject to similar rules. There will be four pools of asset; renewables were placed in the slowest depreciation pool. The renewables industry will rally to change that, if the cost depreciation proposal advances.</p> <p><em>What about Expansion of the Master Limited Partnership (MLP) Rules to Include Renewables?</em></p> <p>A MLP is able to raise equity in the public markets, while only being subject to a single layer of federal income tax. Senator Baucus&rsquo;s energy tax reform proposal is silent with respect to expansion of the MLP rules to include income from renewable projects as &ldquo;qualifying income.&rdquo;&nbsp; The speculation regarding the omission is that the MLP rules are the topic of other potential tax reform discussions, so it would have confused matters to address MLP in the energy tax reform proposal.</p> <p><em>Senator Baucus to China</em></p> <p>It was reported today that President Obama will nominate Senator Baucus to be the next ambassador to China. It is not clear what Baucus&rsquo;s departure from the Senate will mean for the prospects for tax reform generally, or the energy proposals specifically.</p> 7170 Wed, 18 Dec 2013 00:00:00 -0500 SolarCity Responds to Critical Barron’s Article http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-responds-to-critical-barron-s-article.html <p>Barron&rsquo;s in August of this year published an article critical of SolarCity&rsquo;s use of tax credits and grants for its solar projects.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup> That article led Senator Sessions to send a harsh letter with a number of pointed questions to the Secretary of the Treasury. My blog post regarding the senator&rsquo;s letter is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/sen-sessions-pens-letter-to-treasury-critical-of-solarcity-and.html">here</a>. SolarCity has now posted a response to the Barron&rsquo;s article on its own blog. SolarCity&rsquo;s post is available <a href="http://blog.solarcity.com/?p=474">here</a>.</p> <p>Overall SolarCity&rsquo;s post is thoughtful and clear. However, the post&rsquo;s wording contains a technical misstatement with respect to federal income tax law:</p> <p style="margin-left: 30px;">&ldquo;SolarCity does not use a &lsquo;more complex&rsquo; method than similar installers in valuing solar projects, and solar companies cannot &ldquo;estimate&rdquo; the fair market value in applying for grants under Section 1603.&nbsp; That fair market value-which of course is the price the buyer actually paid for the system-must also be determined by an independent appraiser.&rdquo;</p><p><em></em>The author of the post may not be aware that one of SolarCity's, as well as other solar developers, preferred structuring techniques is the inverted lease.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup> In an inverted lease, the 1603 grant or investment tax credit is based on the fair market value of the solar project, which is not what the party claiming the tax credit or grant has paid.</p> <p>The use of the fair market value that was not paid by any party in a lease transaction was sanctioned by Congress in section 50(d)(5) of the Internal Revenue Code, which cross-references to <em>old</em> section 48(d), which was repealed by Congress but effectively reinstated by the cross-reference. <em>Old</em> section 48(d) provided: &ldquo;A person . . . who is a lessor of property may elect with respect to any new [investment tax credit eligible] property <em>to treat the lessee as having acquired</em> such property for an amount equal to . . . the <em>fair market value</em> of such property&rdquo; (emphasis added).</p> <p>Pursuant to this election, a lessor may elect to permit the lessee of a solar project to claim the grant or investment tax credit, even though the lessee is not the owner of the project.&nbsp; As the lessee is paying rent (rather than buying the project), the lessee&rsquo;s grant or investment tax credit is based on the notional fair market value of the project.</p> <p>For instance, if the solar project&rsquo;s fair market value is $100,000, under this election the lessee is eligible for a $30,000 grant or investment tax credit the investment tax credit in the first year the project is operational, while the lessee to that point likely has paid rent nowhere near $100,000. Further, the lessor may be a developer that constructed the project itself at a cost of only $85,000.&nbsp; Therefore, the $100,000 fair market value the grant or investment tax credit is based on does not correlate to what either party has &ldquo;paid for the system.&rdquo;</p> <p>Thus, SolarCity does in some instances use a <em>complex</em> method that results in an investment tax credit or cash grant based on the estimated fair market value of the project. Therefore, contrary to SolarCity&rsquo;s blog post, the &ldquo;fair market value&rdquo; in this scenario that is a preferred structure of SolarCity<sup><a name="_ftnref3" href="#_ftn3">3</a></sup> is<em> not</em> &ldquo;of course . . . the price the buyer actually paid for the system&rdquo; as quoted.</p> <p>SolarCity&rsquo;s blog post also over-emphasized the specificity of the appraisal guidelines provided by the IRS: &ldquo;The IRS provides guidelines for appraisal methods for establishing the fair market value of assets. . . . The entire energy industry uses the same methodology that is stipulated by the IRS.&rdquo;</p> <p>I wish the IRS had &ldquo;stipulated&rdquo; a &ldquo;methodology&rdquo; for valuing solar project, unfortunately, in my experience the IRS&rsquo;s valuation guidance is far more opaque than any stipulation I have read. The applicable tax regulations defining fair market value merely refer to the price determined in an arm&rsquo;s-length transaction between a willing buyer and willing seller.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup> Such generalities are hardly a &ldquo;methodology.&rdquo; The IRS manual and case law provide some detail with respect to the three typical methods of valuation: (i) discounted cash flow; (ii) comparable transactions in the market; and (iii) replacement cost.<sup><a name="_ftnref5" href="#_ftn5">5</a></sup> However, even those sources do not provide much specificity with respect to how to reconcile the different results each of the three methods may produce.</p> <p>The Treasury did publish a memorandum on June 30, 2013, that discussed the determination of the fair market value of solar projects for cash grant purposes. The memorandum is available <a href="http://www.treasury.gov/initiatives/recovery/Documents/N%20Evaluating_Cost_Basis_for_Solar_PV_Properties%20final.pdf">here</a>. In terms of the valuation methodology, the memo merely refers to the arm&rsquo;s-length definition quoted above and the three valuation methods referred to above. The memo does contain some truisms like, &ldquo;Discount rates should reflect an appropriate risk premium above the risk-free rate,&rdquo; and the memo concludes with, &ldquo;These and all other assumptions should be well-reasoned and sufficiently documented and should reflect market expectations.&rdquo;</p> <p>The pronouncements from the IRS and Treasury are silent with respect to a number of issues that are critical to the valuation of solar projects. For instance, how should the discounted cash flow model reflect the benefit of bonus depreciation and state tax benefits that few tax equity investors value and developers generally lack the tax appetite to use themselves. Then there&rsquo;s the question of renewable energy certificates (RECs): the market for RECs in many states has fluctuated tremendously; tax equity investors generally do not value them; and most lenders will not lend against them. In running a discounted cash flow model, the question is unanswered in the IRS&rsquo;s publications as to whether the model should include: today&rsquo;s REC price for the life of the solar project; the average price of RECs over their relatively short history; or how a tax equity investor would value them.</p> <p>SolarCity&rsquo;s blog post references a white paper discussing the determination of fair market value of solar projects. The white paper was published by the Solar Energy Industry Association with assistance from CohnReznick; the white paper, in fact, references the uncertainty surrounding the valuation challenges referred to in the preceding paragraph and nowhere does it refer to the concept of <em>methodology stipulated</em> by the IRS. My blog post about the white paper is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/seia-publishes-white-paper-on-fair-market-value-for-income-tax.html">here</a>.</p> <p>SolarCity is an important leader in the industry, and it serves itself and the industry well by correcting inaccuracies in press reports. Unfortunately, the complexities of tax law are frequently ill suited for sound bites. A company should be judged instead by its action.</p> <div><br /><hr size="1" /> <div> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> <em>Barron&rsquo;s,</em> &ldquo;Dark Clouds Over SolarCity,&rdquo; Aug. 31, 2013, which is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/sen-sessions-pens-letter-to-treasury-critical-of-solarcity-and.html">here</a>.&nbsp;&nbsp;</p> </div> <div> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> <em>Chadbourne &amp; Parke, &ldquo;</em>The Distributed Solar Market&rdquo;<em> </em>(Apr. 2013) (quoting Ben Cook, VP of Structured Finance, SolarCity &ldquo;We use all three structures, but we see mostly partnership flips and inverted leases&rdquo;), which is available <a href="http://www.chadbourne.com/files/Publication/f20db197-909f-4c7d-be58-867143e8469e/Presentation/PublicationAttachment/121c9cdf-ae8b-4dbc-a1a4-87e81dbb7b00/USDistributedSolar_Apr13.pdf">here</a>.&nbsp; <em>&nbsp;</em></p> </div> <div> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup> <em>Id.</em></p> </div> <div> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup> <em>See, e.g., </em>Treas. Reg. &sect;&sect;1.485-5(d)(6)(i) (The fair market value of an investment is the price at which a willing buyer would purchase the investment from a willing seller in a bona fide, arm&rsquo;s-length transaction.), 1.671-2(e)(ii).&nbsp; <em>See also</em> Rev. Rul. 59-60. 1959-1 C.B. 237 (discussing how to determine the fair market value of shares in a closely held corporation).</p> </div> <div> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup> <em>Internal Revenue Manual,</em> <em>Real Property Valuation Guidelines</em>, &sect; 4.48.6.2.4 (revised Jul. 1, 2006); <em>Trout Ranch v. Commissioner, </em>493 Fed. Appx. 944, 2012 WL 3518564 (10<sup>th </sup>Cir. 2012) (holding that the discounted cash flow methodology is a valid way to determine the fair market value of an easement donated to a charity).</p> </div> </div> 7106 Mon, 09 Dec 2013 00:00:00 -0500 CRS Report on the Administration’s Proposal to Repeal Tax Breaks for the Oil & Gas Industry http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/crs-report-on-the-administration-s-proposal-to-repeal-tax-breaks-1.html <p>The Congressional Research Service (CRS) on October 30 published a report on the Obama Administration&rsquo;s proposal to repeal or modify certain tax benefits provided to the oil and gas industry.&nbsp; The report is available <a href="https://www.fas.org/sgp/crs/misc/R42374.pdf">here</a>.</p> <p>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).&nbsp; Since oil prices have been high for several years, the credits have not been applicable for some time.</p> <p>Four of the changes apply to only independent oil and gas producers.&nbsp; The changes conform the tax provisions to apply to the <strong>independents</strong> as they presently apply to the &ldquo;major&rdquo; oil and gas companies (e.g., ExxonMobil).&nbsp; 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.</p><p>Two of the changes in the Administration&rsquo;s 2014 budget proposal are specific to oil and gas; however, their general repeal is on the short list for revenue raises in almost every discussion of fundamental tax reform.&nbsp; These changes are repeal of the &ldquo;domestic manufacturing deduction&rdquo; and &ldquo;last-in-first-out&rdquo; (LIFO) inventory tax accounting.&nbsp; Thus, it would appear that, in any event, these tax provisions&rsquo; days may be numbered.</p> <p><strong><em></em></strong>The last income tax change is reform of a foreign tax credit rule that allows for a foreign tax credit that, as described by the CRS, is in effect a royalty (although couched &ldquo;as taxes&rdquo;) paid to a host foreign government in consideration for the right to drill for oil in the country.&nbsp; CRS calls the current law &ldquo;essentially a transfer of funds from the U.S. Treasury to the Saudi government.&rdquo;</p> <p>The last two changes are not income taxes-reinstatement of the Superfund tax and an increase in the Oil Spill Liability Trust Fund Tax.&nbsp;</p> <p>Below are key excerpts from the report:</p> <ul> <li>The Obama Administration, in the FY2014 budget proposal, seeks to eliminate a set of tax expenditures that benefit the oil and natural gas industries.</li> <li>These proposals include repeal of the enhanced oil recovery and marginal well tax credits, repeal of the current expensing of intangible drilling costs provision, repeal of the deduction for tertiary injectants, repeal of the passive loss exception for working interests in oil and natural gas properties, elimination of the manufacturing tax deduction for oil and natural gas companies, increasing the amortization period for certain exploration expenses, and repeal of the percentage depletion allowance for independent oil and natural gas producers.</li> <li>The Administration also characterizes repealing these tax preferences as eliminating market distortions and links them to providing resources for investments in clean, renewable, efficient energy resources.</li> <li>Many of these proposed tax changes have the effect of equalizing the tax treatment of independent oil producers to that of the major oil companies.&nbsp; Equalization is accomplished by eliminating preferential tax treatment of the independent companies that is not available to the major oil companies.&nbsp; In some cases, for example, the expensing of intangible drilling expense, the major oil companies have been excluded from the benefits of the tax provision for years, while the independent companies continue to receive the benefit.</li> </ul> <p><strong>Repeal Enhanced Oil Recovery Credit</strong></p> <ul> <li>The enhanced oil recovery credit provides for a credit of 15 percent of allowable costs associated with the use of oil recovery technologies, including the injection of carbon dioxide, to supplement natural well pressure, which can enhance production from older wells.&nbsp; The credit is only available during periods of low oil prices, determined by yearly guidance with respect to what constitutes a low price.&nbsp; The credit has not been in effect over the past several years.&nbsp; Elimination of this credit would likely not have any effect on current, or expected, oil production, since oil prices are generally expected to remain high.</li> </ul> <p><strong>Repeal Credit for Oil and Gas from Marginal Wells</strong></p> <ul> <li>The marginal well tax credit was implemented as the result of a recommendation by the national Petroleum Council in 1994.&nbsp; The purpose was to keep low-production oil and natural gas wells in production during periods of low prices for those fuels.&nbsp; The tax credit is designed to maximize U.S. production levels even when energy markets result in low world prices for oil, and low regional prices for natural gas.&nbsp; It is believed that up to 29 percent of U.S. oil production and 12 percent of natural gas production might be sourced from wells of this category.&nbsp; The credit was enacted in 2004, but has not been utilized because market prices have been high enough since that time to justify production on economic grounds without the application of the credit.</li> </ul> <p><strong>Repeal Expensing of Intangible Drilling Costs</strong></p> <ul> <li>The expensing of intangible drilling costs has been part of the federal tax code since 1913.&nbsp; Intangible drilling costs generally include cost items that have no salvage value, but are necessary for the drilling of an exploratory well, or the development of a well for production.&nbsp; Intangible drilling costs cover a wide range of activities and physical supplies, including ground clearing, draining, surveying, wages, repairs, supplies, drilling mud, chemicals and cement required to commence drilling, or to prepare for development of a well.&nbsp; The purpose of allowing current-year expensing of these costs is to attract capital to what has historically been a highly risky investment.&nbsp; Current expensing allows for a quicker return of invested funds through reduced tax payments.</li> <li>In recent years, the risk associated with finding oil has been reduced, but not eliminated, through the use of advanced technology, including three-dimensional seismic analysis and advanced horizontal drilling techniques.</li> <li>In the current law, the full expensing of intangible drilling costs is available to independent oil producers.&nbsp; Since 1986, major integrated oil companies have been able to expense 70% of their intangible drilling costs and capitalize the remaining 30 percent over a 60-month period.&nbsp; The FY2014 budget proposal would repeal both direct expensing and the accelerated capitalization provision, and replace them with generally applicable accounting procedures for cost recovery.</li> <li>Administration estimates are that the repeal of the expensing of intangible drilling costs provision will yield $10 billion in revenue over the decade to 2023.</li> <li>With the October 2013 price of oil around $100 per barrel, reflecting political unrest in the Middle East, as well as other factors, the additional tax expense is likely to have a smaller effect on reducing oil development activity.</li> </ul> <p><strong>Repeal Tertiary Injectants Deduction</strong></p> <ul> <li>Tertiary injection expenses, including the injectant cost, can be fully deducted in the current tax year.&nbsp; Repeal of the deduction, or less favorable tax treatment of the expenses, would be likely to reduce oil output from older producing fields during periods when the profit margin, and the price of oil, is low.&nbsp; During a period of high oil prices, the repeal is likely to have a smaller effect on production levels.</li> </ul> <p><strong>Repeal Passive Loss Exception for Working Interests in Oil Properties</strong></p> <ul> <li>Repeal of the passive loss exception for working interests in oil and natural gas properties is a relatively small item in terms of tax revenues, estimated at $74 million from FY2014 to FY2023.&nbsp; The provision exempts working interests, investments, in gas and oil exploration and development from being categorized as &ldquo;passive income (or loss)&rdquo; with respect to the Tax Reform Act of 1986.&nbsp; This categorization permits the deduction of losses accrued in oil and gas projects against other active income earned without limitation and is believed to act as an incentive to induce investors to finance oil and gas projects.</li> </ul> <p><strong>Repeal Percentage Depletion Allowance</strong></p> <ul> <li>Percentage depletion is the practice of deducting from an oil company&rsquo;s gross income a percentage value, in the current law, 15 percent which represents, for accounting and tax purposes, the total value of the oil deposit that was extracted in the tax year.&nbsp; Percentage depletion has a long history in the tax treatment of the oil industry, dating back to 1926.&nbsp; The purpose of the percentage depletion allowance is to provide an analog to normal business depreciation of assets for the oil industry, in effect equating the tax treatment of oil deposits to the tax treatment of capital equipment in more traditional manufacturing industries.</li> <li>In its current form, the allowance is limited to domestic U.S. production by independent producers, on the first 1,000 barrels per day, per well, of production, and is limited to 65 percent of the producer&rsquo;s net income.</li> <li>Percentage depletion was eliminated for the major oil companies in 1975.&nbsp; Although major oil companies&rsquo; profits were likely affected by the tax change, their production of oil showed little variation as a result.&nbsp; Production of oil within the United States remains attractive for companies, because ownership of the oil is allowed in this country.&nbsp; In most areas of the world, ownership of oil is vested in the national oil company, as a proxy for the state itself.&nbsp; The result is generally a lower share of revenues for private oil companies producing outside the United States.&nbsp; The Administration projects that the repeal of the percentage depletion allowance would yield tax revenues of approximately $10.7 billion over the period FY2014 through FY2023.</li> </ul> <p><strong>Repeal Manufacturing Tax Deduction (&sect; 199)</strong></p> <ul> <li>A provision in the proposed budget for FY2014 that affects both independent and the major companies&rsquo; oil and natural gas tax liability is the repeal of the domestic manufacturing tax deduction for those industries.&nbsp; The Administration estimates that the repeal of this deduction for the oil and natural gas industries would contribute $1.1 billion in revenue in 2014 and $8.8 billion for the period FY2014 to FY2018.&nbsp; The total increase in tax revenue is estimated to be $17.4 billion from FY2014 to FY2024, according to estimates reported in the budget proposal.</li> <li>Section 199(d)(9) of the Tax Code limits the rate available to the oil and natural gas industries to 6%.&nbsp; This tax deduction was intended to provide domestic firms with an incentive to increase domestic employment in manufacturing at a time when there was concern that manufacturing jobs were migrating overseas.&nbsp; If employment did increase, it would have little effect on national employment levels due to the capital-intensive nature of the industry.&nbsp; The Bureau of Labor Statistics reports that oil and natural gas extraction industries employed approximately 185,500 workers in December 2011, of which about 105,700 were classified as production workers.&nbsp;</li> <li>The period since 2004, while difficult for American manufacturing as a whole, has been generally one of high profits for the oil industry.&nbsp; The variability and level of expected oil and natural gas prices are likely to be a more important factor in determining capital investment budgets, and, hence, exploration and production development budgets, than the repeal of a tax benefit that is capped by a relatively low wage bill for the companies.</li> </ul> <p><strong>Increase Geological and Geophysical Amortization Period</strong></p> <ul> <li>Geological and geophysical expenses are incurred during the process of oil and natural gas resource development.&nbsp; The most favorable tax treatment of these costs would be to allow them to be deducted in the year they are incurred.&nbsp; Requiring these costs to be amortized, or spread out for tax purposes, over several years is less favorable.&nbsp; The longer the amortization period, the less favorable the tax treatment, because a smaller amount is deducted each year, and more time is required to recover the entire cost.&nbsp; If the industry were experiencing a time of stagnant oil prices that were near the cost of production, relatively small changes in tax expenditures might affect investment and production activities.&nbsp; However, in a time of high and volatile oil prices, small changes in tax expenses are likely to be overshadowed by price changes derived from other factors.</li> </ul> <p><strong>Other Tax Policies</strong></p> <ul> <li>The FY2014 budget proposal identifies a number of other proposed tax changes that would likely affect the oil industry.&nbsp; These changes include the repeal of the LIFO accounting method, increasing the Oil Spill Liability Trust Fund taxes, reinstating Superfund taxes and modifying the Dual Capacity Rule.</li> </ul> <p><strong>LIFO</strong></p> <ul> <li>LIFO, as described by the API, is not a tax loophole, but a well-established accounting methodology to determine taxable earnings.&nbsp; Under LIFO accounting procedures, firms assume that the last unit of a good that the company acquires in its inventory is the first unit of the good that is sold.&nbsp; In periods of price inflation, or periods when the expected cost of acquiring inventories is rising, LIFO is beneficial in reducing taxes by allowing the cost deduction of the most recent (expensive) goods, independently of which goods were actually sold out of inventory.</li> <li>The general upward movement of oil prices since 2004 has been, with the significant exception of the period when the effects of the recession drove oil prices down (September 2008 to January 2009), a favorable period for the oil industry to be using LIFO.&nbsp; To the extent that demand conditions and political unrest in oil exporting regions might keep the price of oil rising, keeping LIFO in place could be a tax advantage for the oil industry.</li> </ul> <p><strong>Oil Spill Liability Trust Fund</strong></p> <ul> <li>The FY2014 budget proposal includes a proposed increase in the Oil Spill Liability Trust Fund financing, by raising the tax on imported and domestic crude oil to 9 cents per barrel in 2014 and to 10 cents per barrel in 2017.&nbsp; The current tax is 8 cents per barrel, and, under current law, is set to rise to 9 cents per barrel in 2016.&nbsp; These proposed tax increases to finance the fund at a higher rate were possibly motivated as a response to the Deepwater Horizon oil spill in the Gulf of Mexico.&nbsp; These changes are expected to generate $64 million in 2014 and $1 billion over the period 2014 to 2023.</li> </ul> <p><strong>Superfund</strong></p> <ul> <li>The Superfund finances cleanup of the nation&rsquo;s high-risk contaminated sites for which the responsible parties cannot be found, or cannot pay.&nbsp; Superfund taxing authority expired at the end of 1995.&nbsp; The FY2014 budget proposal would reinstate an excise tax of 9.7 cents per barrel on domestic and imported petroleum products, including crude oil sourced from bituminous deposits and kerogen-rich rock.&nbsp; In addition to the oil excise tax, other dedicated taxes on chemicals and corporate income have been proposed.&nbsp; According to the budget proposal, reinstating the Superfund taxes would raise approximately $1.3 billion in 2014 and $20.2 billion from FY2014 to FY2023.</li> </ul> <p><strong>Dual Capacity Rule and Foreign Tax Credits</strong></p> <ul> <li>The credit for foreign income taxes paid, upon which the Dual Capacity Rule is based, dates back to 1918.&nbsp; Since that time, corporations have been able to credit, directly from their U.S. income tax liabilities, income tax payments made to foreign governments.&nbsp; The period from the end of World War II to 1950 saw a new interpretation of this tax rule develop with respect to the oil industry.&nbsp; Before that time, oil-producing countries like Saudi Arabia charged the oil companies operating in their countries royalties, based on the resources extracted, as well as other taxes.&nbsp; For U.S. tax purposes, the royalties were treated as costs of doing business, hence, an expense, but not a direct credit against U.S. tax liabilities.&nbsp; In 1950, Saudi Arabia and the U.S. major oil companies operating there began negotiations to transform royalty payments into income taxes.&nbsp; This change had the effect of allowing the companies to pay more to Saudi Arabia, and increasing their after-tax earnings, at the expense of essentially transferring funds from the U.S. Treasury to the Saudi government.</li> <li>Proposed modification of the Dual Capacity Rule would restrict companies from claiming the full amount of foreign income taxes as a credit against U.S. taxes.&nbsp; Instead, the oil companies would be allowed to credit only amounts equal to the general corporate tax rate applicable to other industries.&nbsp; Any additional tax payments would be classified as tax-deductible operating expenses.&nbsp; The effect of the change in Dual Capacity Rules would be to reduce after-tax revenues for the companies, as well as returns from overseas investments.&nbsp; This could lead to U.S. firms choosing to invest in fewer marginal overseas projects.</li> <li>Modified rules for dual capacity taxpayers are estimated to generate $552 million in revenue in 2014 and $11 billion over the period 2014 through 2023.</li> </ul> 7078 Wed, 04 Dec 2013 00:00:00 -0500 What does the New IRS PTC Guidance for Start of Construction Mean for Projects? http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/what-does-the-new-irs-ptc-guidance-for-start-of-construction.html <p>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 <a href="http://cdn.akingump.com/images/content/2/6/v2/26018/PTC-Webinar-November-12-2013.pdf">here</a> and the webinar discussed the following:</p> <ul> <li>What clarifications did the recent IRS guidance offer on the expanded &ldquo;start of construction&rdquo; safe harbor for renewable energy projects?</li> <li>What steps should projects take to meet the start of construction requirements?</li> <li>What are solutions to typical problems confronted by project owners seeking to start construction in 2013?</li> </ul> 7038 Mon, 25 Nov 2013 00:00:00 -0500 MLP Renewables Bill Scored at a Modest $1.3 Billion http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/mlp-renewables-bill-scored-at-a-modest-1-3-billion.html <p>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&rsquo;s office, it is scored at a $1.3 billion cost over its first 10 years.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup> Ten years is the period used for scoring. One would hope it would be relatively easy to find &ldquo;revenue raisers&rdquo; to offset that modest cost. Revenue raisers are often closing what are perceived by the public to be tax loopholes.</p> <p>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. <em>See</em> <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/letter-correcting-the-renewables-industry-s-position-on-mlp.html">here</a>. 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.</p><p>The MLP Parity Act has a glitch for the solar industry: it does not include income from solar leases in the definition of &ldquo;qualifying income.&rdquo; Section 7704(c)(2) of the Internal Revenue Code requires an MLP, to avoid characterization as a corporation (and a second layer of tax), to have 90 percent of its gross income be &ldquo;qualifying income.&rdquo; This apparent inadvertent omission is important to the solar industry, because a large percentage of residential solar is financed using a lease to the homeowner. Thus, if the MLP Parity Act is enacted in its current form, residential solar projects using a lease to the homeowner would not be good candidates for inclusion in an MLP.&nbsp;</p> <p>The MLP Parity Act has bipartisan and bicameral support and appears to be supported by the White House. <em>See</em> <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/white-house-seeks-to-expand-energy-tax-policy.html">here</a>.</p> <hr /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> Ari Natter, <em>Senate Bill on Master Limited Partnerships to Cover $1.3 Billion Over 10 Years</em>, Daily Tax Report G-6 (Nov. 19, 2013).</p> 7019 Wed, 20 Nov 2013 00:00:00 -0500 Sen. Sessions Pens Letter to Treasury Critical of SolarCity and 1603 Practices http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/sen-sessions-pens-letter-to-treasury-critical-of-solarcity-and.html <p>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&rsquo;s purported practices and the investment tax credit.&nbsp; The letter is available <a href="http://cdn.akingump.com/images/content/2/5/v2/25978/Sen-Sessions-1603-letter-to-Treasury-11-18-13-2.pdf">here</a>.</p> <p>It is unfortunate that Senator Sessions does not appreciate how cautious and deliberate Treasury has been in administering the Cash Grant program.&nbsp; In fact, the SolarCity litigation that the letter references is essentially a response to Treasury&rsquo;s exceedingly high level of caution and deliberation in the administration of the Cash Grant program.&nbsp; There are projects with Cash Grants that have been delayed over a year.</p> <p>The letter was apparently triggered by an August 31 article in Barron&rsquo;s titled <em>Dark Clouds Over SolarCity</em>; the article is referenced in a footnote to the letter.&nbsp; It is not clear why the senator&rsquo;s office opted to produce this letter two and half months after the article.</p><p>The letter makes a number of requests of Treasury.&nbsp; The first request is &ldquo;Please explain the logic behind allowing companies that take advantage of Section 1603 of ARRA to establish the fair market value of their solar product instead of establishing a set value.&rdquo;&nbsp; My personal response to that is Congress provided that Section 1603 should &ldquo;mimic&rdquo; the investment tax credit, and the investment tax credit is based on tax basis (rather than &ldquo;a set value&rdquo;).&nbsp;</p> <p>The letter goes on to provide: &ldquo;If Treasury provides guidance to firms to calculate fair market value, please provide that information.&rdquo;&nbsp; I would like to see that myself.&nbsp; Treasury&rsquo;s memorandum of June 30, 2011 provided such guidance with respect to California solar projects; however, Treasury has now moved away from that guidance and declines to publish updated numbers.&nbsp;</p> <p>The letter is somewhat confused in that it asks &ldquo;How many companies have received a tax credit under Section 1603?&rdquo;&nbsp; Section 1603 provides for a Cash Grant (not a tax credit); nonetheless, the question is easily answered for Section 1603 Cash Grants as Treasury regularly publishes these statistics.</p> <p>The letter asks &ldquo;Are there any other companies simultaneously in ligation against the government regarding the calculation of solar installation tax credits and receiving Section 1603 tax credits?&rdquo;&nbsp; A cheeky answer to this question would be &ldquo;zero&rdquo; because neither &ldquo;solar <em>installation </em>tax credits&rdquo; nor &ldquo;Section 1603 <em>tax credits</em>&rdquo; exist.&nbsp;</p> <p>The letter asks &ldquo;How long are these tax credits allowed to stay on the books, shielding tax liability?&rdquo;&nbsp; It is not clear which &ldquo;tax credits&rdquo; the letter is asking about.&nbsp; Presumably, it is the Section 48 investment tax credit.&nbsp; Those tax credits, if unused, can be carried forward twenty years as &ldquo;general business credits&rdquo;.</p> <p>The letter asks &ldquo;Please provide a list of solar companies that have received federal loans in addition to tax credits.&rdquo;&nbsp; I think the answer to that is zero as I believe that the Department of Energy loan program was generally used by solar projects that claimed the Cash Grant.&nbsp; If the senator is asking about the combination of the Department of Energy loan program and Cash Grants, then there will be a handful of solar projects that used both.</p> <p>We may not have to wait long to see the Treasury&rsquo;s response as the senator&rsquo;s letter asks for a &ldquo;hard copy and in an electronic, searchable format no later than December 18, 2013&rdquo;.</p> 7018 Tue, 19 Nov 2013 00:00:00 -0500 Economists’ Paper Suggest Carbon Tax Would have Minimal Determinate on U.S. GDP http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/economists-paper-suggest-carbon-tax-would-have-minimal-1.html <p>Economists Lawrence Goulder and Marc Hafstead in October published <em>Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide</em> on behalf of Resources for the Future.&nbsp; The paper is available <a href="http://www.rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=22285">here</a>.&nbsp; 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.&nbsp; The paper considers three scenarios for using the revenue raised by the carbon tax:&nbsp; (i) cash rebates to households; (ii) a reduction in personal income tax rates; and (iii) a reduction in corporate income tax rates.&nbsp; However, in all scenarios, 15 percent of the revenues from the carbon tax are used to provide &ldquo;tradeable exemptions&rdquo; for companies in the 10 industries projected to suffer the largest reductions in profits due to the carbon tax.&nbsp; Further, in none of the scenarios is an economic benefit included for the health or environmental benefits of reduced carbon emissions.</p><p>GDP in each of the scenarios is reduced by less than 1 percent per year.&nbsp; In the scenario in which the revenue is used to pay cash rebates to households, GDP is reduced by .56 percent; in the scenario in which the revenue is used to reduce personal income tax rates, GDP is reduced by .33 percent; and in the scenario in which the revenue is used to reduce corporate income tax rates GDP falls by only .24 percent.&nbsp;</p> <p>The paper does not include a scenario in which none of the revenue is used to fund tradeable exemptions.&nbsp; If instead that 15 percent of the revenue was used to fund further reductions in corporate income tax rates, it would have been interesting to see if the authors&rsquo; model projected an increase in GDP.&nbsp; If it did, that would mean the nation could have clean air and a larger economy (but at the cost of not assisting the industries and households most disadvantaged by the carbon tax).</p> <p>If the paper is correct, even in the least efficient scenario of using the revenue available after the cost of providing the tradeable exemptions and paying cash rebates to households, GDP is reduced by only .56 percent.&nbsp; It would seem reasonable that the reduced health care costs from the reduction in carbon emissions would offset much if not all of .56 reduction in GDP.&nbsp; If that supposition is correct, it would mean that clean air, tradeable exemptions for the affected industries &nbsp;and cash rebates to households could all be achieved while having no adverse effect on GDP.&nbsp; Unfortunately, the current Congress is far too dysfunctional to even entertain such a proposal.</p> <p>For additional information with respect to the intersection of a carbon tax and income taxes, a discussion of the Congressional Budget Office&rsquo;s report on a carbon tax is available in the post below, available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/cbo-s-carbon-tax-report-interesting-but-inconclusive.html">here</a>.</p> 6947 Tue, 12 Nov 2013 00:00:00 -0500 OCC Publishes Fact Sheet on Wind Tax Equity as Public Welfare Investments http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/occ-publishes-fact-sheet-on-wind-tax-equity-as-public-welfare.html <p>The Office of the Comptroller of the Currency (OCC) at the end of October published a fact sheet to clarify the eligibility of wind tax equity investments as public welfare investments for national banks and federal savings associations (federal thrifts). &nbsp;Qualifying as such permits the investment to be held in the bank, rather than a bank holding company.&nbsp; Further, it qualifies the investment for favorable capital weighting under Basel III and qualifies the investment for exceptions to the Volker and Dodd-Frank and real estate limitation rules.&nbsp;</p> <p>The OCC&rsquo;s fact sheet is available <a href="http://www.occ.gov/topics/community-affairs/publications/fact-sheets/fact-sheet-pwi.pdf">here</a>.</p> <p>Here are some key excerpts:</p> <p>More information about this topic is available in my article <a href="http://www.powerintelligence.com/Article/3266085/Search/OCC-Regulatory-Benefits-for-Banks-Tax-Equity-Investments.html">here</a>.</p> 6915 Mon, 04 Nov 2013 00:00:00 -0500 U.S. Tax Policy Effect on Greenhouse Gases Report Summary and Critique http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/u-s-tax-policy-effect-on-greenhouse-gases-report-summary-and.html <p>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.&nbsp; The full report of June 20 is available <a href="http://cdn.akingump.com/images/content/2/5/v2/25471/Effects-of-US-Tax-Policy-On-Greenhouse-Gas-Emissions-NAP-20407.pdf">here</a>. Below are key excerpts from the report.&nbsp; 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.</p> <p>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 (<em>e.g.</em>, manufacturing equipment, computers).</p><h3>Excerpts from the Report</h3> <h4>Effect of Favorable Percentage Depletion for oil, gas and Coal on Greenhouse Gasses</h4> <ul> <li>From a fiscal point of view, the oil depletion allowance was not motivated by concerns about climate change when it was enacted in 1926.&nbsp; From the point of view of climate change, this is not an effective subsidy for reducing emissions.</li> <li>The impact on CO<sub>2</sub> emissions of removing the [favorable] percentage depletion allowance is small under all &hellip; scenarios.</li> <li>The treatment of depletion in the oil and gas sector is complicated by the fact that the depletion allowance depends on firm size (small independent, large independent and major producer).</li> <li>The primary impact of removing the percentage depletion tax preference is to increase the cost of natural gas production and, hence, natural gas prices.&nbsp; All sectors reduce their natural gas consumption.&nbsp; However, the biggest impact occurs in the power sector because substitution of other fuels is easiest there.</li> <li>In the Cost-Depletion scenario, where [less favorable] cost depletion replaces the percentage depletion allowance, capital recovery is slower, resulting in higher drilling costs, and reducing incentives to explore and develop new supply. &nbsp;Less investment in drilling would be expected to reduce domestic production and raise the price of natural gas.</li> <li>As intuition would suggest, the primary impact of the move to [less favorable] cost depletion from percentage depletion is to increase the cost of natural gas production and prices, with the High-Macroeconomic-Growth scenario showing the largest difference and the Low-Natural-Gas-Prices scenario showing the least difference.</li> <li>To a first approximation, the depletion allowance produces no impact on greenhouse gas emissions.&nbsp; &hellip; Both theoretical and empirical work suggests that market and behavioral failures (<em>e.g.</em>, externalities, principal-agent issues, and informational barriers) can cause underinvestment in residential energy efficiency, and that government intervention can help.</li> </ul> <h4>Effect of Energy Tax Credits on Greenhouse Gas Emissions</h4> <p>[The report&rsquo;s generalities sound relatively favorable for renewable energy tax incentives.]</p> <ul> <li>The committee&rsquo;s analysis of the tax provisions for renewable electricity indicates that they lower CO<sub>2</sub> emissions.</li> <li>To the extent that the PTC/ITC encourages the substitution of electricity from wind or solar power for electricity from fossil fuels, CO<sub>2</sub> emissions are expected to decrease.</li> <li>Removal of the renewable electricity credit raises the price of natural gas and electricity, which increases the cost of energy to consumers.</li> <li>In NEMS-NAS analysis, investment tax credits and cash grants are both treated as a percentage reduction in the capital cost of the technology and are therefore identical.&nbsp; Under current law, most of these provisions have expired or are scheduled to expire; however, under the committee&rsquo;s methodology, they are extended through 2035 in the baselife analysis for each scenario.</li> </ul> <p>[The report&rsquo;s summary of its empirical conclusions regarding renewable energy tax incentives reflect a conclusion the tax incentives provide minimal reductions in greenhouse gasses.]</p> <ul> <li>If the revenue lost as of a result of the PTC/ITC is divided by the reduction in CO<sub>2</sub> emissions, just under $250 in revenues are lost per ton of CO<sub>2</sub> reduced.&nbsp; While this does not represent the social cost of reducing the ton of CO<sub>2</sub> emissions (because revenue losses are not a dead-weight loss &hellip;), <em>the fiscal cost per ton of CO<sub>2</sub> reduced is high relative to other, more efficient approaches</em> [emphasis added].</li> <li>[Existing energy tax credits] lower the cost of electricity generated from renewable resources, encouraging their substitution for fossil fuels and thereby tend to reduce GHG emissions.&nbsp; The committee&rsquo;s analysis indicates that these provisions do lower CO<sub>2</sub> emissions under the macroeconomic conditions in the AEO11 reference and high GDP growth cases, <em>but the impact is small</em>, about 0.3 percent of U.S. CO<sub>2</sub> in the reference case [emphasis added].&nbsp;</li> </ul> <p>[It is not clear to me how the impact of energy tax credits can be &ldquo;small,&rdquo; when the report concludes that due to not extending energy tax credits through 2035]</p> <p>utilities will add more than twice as many combustion turbines and nearly 50 percent more natural gas combined cycle plants while retiring 25 percent fewer coal-fired plants (compared to base line projections where the PTC/ITC are still available). [Further, gas] replaces most of the reduced renewable generation in the No-ITC/PTC scenario, and coal and nuclear power contribute modestly in some instances. &nbsp;In the Low-Gas-Price scenario, more nuclear power plants that were on the cusp of retirement in the Reference scenario remain in use, and as a result the increase in CO<sub>2</sub> emissions is close to the Reference scenario.</p> <ul> <li>Given the small changes in generation in the No-ITC/PTC scenario changes to overall emissions from the domestic electric power sector also are small. &nbsp;&hellip; The impact on CO<sub>2</sub> emissions, however, increases over time, reflecting the change in generation capacity. &nbsp;</li> <li>The impact on CO<sub>2</sub> emissions of removing the PTC/ITC is larger in the High-Macroeconomic-Growth scenario: &nbsp;The increase in CO2 emissions over the period 2031-2035 is twice as large in the High-Macro-Growth scenario as in the Reference scenario, increasing CO<sub>2</sub> emissions from the power sector by 0.8 percent.</li> <li>The impacts of removing the PTC/ITC on electricity demand in the NEMS-NAS model appear paradoxical.&nbsp; This results from the intricacies of the treatment of end-use (household and other) generation.&nbsp;</li> <li>Compared to the Reference scenario, electricity prices increase by 0.2 cents per KWh or 1.8 percent by 2035 when tax credit are removed.&nbsp;</li> </ul> <h4>Interaction with State Renewable Energy Portfolio Standards</h4> <ul> <li>In other words the increase of CO<sub>2</sub> emissions, the result of removing the PTC/ITC tax credits, are about twice as large if RPS mandates are not in effect.</li> <li>The finding on the role of the RPS is important.&nbsp; It indicates that the regulatory mandates constrain production and emissions.&nbsp; As a result, the impacts of tax policies on emissions are reduced, in this case by half, when the regulatory mandates are considered.</li> <li>NEMS-NAS model results indicate a greater impact of removing the PTC/ITCs in the situation when there are no state RPS.&nbsp; For the No-RPS scenario, there is an increase of 0.5 percent in both cumulative and average annual emissions from the energy sector over the period 2010-2035.</li> </ul> <h4>Effect of Accelerated Depreciation on Greenhouse Gas Emissions</h4> <p>[The excerpts below are discussing accelerated depreciation in general, not merely the accelerated depreciation for renewable energy asset.]</p> <ul> <li>Accelerated depreciation is one of the largest tax expenditures in the federal income tax code (although, as indicated above, the cost of the preference is imprecisely estimated).</li> <li>The impact of removing accelerated depreciation on total emissions of GHGs is essentially zero in the case when revenues are recycled through lower tax rates.&nbsp; While national output is higher by about 0.38 percent, the emissions intensity of the economy declines by 0.49 percent.&nbsp; The net effect on GHG emissions of -0.17 percent is essentially zero and probably not within the resolution of the model.</li> <li>The impact of removing accelerated depreciation on overall GHG emissions is probably negative, but the amount depends upon the fate of the revenues. &nbsp;If the revenues are returned by lowering tax rates, then the overall impact on GHGs is essentially zero. &nbsp;In contrast, if they are returned through lump-sum rebates, then GHGs are probably lower because the lower emissions intensity is combined with lower economic growth, and overall emissions are calculated to fall by about 2 percent.</li> </ul> <h3>Critique of the Report&rsquo;s Methodology</h3> <p>As noted by the American Wind Energy Association&rsquo;s (AWEA) blog, the report uses a methodology containing an assumption that natural gas prices remain at historic 2011 lows and wind turbine prices from 2011 that are relatively high:</p> <p>[The] report attributes small pollution reductions to the PTC largely become of some quirky out-of-date assumptions that led the report&rsquo;s model to build a very small amount of additional wind under the PTC.</p> <p>[The] report relies on out-of-date 2011 assumptions from &hellip; which include extremely high capital cost for wind and low gas prices.&nbsp; So the model wrongly assumes that wind can&rsquo;t compete even with the PTC, which largely explains why the reports model builds only 15 gigawatts (GW) of wind between now and 2015.</p> <p>In reality, &hellip; the U.S. wind industry installed over 13 GW of wind last year alone.</p> <p>AWEA&rsquo;s full blog post is available <a href="http://www.aweablog.org/blog/post/wind-tax-credits-a-nocost-way-to-avoid-greenhouse-gas-emissions">here</a>.</p> <p>The report&rsquo;s use of the 2011 wind turbine prices is particularly galling when between 2008 and 2013 the levelized cost of energy from wind in the U.S. has fallen 50 percent as discussed in my blog post<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/awea-s-wall-street-conference-sound-bites-from-panelists.html"> here</a>.</p> <p>Further, natural gas prices in 2011 were at historic laws and have risen since then.&nbsp; For natural gas prices to stay at 2011 lows, there would have to be no voluntary or involuntary regulation of shale gas production methods, and the natural gas price must not increase as a result of exports.&nbsp; Regulation of the production of shale gas production continues to be discussed in multiple forums and natural gas export permits have been granted as described <a href="http://www.akingump.com/en/experience/industries/energy/speaking-energy/dominion-authorized-to-export-lng-to-non-fta-countries.html">here</a>.</p> <p>Finally, the International Monetary Fund (IMF) has determined that the U.S. provides hundreds of billions of dollars in post-tax subsidies to the fossil fuel industry by not making it bear the health and environmental costs of using fossil fuels. The IMF&rsquo;s report is available <a href="http://www.imf.org/external/np/pp/eng/2013/012813.pdf">here</a>. The report from the National Research Council and the collaborating science academies makes no effort to include those costs in its analysis of the cost of fossil fuels.</p> 6867 Mon, 28 Oct 2013 00:00:00 -0400 Cash Grant Sequester Percentage Reduced to 7.2% http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/cash-grant-sequester-percentage-reduced-to-7-2.html <p>Treasury has issued an updated message on sequestration on its 1603 Program website, which can be accessed <a href="http://www.treasury.gov/initiatives/recovery/Documents/Message%20on%20Sequestration%201603%20Program.pdf">here</a>. 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 <a href="http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/fy14_preview_and_joint_committee_reductions_reports_04102013.pdf">here</a>. The sequestration reduction rate will be applied unless and until the federal government enacts a law that cancels or otherwise impacts the sequester.</p><p>The updated sequester message does not contain a date as to when the message was published on-line, but it appears to have been issued on or about September 30.</p> 6820 Mon, 21 Oct 2013 00:00:00 -0400 Comparison of Energy Tax Credit Structuring Alternatives http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/comparison-of-energy-tax-credit-structuring-alternatives.html <p><a href="http://cdn.akingump.com/images/content/2/5/v2/25016/3-Structrued-Finance-Renewable-Energy-Structures-Compared-DKB-AW.pdf">Here</a> is a one page chart comparing structuring alternatives for transactions involving energy tax credits.&nbsp; The chart is intended to assist developers and financiers in understanding the trade-offs involved in each structure.&nbsp; For instance, the chart considers upfront proceeds, exit costs and the degree to which tax benefits are monetized.</p> 6800 Mon, 14 Oct 2013 00:00:00 -0400 New Energy Finance Paper Discusses Tax Equity http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-energy-finance-paper-discusses-tax-equity.html <p>America&rsquo;s Power Plan describes itself as a &ldquo;toolkit&rdquo; for policymakers.&nbsp; The information that constitutes the toolkit is available <a href="http://americaspowerplan.com">here</a>.&nbsp; Its energy finance paper was just published.&nbsp; The paper is available <a href="http://americaspowerplan.com/site/wp-content/uploads/2013/09/APP-FINANCE.pdf">here</a>.&nbsp; Below are key quotations about tax equity and tax policy.</p> <ul> <li>[T]oday&rsquo;s electricity markets do not adequately compensate investors for the value provided by two critical services in a high renewables future &ndash; avoided pollution and system-wide grid flexibility services.</li> <li>At present, compensation for pollution reduction benefits is primarily addressed by federal tax incentives (including production and investment tax credits) and indirectly through state renewable portfolio standards. The tax incentives also compensate investors for bearing risks associated with the scale-up and deployment of a new technology. They have played a critical role in enabling the scale-up of renewable technologies across the country. Along with global technology improvements and economies of scale, they have helped to drive steep cost reductions over the last few years, making wind and solar increasingly competitive. Many investors expect that with sustained policy to drive continued deployment and cost reductions, wind and solar generation will be cost competitive with traditional fossil fuel resources without federal support by the end of this decade.</li> <li>[I]ncreasing [economics] rewards [for renewable energy] through temporary tax incentives creates additional risk associated with uncertainty regarding the future of the policy, and leads to financing barriers associated with the relatively small market of investors who can use them.</li> <li>[F]inancing for renewable generation relies on tax equity &ndash; investors who have enough tax liability to make use of federal tax incentives. However, in part due to the lack of political certainty associated with temporary renewable tax incentives, only 20 tax equity investors actively finance renewable projects in the U.S. today. The transactions are generally bilateral agreements that do not have as much transparency on prices or conditions as larger public debt or equity markets. Further, IRS rules require five years of continuous ownership to &ldquo;vest&rdquo; the investment tax credit, which restricts the liquidity of these investments.</li> <li>The additional costs of bringing tax equity into a project consume some value of the tax incentives available to a project. The government can get a better &ldquo;bang for its buck&rdquo; by instead offering taxable cash or refundable incentives, as described by the Climate Policy Initiative and the Bipartisan Policy Center.</li> <li>To provide investors with more certainty &hellip;, these tax credits should be extended for a significant length of time, rather than being allowed to expire every few years.</li> <li>Though important to the success of renewable energy development, private equity is both expensive and relatively rare. Independent power producers would benefit from having better access to public markets as well. One way to do this would be by allowing renewables companies to organize as MLPs or REITs, both of which are currently off-limits to clean energy. These instruments are publicly traded and have a tax benefit, since MLPs don&rsquo;t pay corporate taxes and REIT dividends are tax-deductible.</li> </ul> <p>&nbsp;</p> 6725 Tue, 01 Oct 2013 00:00:00 -0400 AWEA’s Wall Street Conference – Sound Bites from Panelists http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/awea-s-wall-street-conference-sound-bites-from-panelists.html <p>AWEA recently held its annual Wall Street conference.&nbsp; Below are selected sound bites from panelists speaking on September 10<sup>th</sup> about finance, the state of market for wind in the United States, and the health of the tax equity market.&nbsp; 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.&nbsp; Further, edits were made in the interest of clarity.&nbsp; The sound bites are organized by topic, rather than appearing in the order in which they were said.&nbsp;</p> <h4><strong>Tax Equity Volume in 2013</strong></h4> <p>&ldquo;Eleven deals totaling $1.75 billion have been awarded.</p> <p>&ldquo;Four deals totaling $.4 billion are closing to being awarded.</p> <p>&ldquo;Seven more deals will be in the market before year end.&nbsp;</p> <p>&ldquo;This year there will be more deals than in either of the prior two years.&nbsp; There could be $4 billion of tax closed in 2013.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan<strong><em></em></strong></p><h4><strong>Rates of Return and the Depth of the Tax Equity Market</strong></h4> <p>&ldquo;Tax equity after-tax internal rate of returns are 8 to 9%.&rdquo;</p> <p>Tristan Grimbert, CEO of EDF Renewables</p> <p>&ldquo;The pricing of tax equity is not based on risk.&nbsp; Tax equity investors are getting as much as they can given the shallow market.&rdquo;</p> <p>Mart&iacute;n M&uacute;gica, President &amp; CEO of Iberdrola Renewables, LLC</p> <p>&ldquo;There are 18 tax equity investors that have either invested or committed to invest.&nbsp; We&rsquo;re talking with six new investors.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan</p> <p>&ldquo;The short term extension of the PTC keeps investors out of the tax equity industry because it takes a lot of work to invest in tax equity and institutions don&rsquo;t want to bother for just a year or two.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan</p> <p>&ldquo;Everything is coming to market at once.&nbsp; There are not enough due diligence experts and engineers to handle it all.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan</p> <h4><strong>Deal Structuring</strong></h4> <p>&ldquo;Tax equity is three times as expensive as debt but taking similar risks as debt, so we value tax equity structures that enable you to fill out the rest of the capital stack with as much debt as possible&rdquo;</p> <p>Pete Keel, Vice President, Strategic &amp; Financial Planning, First Wind</p> <p>&ldquo;Historically, ninety percent of PTC deals were unlevered.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan</p> <p>&ldquo;It is easier to close an electricity pricing hedge than a power purchase agreement (PPA) with a utility, because the hedge is not subject to a request for proposal (RFP) process.&nbsp; Also, a hedge only locks in the price of 70 to 75% of capacity which gives the project upside for the remaining portion.&rdquo;</p> <p>Borja Negro, CEO of Gamesa North America</p> <p>&ldquo;In a hedge deal, use P95 production assumptions and plan for the tax equity investor to &lsquo;flip&rdquo; in ten or eleven years.&nbsp; Work backwards to determine the size of the tax equity investment.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan</p> <p>&ldquo;The hedge market is just temporary because of the constraints of the PTC extension to start construction in 2013.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan</p> <p>&ldquo;Hedge deals are viewed as riskier than PPA deals by a big part of the tax equity market, but JP Morgan will do them.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan<strong><em> </em></strong></p> <h4><strong>Forecasts for Growth of Wind in the United States</strong></h4> <p>&ldquo;The PTC &ldquo;start of construction&rdquo; rules are a tremendous for the industry.&nbsp; They are equivalent to a three-year window for projects &ndash; 2013, 2014 and 2015.&rdquo;</p> <p>Tristan Grimbert, CEO of EDF Renewables</p> <p>&ldquo;The IRS will be suspicious of 2016 projects.&rdquo;</p> <p>John Eber, Managing Director Energy Investments, J.P. Morgan</p> <p>&ldquo;This year will be bad in terms of the gigawatts of new wind projects constructed in the United States, but next year will be a boom.&rdquo;</p> <p>Tristan Grimbert, CEO of EDF Renewables</p> <p>&nbsp;&ldquo;There will be six to eight gigawatts of wind constructed in the United States in 2014.&nbsp; 2015 will be slightly less.&rdquo;</p> <p>Gabriel Alonso, CEO of EDP Renewables North America</p> <p>&nbsp;&ldquo;There will be years in which only two gigawatts of wind are added and years in which ten gigawatts of wind are added.&rdquo;</p> <p>Borja Negro, CEO of Gamesa North America</p> <h4><strong>Improvements in Efficiency</strong></h4> <p>&ldquo;Gamesa turbines are the same price as eight years ago but produce 30 percent more power.&rdquo;</p> <p>Borja Negro, CEO of Gamesa North America</p> <h4><strong>Energy Policy Options</strong></h4> <p>&nbsp;&ldquo;The best choices to bring down the cost of capital for wind projects are in the first instance a national RPS or carbon tax and second making PTCs transferable or refundable.&rdquo;</p> <p>Tristan Grimbert, CEO of EDF Renewables</p> <p>&ldquo;The largest long-term benefit of state renewable portfolio standards (RPS) is that projects receive long-term contracts.&nbsp; The Illinois RPS is not effective because it does not do that.&rdquo;</p> <p>Gabriel Alonso, CEO of EDP Renewables North America</p> 6696 Tue, 24 Sep 2013 00:00:00 -0400 “SolarCity” Cash Grant Case Survives DOJ’s Motion to Dismiss http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-cash-grant-case-survives-doj-s-motion-to-dismiss.html <p>Today, Judge Bruggnick of the Court of Federal Claims denied the Department of Justice&rsquo;s (DOJ) motion to dismiss the complaint filed by two special purpose entities affiliated with SolarCity regarding the Treasury&rsquo;s calculation of the 1603 cash grant awards for solar projects. &nbsp;The judge&rsquo;s order is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-fires-back-in-solarcity-cash-grant-litigation-motion-to.html">here</a>. Unfortunately, the order is quite short and does not contain any legal discussion but rather references reasons stated during oral argument.&nbsp;</p> <p>Although, surviving a motion to dismiss is a far cry from winning the case, the judge&rsquo;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.</p> <p>The judge gave DOJ until October 21 to prepare answer to the complaint. Prior blog posts about this case are available [<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-fires-back-in-solarcity-cash-grant-litigation-motion-to.html">Aug. 14 post</a>], [<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/brief-in-solarcity-cash-grant-litigation-provides-insight-into.html">July 9 post</a>], [<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-moves-to-dismiss-solarcity-s-cash-grant-case-1.html">June 2 post</a>] and [<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-sues-the-united-states-over-treasury-s-administration.html">May 21 post</a>].</p> 6690 Fri, 20 Sep 2013 00:00:00 -0400 Treasury may be Planning to Issue More PTC “Start of Construction” Guidance http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/treasury-may-be-planning-to-issue-more-ptc-start-of-construction.html <p>Today, at the American Wind Energy Association&rsquo;s Finance &amp; 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 <em>start construction</em> in 2013 and then pursue <em>continual</em> 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.&nbsp; 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.&nbsp;</p> <p>Another Treasury official on June 17 had written Congress that Treasury &ldquo;believe[d] that Notice 2013-29 provides the desired degree of certain in the marketplace and allows renewable energy project to move forward.&rdquo; A blog post discussing this Treasury letter is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/treasury-tells-congress-ptc-guidance-provides-the-desired-degree.html">here</a>, and client alerts discussing Notice 2013-29 are available <a href="http://www.akingump.com/en/news-publications/ptc-start-of-construction-guidance-worth-the-wait.html">here</a> and <a href="http://www.akingump.com/en/news-publications/irs-clarifies-begun-construction-guidance-for-production-tax.html">here</a>.&nbsp; Treasury appears to be having second thoughts as to whether &ldquo;desired degree of certainty&rdquo; was in fact provided by Notice 2013-29.</p><p>The issues that may be addressed in the additional guidance relate primarily to two areas.&nbsp; First, more specificity around what it means to use <em>continuous</em> <em>efforts</em> to compete a project. Second, what happens to a project&rsquo;s 2013 <em>start of construction</em> status when it is transferred whether to a strategic investor in an asset sale, a &ldquo;flip&rdquo; partnership in a tax equity transaction or to a lessor in a sale-leaseback.</p> <p>It was suggested that any &ldquo;transfer&rdquo; guidance may be similar to the relatively accommodating rules in FAQs 23 and 24 in the Treasury&rsquo;s cash grant <em>start of construction</em> guidance. Those FAQs generally permit transfers, so long as the original developer (1) transfers meaningful development rights along with the safe-harbored assets, (2) retains more than a 20 percent equity interest in the project or (3) the transfer is a sale-leaseback within no later than 90-days after the <em>placed in service</em> date of the project. A client alert discussing the cash grant FAQs is available <a href="http://www.akingump.com/en/news-publications/treasury-releases-guidance-on-the-sale-of-5-safe-harbor-qualified-projects.html">here</a>.</p> <p>With respect to the meaning of <em>continuous efforts</em>, it was suggested that the government is considering an additional safe harbor whereby if a project starts construction in 2013 and is completed by a stipulated date that it will be deemed to have met the applicable <em>continual work </em>requirement.&nbsp; It is possible that the later the <em>placed in service</em> date is then the greater the qualified expenses that must have been incurred in 2013 will be. Such certainty would mean that as long as <em>placed in service</em> was achieved by the stipulated date and the required level of expenses were incurred in 2013 developers and their investors would not have to wrestle with questions like how many days a pause in construction is permissible.&nbsp; However, the government is reported to have considered such a rule when it was drafting Notice 2013-29 and did not adopt it, so it is possible that such an approach will be declined in this iteration as well.</p> <p>If developers truly want certainty, Mr. Kelley suggested that he understood the IRS would entertain requests for private letter rulings regarding more detailed and nuanced fact patterns. A private letter ruling can take a number of months to obtain and the filing and legal fees can be substantial.&nbsp; Nonetheless for a large project with a completion date well in the future, a private letter ruling may be worth the investment to obtain certainty and attract the most advantageous terms and conditions from tax equity investors.</p> 6649 Tue, 10 Sep 2013 00:00:00 -0400 Letter Correcting the Renewables Industry’s Position on MLP Legislative Tradeoffs http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/letter-correcting-the-renewables-industry-s-position-on-mlp.html <p>Here is a&nbsp;<a class="rubycontent-asset rubycontent-asset-24591" href="https://ruby.akingump.com/images/content/2/4/24591.pdf">link</a> 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 &ldquo;qualified&rdquo; income for purposes of the master limited partnership rules to include income from renewable energy projects.&nbsp;</p> <p>If a publicly traded partnership (known as &ldquo;master limited partnership&rdquo; (MLP)) has at least 90 percent of its income from &ldquo;qualified&rdquo; sources, then it is eligible to avoid the corporate level income tax typically imposed on U.S. publicly traded entities.&nbsp; I.R.C. &sect; 7704.&nbsp; Bills have been introduced in Congress to amend the definition of &ldquo;qualified&rdquo; income to include income from renewable energy projects.&nbsp; The proposed legislation is discussed in blog posts of [Aug. 1], [Apr. 9] and [Mar. 12].&nbsp; 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.</p> <p>The letter also corrects misstatements in the article about the tax and the GAAP treatment of leasing transactions.</p> 6634 Mon, 09 Sep 2013 00:00:00 -0400 SEIA Publishes White Paper on Fair Market Value for Income Tax Purposes http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/seia-publishes-white-paper-on-fair-market-value-for-income-tax.html <p>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 <a href="http://www.seia.org/research-resources/valuation-solar-generation-assets?utm_source=informz&amp;utm_medium=email&amp;utm_campaign=email">here</a>.&nbsp;</p> <p>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.&nbsp; Further, the tax principles described in the white paper are broadly applicable to tax planning generally, even outside of the renewables area.</p> <p>The white paper was prepared by SEIA&rsquo;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.</p><p>Currently, many solar developers and investors are in disputes with the U.S. Treasury regarding the fair market value of projects that have applied for the cash grant.&nbsp; Special purpose entities affiliated with SolarCity have elevated one set of these disputes to the Court of Federal Claims.&nbsp; This case is discussed in posts below and available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-moves-to-dismiss-solarcity-s-cash-grant-case-1.html">here</a>, <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-fires-back-in-solarcity-cash-grant-litigation-motion-to.html">here</a> and <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-sues-the-united-states-over-treasury-s-administration.html">here</a>. Unless, the Department of Justice prevails in its motion to dismiss the case, which I think is unlikely, the case will give the industry an opportunity to see how the Court of Federal Claims applies the fair market value and tax basis principles discussed in SEIA&rsquo;s white paper to actual solar projects.</p> 6617 Wed, 04 Sep 2013 00:00:00 -0400 Project Perspectives Summer 2013 Edition http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/project-perspectives-summer-2013-edition.html <p>Akin Gump is pleased to announce our summer 2013 edition of the Project Perspectives Newsletter. Please click <a href="http://cdn.akingump.com/images/content/2/4/v2/24491/Project-Perspectives-Newsletter-2013-Summer.pdf">here</a> to read Project Perspectives.</p><p>Project Perspectives Summer 2013 Contents</p> <p>Tax Indemnity Considerations for Developers Entering into Investment Tax Credit Transaction...............................................2</p> <p>FERC&rsquo;s Office of Enforcement Takes Aim at the Financial Industry......................................................................................5</p> <p>Minding the Gap: Managing Interface Risks Under Turbine Supply and Balance of Plant Agreements...................................8</p> <p>Flip Partnership Tax Credit Structure Demystified...........................................................................................................12</p> <p>Will Latin America and the Caribbean Save Renewable Energy or Will Renewable Energy Save Latin America and the Caribbean?..............15</p> <p>Update on Electricity Production Capacity in Iraq.........................................................................................................18</p> <p>State Tax Update: A Summary of Recent State Renewable Energy Tax Law Developments..................................................20</p> <p>Climate Check: A Roundup of Noteworthy U.S. Wind and Solar Transactions From Q2 2013............................................22</p> 6604 Fri, 30 Aug 2013 00:00:00 -0400 California and Arizona House Republicans Join the “Start of Construction” ITC Effort http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/california-and-arizona-house-republicans-join-the-start-of.html <p>On August 2, Rep. Cook (R-CA) and Rep. Salmon (R-AZ) introduced H.R. 3017 that is entitled the &ldquo;Renewable Energy Construction and Investment Parity Act&rdquo;. The bill is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24496/Renewable-Energy-Parity-Act-Rep-Cook-HR-3017-8-2-13.pdf">here</a>. Section 2 of the bill is identical to section 2 of Rep. Thompson&rsquo;s (D-CA) H.R. 2502 (&ldquo;Renewable Energy Parity Act of 2013&rdquo;). My prior blog post analyzing H.R. 2502 is available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/introduction-of-renewable-energy-parity-act-of-2013-extending-30.html">here</a> and contains a link to H.R. 2502.&nbsp;</p> <p>In summary, the bills would change the sunset language for the 30 percent investment tax credit (ITC) from <em>placed in service</em> by the applicable deadline to <em>start of construction</em> by the applicable deadline. This change would enable more ITC-eligible renewable energy projects to be built and is a legislative priority of the Solar Energy Industry Association.</p><p>The Republican version (H.R. 3017) varies from the Democratic version (H.R. 2502) in that the Republican version also requires proceeds from sales from the Federal helium reserve to be applied first to the annual &ldquo;Federal budget deficit&rdquo; and then to &ldquo;Federal debt.&rdquo;&nbsp;</p> <p>The existence of a Federal helium reserve was news to me. Rather than ensuring sufficiently buoyant balloons and high pitched voices at birthday parties, the helium reserve is used for defense, medical and research purposes. According to the Bureau of Land Management&rsquo;s (BLM) webpage, there was a shortage of helium in 2012 that was connected to lower natural gas production due to lower natural gas prices.<sup><a name="ftnref1" href="#ftn1">1</a></sup> According to the BLM, there are twelve companies that supply helium to the government&rsquo;s reserve; none of them are major oil and gas companies.&nbsp; Click <a href="http://www.blm.gov/nm/st/en/prog/energy/helium/federal_helium_program.html">here</a> for a link to the BLM webpage that addresses the helium reserve.&nbsp;</p> <p>It is a good sign for the ITC <em>start of construction</em> initiative that it now has bi-partisan support in the House. However, given the looming debt ceiling showdown, tax reform debates and the current general dysfunction of the Federal legislative process, adoption is still a long shot. As the 30 percent ITC does not sunset until the end of 2016, from my perspective an extension of the production tax credit (most often used by wind projects) is a higher priority for the renewable energy industry as a whole. Nonetheless, I believe the s<em>tart of construction</em> ITC proposal to be good policy.</p> <div><br /><hr size="1" /> <div> <p><sup><a name="ftn1" href="#ftnref1">1</a></sup> The webpage is silent as to whether the shortage has continued into 2013.&nbsp; Possibly the budget cuts due to sequestration have precluded the BLM from updating its webpage regarding the helium reserve.</p> </div> </div> 6454 Wed, 28 Aug 2013 00:00:00 -0400 New York Supports Solar with Expanded Net Metering & Sales Tax Exemptions http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-supports-solar-with-expanded-net-metering-sales-tax.html <p>In July, the New York Public Service Commission increased the solar net metering limits for businesses and residences.</p> <p>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 <a href="http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=NY05R&amp;re=0&amp;ee=0">here</a> 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.</p><p>The Public Service Commission hopes these changes result in 120 megawatts of solar capacity being added in New York in 2013. Click <a href="http://www.lohud.com/apps/pbcs.dll/article?AID=2013308080076&amp;nclick_check=1">here</a> for a short article in <em>The Journal News </em>highlighting the effects of the net metering changes.</p> <p>In further support for renewables in New York, the Westchester County Board of Legislators unanimously approved a bill that would exempt the sale and installation of commercial solar systems from sales tax. The County Executive, Rob Astornio, is expected to sign the bill.&nbsp; Westchester County already exempts residential solar system from sales tax. Click <a href="http://www.lohud.com/apps/pbcs.dll/article?AID=2013308120049">here</a> for an article discussing the legislation.</p> <p>New York State has also expanded its tax incentives for solar. The New York State incentives are discussed in the blog posting <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-state-senate-votes-to-extend-ny-sun-initiative.html">here</a> and in our client alerts <a href="http://www.akingump.com/en/news-publications/new-york-provides-homeowners-solar-power-tax-credit.html">here</a> and <a href="http://www.akingump.com/en/news-publications/new-york-governor-announces-107-million-available-for-large-solar-power-installations.html">here</a>.</p> 6436 Fri, 23 Aug 2013 00:00:00 -0400 Senators’ Letter Defends Renewables in Tax Reform http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/senators-letter-defend-renewables-in-tax-reform.html <p>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 <a href="http://cdn.akingump.com/images/content/2/4/v2/24421/Senators-Letter-on-Renewables-in-Tax-Reform-7-26-13.pdf">here</a>.</p> <p>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 <em>placed in service</em> date to the <em>start of construction</em> date.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp; 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 &ldquo;long-term&rdquo; but nonetheless have a sunset date?</p><p>The letter advocates for continuing both the production and the investment tax credits because different technologies are better suited for one or the other. For instance, wind is less expensive and more efficient than solar, so it is typically better served by the production tax credit that pays 2.3 cents per kilowatt hour of production;<sup><a name="_ftnref2" href="#_ftn2">2</a></sup> while solar is better served by the investment tax credit that is based on the tax basis (or in some instances, the fair market value)<sup><a name="_ftnref3" href="#_ftn3">3</a></sup> of the solar project.</p> <p>The letter&rsquo;s discussion&nbsp;of expanding access to low cost of capital also appears to advocate for expanding the master limited partnership (MLP) rules<sup><a name="_ftnref4" href="#_ftn4">4</a></sup> to apply to renewables, but the letter does not refer MLPs directly.</p> <p>In addition, the letter&rsquo;s reference to &ldquo;creating policies that attract more investors to the tax equity market&rdquo; hints at support for relaxing the passive activity loss rules.<sup><a name="_ftnref5" href="#_ftn5">5</a></sup> Those rules generally preclude the participation of individuals in the clean energy tax credit market, but the letter does not refer to those rules directly.</p> <p>Here are some key excerpts from the letter:</p> <ul> <li>&ldquo;Tax credits like the production tax credit that only last a year or two and then lapse, only to return again with no apparent predictability, are not effective for projects that can take five years to plan.&rdquo;</li> <li>&ldquo;[A]ll clean energy tax credits should use a consistent eligibility standard based on the beginning of construction, rather than the time that this project is placed into service.&nbsp; This &hellip; greatly enhances the predictability and certainty of the credit&rdquo;.</li> <li>&ldquo;[I]t will be important to also continue different types of tax incentive structures to accommodate unique needs across different technologies and project types.&rdquo;</li> <li>&ldquo;[H]ighly capital intensive projects such as solar and offshore wind prefer an investment tax credit in order to deploy, whereas on shore wind &hellip; deploy[s] more effectively with a production tax credit.&rdquo;</li> <li>&ldquo;[T]he PTC and ITC would be significantly more effective tax credits if they could be monetized more easily, either through payments in lieu of tax credits, or by creating policies that attract more investors to the tax equity market.&rdquo;</li> </ul> <p>The letter also includes some noteworthy statistics about global economic activity in renewables: &ldquo;while global energy investment fell by 11% last year, China advanced to become the world leader in clean energy investment, attracting $65.1 billion in investment.&nbsp; In the United States, clean energy investment declined by 37%, to $35.6 billion.&rdquo;</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> <em>See </em>blog post of <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/introduction-of-renewable-energy-parity-act-of-2013-extending-30.html">August 12</a> that discusses a bill that would make this change.</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> <em>See</em> blog post of <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-inflation-adjustment-increases-ptc-to-2-3-cents-per-kwh.html">April 2</a> that discusses the increase in the production tax credit for wind to 2.3 cents per kilowatt hour.</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup> Internal Revenue Code Section 50(d)(5) (referencing old Code Section 48(d)) that provides for an election to pass-through the investment tax credit to a lessee that calculates its investment tax credit based on the fair market value of the property, without regard to the lessor&rsquo;s tax basis in it or the lessee&rsquo;s rent payments for it.</p> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup> <em>See</em> blog posts of <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/a-camel-s-nose-under-the-tent-mlp-legislation.html">March 12</a> and <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/senate-hearing-on-extending-the-mlp-rules-to-renewables.html">August 1</a> that discuss legislation to expand the MLP rules to include renewables.</p> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup> <em>See </em>[Project Perspectives &ldquo;Hunting Unicorns&rdquo; <a href="http://cdn.akingump.com/images/content/2/4/v2/24406/Project-Perspective-Newsletter.pdf-Summer-2012.pdf">article</a>] that discusses the application of the passive activity loss rules to individuals that want to make tax-advantaged investments in renewable energy projects.</p> 6421 Tue, 20 Aug 2013 00:00:00 -0400 DOJ Fires Back in SolarCity Cash Grant Litigation Motion to Dismiss Battle http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-fires-back-in-solarcity-cash-grant-litigation-motion-to.html <p>On August 12, the Department of Justice filed a brief in response to the plaintiffs&rsquo; opposition to DOJ&rsquo;s motion to dismiss. A copy of the brief is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24326/DOJ-Brief-SolarCity-Litigation-8-13-13.pdf">here</a>. 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 <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-sues-the-united-states-over-treasury-s-administration.html">May 21</a>, <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-moves-to-dismiss-solarcity-s-cash-grant-case-1.html">June 2</a> and <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/brief-in-solarcity-cash-grant-litigation-provides-insight-into.html">July 9</a>.</p><p>Below are excerpts of particular note from DOJ&rsquo;s brief:</p> <ul> <li>[T]he majority of the complaint&rsquo;s allegations are irrelevant to any claim for payment under Section 1603, and do not mention plaintiffs or any alleged harm.</li> <li>Plaintiffs&rsquo; arguments in their opposition to our motion are . . . an attempt to rewrite the complaint.</li> <li>Plaintiffs claim that their allegations challenging Treasury&rsquo;s method for calculating payments under Section 1603 are &ldquo;entirely appropriate to lay the predicate for claims of monetary relief,&rdquo; that such allegations are &ldquo;routine in Tucker Act challenges, and in any event have no bearing on subject matter jurisdiction.&rdquo; The Court should reject each of these arguments because they do not change the fact that complaint seeks review of the administration of a federal program.</li> <li>[T]he opposition attempts to reframe plaintiffs&rsquo; allegations in multiple instances to state that they merely challenge the manner in which Treasury analyzed the claimed basis in their 1603 applications.</li> <li>The complaint, however, challenges Treasury&rsquo;s very authority to perform any independent evaluation of basis prior to administering a Section 1603 payment.</li> <li>As we showed in our motion, the complaint contains numerous allegations seeking review of Treasury&rsquo;s administration of the Section 1603 program.</li> <li>The complaint alleges that Treasury&rsquo;s administration of the program violated Treasury&rsquo;s statutory mandate and exceeded Treasury&rsquo;s statutory authority.</li> <li>Only a few isolated allegations in the complaint directly address plaintiffs&rsquo; request for increased payment under Section 1603.</li> <li>The Court should reject plaintiffs&rsquo; attempt to use their opposition to a motion to dismiss as a way to reframe their complaint as only seeking payment under Section 1603, ignoring extensive allegations demonstrating otherwise.</li> <li>Plaintiffs contend that their complaint &ldquo;only sought monetary damages . . . and the award of a money judgment equal to the difference between the grant Plaintiffs were paid and the grant to which they were entitled under Section 1603.&rdquo; Plaintiffs, however, describe and seek this relief in seven paragraphs in the complaint. They fail to explain why 25 paragraphs in the complaint are dedicated to Treasury&rsquo;s alleged actions and conduct having nothing to do with demonstrating their entitlement to damages.</li> <li>If, however, the Court concludes that plaintiffs have established jurisdiction by alleging a claim under Section 1603, the Court should strike those paragraphs in the complaint that Sequoia and Eiger admit are unnecessary to a claim for damages.</li> <li>The Court should conclude that the complaint&rsquo;s paragraphs challenging Treasury&rsquo;s conduct are not consistent with a monetary claim.</li> <li>[A]ccording to plaintiffs&rsquo; complaint, one need only look at statutes to determine how much additional money is owed.&nbsp; Thus, plaintiffs&rsquo; handwringing over Treasury&rsquo;s conduct is rendered unnecessary by plaintiffs&rsquo; own allegations.</li> <li>Plaintiffs acknowledge that &ldquo;the Complaint certainly details the ways in which the Government&rsquo;s calculation of the amounts owed did not comport with statutory requirements,&rdquo; but assert that these allegations are harmless. Indeed, plaintiffs insist that &ldquo;such allegations are routine in Tucker Act challenges&rdquo; and &ldquo;have no bearing on subject matter jurisdiction.&rdquo;</li> <li>[I]f plaintiffs&rsquo; admittedly overbroad complaint is permitted to stand, the United States would be required to answer dozens of allegations far removed from any money mandating claim. These preservation and response obligations would be costly, burdensome, and, most importantly, unnecessary for resolving any claim within the Court&rsquo;s jurisdiction.</li> <li>The complaint clearly alleges injuries to nonparty SolarCity Corporation, and the Court may not entertain claims on behalf of nonparties.</li> </ul> <p>Mark your calendars; Judge Bruggink has scheduled an oral argument with respect to the motion to dismiss for September 17, 2013. The over/under is that the case survives DOJ&rsquo;s motion to dismiss, but the judge takes a scalpel to the plaintiffs&rsquo; complaint.</p> 6397 Wed, 14 Aug 2013 00:00:00 -0400 Introduction of Renewable Energy Parity Act of 2013 Extending 30 Percent ITC to Solar Projects Beginning Construction http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/introduction-of-renewable-energy-parity-act-of-2013-extending-30.html <p>Mike Thompson (D-CA) introduced the Renewable Energy Parity Act of 2013 in the House of Representatives on June 25. The bill is co-sponsored by 18 other Democratic House members. The text of the bill, H.R. 2502, is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24286/Renewable-Energy-Parity-Act-HR-2502-Text-6-25-13-Start-of-Constr.pdf">here</a>.</p><p>The bill&rsquo;s title, Renewable Energy Parity Act, may appear to the uninitiated to refer to <em>parity</em> between renewables and fossil fuels.<sup><a name="ftnref1" href="#ftn1">1</a></sup> However, the reference to &ldquo;parity&rdquo; refers to providing the solar 30 percent investment tax credit (ITC) with a <em>comparable</em> effective date standard as was enacted earlier this year for the wind production tax credit (PTC).<sup><a name="ftnref2" href="#ftn2">2</a></sup> The desired standard is <em>beginning of construction</em>, rather than <em>placed in service.</em></p> <p>As the solar ITC has far more favorable treatment in the Internal Revenue Code than the wind PTC, it is surprising for the title of a bill benefiting solar to use the term &ldquo;parity&rdquo; in an unstated reference to wind. Specifically, the wind PTC, absent an extension, only applies to projects that <em>begin construction</em> this <em>year</em>.&nbsp; In contrast, under current law the 30 percent solar ITC applies to projects <em>placed in service</em> by the end of <em>2016.&nbsp; </em>Further, after that a 10 percent ITC applies to any solar project regardless of its <em>placed in service</em> date. Also, wind projects that use leasing structures are ineligible for the PTC, while the ITC rules encourage leasing.&nbsp; Finally, the ITC is completely exempted from the alternative minimum tax (AMT) preference, while PTCs only avoid AMT&rsquo;s painful clutch for the first four years of a project&rsquo;s operation. Thus, Rep. Thompson would have needed to draft several additional pages to meet the aspiration of his bill&rsquo;s title of creating tax &ldquo;parity&rdquo; between renewable energy technologies.</p> <p>The title aside, H.R. 2502 makes good policy sense. First, if enacted, it will result in more solar projects being built.<sup><a name="ftnref3" href="#ftn3">3</a></sup> This is good for the environment and generates jobs in America for installers, servicers and sales people. Second, projects often run into snags with permits, transmission or interconnection arrangements or weather that unexpectedly delay their completion. Such projects should not be denied a 30 percent ITC merely because such an event precluded their completion by the end of 2016.</p> <p>So I support and hope the Renewable Energy Parity Act of 2013 is enacted, but if I was given only one legislative wish it would be for the availability of PTCs for wind projects that <em>begin construction</em> in 2014 or later.</p> <div><br /><hr size="1" /> <div> <p><sup><a name="ftn1" href="#ftnref1">1</a></sup> <em>See, e.g., </em>Sen. Coons&rsquo;s (D-DE) Master Limited Partnerships Parity Act that would extend the benefit of a single layer of taxation regime that is available to fossil fuel investments to renewable energy investments.&nbsp; That bill is discussed in our blog posts available here <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/senate-hearing-on-extending-the-mlp-rules-to-renewables.html">[Aug. 1 blog post]</a> and<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/a-camel-s-nose-under-the-tent-mlp-legislation.html"> [Mar. 12 blog post].</a></p> </div> <div> <p><sup><a name="ftn2" href="#ftnref2">2</a></sup> In Notice 2013-29, the IRS published rules as to what it means to &ldquo;begin construction&rdquo; in 2013.&nbsp; The notice provides planning opportunities but also creates foot fault risk.&nbsp; Our client alerts discussing the notice are available here <a href="http://www.akingump.com/en/news-publications/ptc-start-of-construction-guidance-worth-the-wait.html">[April 16 client alert]</a> and <a href="http://www.akingump.com/en/news-publications/irs-clarifies-begun-construction-guidance-for-production-tax.html">[April 26 client alert].</a></p> </div> <div> <p><sup><a name="ftn3" href="#ftnref3">3</a></sup> The bill also applies to fuel cell, microturbine, combined heat and power and small wind projects and projects that generate thermal energy from heat from the ground or ground water.</p> </div> </div> 6386 Mon, 12 Aug 2013 00:00:00 -0400 Senator Grassley Proposes Repeal of Fossil Fuel Tax Incentives if any Renewables Tax Incentives Expire http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/senator-grassley-proposes-repeal-of-fossil-fuel-tax-incentives.html <p>The tax press is reporting comments made by Senator Grassley (R-IA) at a Department of Energy forum on biomass.&nbsp; Senator Grassley is reported to have said: &ldquo;Congress should &lsquo;do away with the incentives for oil&rsquo; tax breaks if tax breaks for alternative energy are repealed or allowed to expire.&rdquo; The report goes on to provide: &ldquo;Grassley &hellip; declined to specify which incentives he was referring to, simply saying &lsquo;any of them.&rsquo;&rdquo;<sup><a href="#ftn1">1</a></sup></p> <p>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.</p><p>The scenario posited in the senator&rsquo;s comments is comparable to a parent having two children years apart in age. For the older child, the parent pays for college, graduate school, a wedding, provides a down payment on a house, gives them a car and helps them start a business. Once all of that is complete, the younger child is just finishing high school. Then the parent says I need to start saving for my retirement, so I am no longer providing either of you with financial support.&nbsp; The financial support may have been terminated in the same year, but the younger child is in a far different position than the older child.</p> <div><hr size="1" /> <div> <p><sup><a name="ftn1" href="#ftnref1">1</a></sup> Natter, Ari.&nbsp; <em>Grassley Calls for Ending Oil Incentives if Alternative Energy Tax Breaks are Removed</em>, 148 Daily Tax Report G-9 (Aug. 1, 2013).</p> </div> </div> 6375 Thu, 08 Aug 2013 00:00:00 -0400 Twelve Best States for Solar http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/twelve-best-states-for-solar-and-voting-patterns.html <p>The Environment America Research &amp; 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 <a href="http://www.environmentamericacenter.org/news/amc/new-report-ranks-top-12-states-leading-us-solar-power.">here</a>. 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:</p><p>1. Arizona<br />2. Nevada<br />3. Hawaii<br />4. New Jersey<br />5. New Mexico<br />6. California<br />7. Delaware<br />8. Colorado<br />9. Vermont<br />10. Massachusetts<br />11. North Carolina<br />12. Maryland</p> <p>As the center notes, these states constitute only twenty-eight percent of the nation&rsquo;s population but eighty-five percent of installed solar.&nbsp;</p> <p>The experience of these states can provide lessons to other states in terms of what is required to be a leader in solar. The center has three observations that are particularly noteworthy.&nbsp; First eleven of the twelve have adopted net metering. Second, eleven of the twelve also have imposed a renewable energy standard on their utilities. Third, ten of twelve have enacted policies that simplify the process for a residential or distributed generation solar project to connect to the grid.</p> <p>New York is not on the list, but Governor Andrew Cuomo with the NY-Sun Initiative inspires to have New York be competitive with the states above in terms of policies that support solar. For more on the NY-Sun Initiative, click <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-state-senate-votes-to-extend-ny-sun-initiative.html">here</a>.</p> <p>The report concludes with policy recommendations that include the continuation of the federal investment tax credit for solar projects. In my view, the federal investment tax credit (and the associated and now lapsed Treasury Cash Grant program) has been the most significant factor in promoting solar power in the United States.</p> 6371 Wed, 07 Aug 2013 00:00:00 -0400 Senate Hearing on Extending the MLP Rules to Renewables http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/senate-hearing-on-extending-the-mlp-rules-to-renewables.html <p>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 &ldquo;corporate&rdquo; layer of income tax. These rules and the proposed legislation are discussed in the post below. Click <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/a-camel-s-nose-under-the-tent-mlp-legislation.html">here</a> to see a link to our March 12, 2013, blog post.</p> <p>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.</p><p>Senator Coons is reported to have said that the bill &ldquo;has the potential to bring a significant wave of private capital off the sidelines&rdquo;. <sup><a name="ftnref1" href="#ftn1">1</a></sup> His written testimony provides the following: &ldquo;In summary, access to low-cost financing will define our nation&rsquo;s energy future. It will determine how, when, and which energy sources emerge as the central players in the American energy marketplace in the long term.&rdquo;<sup><a name="ftnref2" href="#ftn2">2</a></sup></p> <p>Senator Moran is reported to have noted that the oil and gas industry raised more than $23 billion in equity in 2012 using MLPs.<sup><a name="ftnref3" href="#ftn3">3</a></sup> His written testimony provides the following: &ldquo;It is important to note that the MLP does not represent a &lsquo;tax break&rsquo;&hellip; . Rather, it is a tax simplification structure that concentrates tax at the investor level, avoids double taxation, and significantly broadens the potential investment base.&rdquo;<sup><a name="ftnref4" href="#ftn4">4</a></sup> The spirit of this testimony is admirable, but how does the senator define &ldquo;tax break&rdquo; if it does not include avoiding the corporate layer of income tax? Or is a &ldquo;tax break&rdquo; only a reduction in taxes advocated by one&rsquo;s opponents?&nbsp;</p> <p>Here are some highlights from Senator Stabenow&rsquo;s written opening remarks:</p> <ul> <li>&ldquo;We need a &lsquo;do it all&rsquo; approach when it comes to energy production &hellip; But we can&rsquo;t have a true &lsquo;do it all&rsquo; approach if we support one technology with 100-year-old tax credits<sup><a name="ftnref5" href="#ftn5">5</a></sup> while ignoring emerging clean energy technologies.&rdquo;</li> <li>&ldquo;China is spending over $178 million per day on clean energy technologies.&rdquo;</li> <li>&ldquo;There are 8,000 parts in a wind turbine, &hellip; and we can make every one of them here.&nbsp; During 2012, wind energy became the number one source of new U.S. electricity generating capacity, providing 42% of all new generating capacity and supporting 75,000 jobs nationwide. The solar industry employs 119,000 people - up 13% from 2011 -representing one of the fastest growth rates for any industry.&nbsp; Solar prices have declined by 60 percent since 2011.&rdquo;</li> <li>&ldquo;We must engage in the global race to lead the world in these new technologies, or risk falling further behind other countries.&nbsp; We need to seize the opportunity before it is too late.&nbsp; And tax reform is that opportunity.&rdquo;<sup><a name="ftnref6" href="#ftn6">6</a></sup></li> </ul> <p>The bill should be enacted but not as a trade for production or investment tax credits. Dan Reicher of Stanford Law School acknowledged this in his testimony: &ldquo;<em>I want to emphasize strongly that my support for MLPs and REITs should in no way signal that I endorse an immediate phase-out of PTC or any weakening of the current ITC.&nbsp; The PTC and ITC have been critical catalysts in the growth of U.S. renewables</em>&rdquo; (emphasis in the original).<sup><a name="ftnref7" href="#ftn7">7</a></sup> It would have been helpful if Mr. Reicher could have made this point in the June 1, 2012, <a href="http://www.nytimes.com/2012/06/02/opinion/how-to-make-renewable-energy-competitive.html?pagewanted=all&amp;_r=1&amp;"><em>New York Times</em> editorial</a> that he co-authored that advocated for MLPs.<sup><a name="ftnref8" href="#ftn8">8</a></sup> That editorial appears to have spawned the idea in the Washington consciousness that MLPs (or real estate investment trusts (REITs)) were a fair trade for the tax credit regime.</p> <p>The bill will provide two critical improvements for the renewables industry: (1) it will enable private-equity-fund-backed developers to trade their private equity investors for less expensive retail investors and (2) a liquid market for renewable energy projects that are beyond the tax benefit period (e.g., beyond the five year recapture period for investment tax credits or the 10-year production tax credit period).</p> <p>Further, it is important to keep in mind that the bill does not solve the industry&rsquo;s largest challenge - a shortage of tax equity. MLPs, as contemplated by this bill, will not be able to effectively pass through tax credits or accelerated depreciation to their unit holders who are individuals due to the passive activity loss rules and the at-risk rules in the Internal Revenue Code. Therefore, the low cost of capital of MLPs will not be competition for the small cadre of tax equity investors that currently set the market for tax equity, but it will compete with sponsor/developer capital providers.</p> <div><br /><hr size="1" /> <div> <p><sup><a name="ftn1" href="#ftnref1">1</a></sup> Shreve, Meg.&nbsp; <em>Senators Urge Expanding Master Limited Partnerships</em>, 2013 Tax Notes Today 148-7 (Aug. 1, 2013).</p> </div> <div> <p><sup><a name="ftn2" href="#ftnref2">2</a></sup> The written testimony of Senator Coons is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24208/Coons-MLP-Testimony-7-31-13.pdf">here</a>.&nbsp;</p> </div> <div> <p><sup><a name="ftn3" href="#ftnref3">3</a></sup> Shreve, Meg.&nbsp; <em>Senators Urge Expanding Master Limited Partnerships</em>, 2013 Tax Notes Today 148-7 (Aug. 1, 2013).</p> </div> <div> <p><sup><a name="ftn4" href="#ftnref4">4</a></sup> The written testimony of Senator Moran is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24207/Moran-MLP-Testimony-7-31-13.pdf">here</a>.</p> </div> <div> <p><sup><a name="ftn5" href="#ftnref5">5</a></sup> &ldquo;[T]ax credits&rdquo; appears intended to refer colloquially to provisions in the Internal Revenue Code that reduce a taxpayer&rsquo;s current tax liability (e.g., percentage depletion) because I cannot identify a fossil-fuel-specific &ldquo;tax credit&rdquo; that is still effective and has been for the last 100 years.</p> </div> <div> <p><sup><a name="ftn6" href="#ftnref6">6</a></sup> Senator Stabenow&rsquo;s written testimony is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24213/Stabenow-MLP-Testimony-7-31-13.pdf">here</a>.</p> </div> <div> <p><sup><a name="ftn7" href="#ftnref7">7</a></sup> Mr. Reicher&rsquo;s written testimony is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24206/Reicher-MLP-7-31-13.pdf">here</a>.</p> </div> <div> <p><sup><a name="ftn8" href="#ftnref8">8</a></sup> http://www.nytimes.com/2012/06/02/opinion/how-to-make-renewable-energy-competitive.html?pagewanted=all&amp;_r=0</p> </div> </div> 6350 Thu, 01 Aug 2013 00:00:00 -0400 CRS says Bonus Depreciation Has Little Stimulative Bang for the Buck http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/crs-says-bonus-depreciation-has-little-stimulative-bang-for-the.html <p>The Congressional Research Service published a report on July 15, 2013 on bonus depreciation and expensing allowances. The report is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24046/CRS-179-and-168-Report-7-15-13.pdf">here</a>.The report is lukewarm at best as to the economic benefits of these tax incentives.</p> <p>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.&nbsp; It is of little interest to tax equity investors, so the remainder of this post will focus on bonus deprecation.</p> <p>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.&nbsp; Renewable energy assets qualify, as do gas fired power plants and electric transmission lines.&nbsp; 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.</p><p>The report had little good to say about the ability of bonus depreciation to stimulate the economy.&nbsp; Here are key excerpts:</p> <ul> <li>The forces constraining the stimulative potential of accelerated depreciation, particularly in a weak economy, suggest that the two expensing allowances examined here would have relatively little bang for the buck as a means of boosting economic activity. (p. 13)</li> <li>Basically, the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy. (p. i)</li> <li>Furthermore, there is anecdotal evidence that the current bonus depreciation allowance has made little or no difference in the investment plans of some companies, while accelerating the timing of planned investments by other companies to take advantage of the tax savings.&nbsp; (p. 13)</li> <li>Since 2002, seven bills have been enacted to extend or enhance the bonus depreciation allowance.&nbsp; Each one was intended, in part, to spark an increase in small business investment, as part of a broader government-financed effort to stimulate the economy. (p. 10)</li> <li>According to corporate income tax data made available by the IRS through its website, corporations claimed a total of $609.8 billion in depreciation allowances for the 2009 tax year.&nbsp; Of that amount &hellip; bonus depreciation allowances came to $137.4 billion (or 22.5% of the total amount). (p. 12)</li> <li>[B]onus deprecation [has] the potential to distort the allocation of resources in an economy by driving a wedge between [eligible] assets and all other assets regarding their profitability. (p. 14)</li> </ul> <p>Some of these points may be valid; however, it is difficult to give the report too much credence as it has internal contradictions as to the economic benefit of accelerated depreciation.&nbsp; The report provides: &ldquo;Allowing a firm to expense the cost of an asset is equivalent to the U.S. Treasury providing the firm with a tax rebate equal to the firm&rsquo;s marginal tax rate multiplied by the cost of the asset.&rdquo;&nbsp; (p. 11)&nbsp; This statement contradicts a later reference in the report and the economic (and accounting) theory of the value of accelerated depreciation as being equivalent to an interest free loan from the U.S. Treasury (as opposed to a tax refund (<em>i.e.</em>, a cash payment that may be permanently retained)).<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>The rationale for accelerated depreciation being equivalent to an interest free loan from the U.S. Treasury is that a corporation would be able to eventually deduct the cost of a capital expenditure (regardless of what type of asset was acquired), but for an asset that qualifies for accelerated deprecation that same tax deduction is available <em>earlier</em>.&nbsp; The report later correctly provides,</p> <p>Yet the allowance does <em>not change the actual marginal rates</em> at which this income is taxed.&nbsp; Accelerated depreciation &hellip; does <em>not reduce the federal taxes paid on the stream of income earned by an asset over its useful life</em>.&nbsp; Rather, it allows firms to take a larger share of depreciation deduction for an asset in the first year or two of use than would be possible under MACRS.&nbsp; This forward shift of acceleration in depreciation allowances <em>raises the present discounted value of the tax savings from depreciation </em>(emphasis added). (p. 16)</p> <p>The report also overlooks the fact that under the rules of how Congress calculates the deficit impact of legislation that bonus depreciation is a stimulative measure that has one of the smallest deficit costs.&nbsp;</p> <p>In &ldquo;scoring&rdquo; legislation for its deficit impact, Congress treats as zero cost any tax expenditure that cancels itself out in the first ten years.&nbsp; Therefore, if bonus depreciation means that an asset that would otherwise be depreciated using double declining balance depreciation over five years is substantially depreciated in the first two years, there is no scoring impact.&nbsp; This is due to the fact in any event the asset would have been fully depreciated (reducing the taxpayer&rsquo;s taxes and the U.S. Treasury&rsquo;s collections) in five years and that is within the scoring period for deficit calculation purposes.&nbsp;</p> <p>The only scoring impact from bonus depreciation is with respect to assets with 15 and 20 year recovery periods: for those assets bonus depreciation &ldquo;pulls&rdquo; deductions into the first ten years, when they would otherwise accrue after ten years.&nbsp; There are few assets with these recovery periods; the leading examples are electric transmission lines and gas fired power plants.&nbsp;</p> <p>When the economy starts to signs of needing some fiscal medicine, Congress enacting bonus depreciation is like a parent reaching for baby aspirin for a child with a warm forehead.&nbsp; Both remedies are low cost, low risk and effective for some ailments but little good in stopping systemic bleeding.</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> Borris I. Bittker &amp; Lawrence Lokken, Federal Taxation of Income, Estates and Gifts &para;23.1.3; Toby Cozart, Equipment Leasing: Substance and Form, D. (BNA-Port 544).</p> 6339 Tue, 30 Jul 2013 00:00:00 -0400 CRS Reports on Energy Policy but Mischaracterizes the PTC Extension http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/crs-reports-on-energy-policy-but-mischaracterizes-the-ptc.html <p>On July 17, the Congressional Research Service released a report: <em>Energy Policy: 113<sup>th</sup> Congress Issues</em>. The report is available <a href="http://cdn.akingump.com/images/content/2/4/v2/24056/CRS-Report-Energy-Policy-113th-Congress-7-17-13.pdf">here</a>. &nbsp;</p> <p>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.&nbsp;</p> <p>Oddly, the report mischaracterizes the extension of the production tax credit (PTC) that was enacted this January: &ldquo;The 112<sup>th</sup> Congress[&lsquo;s] &hellip; 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.&rdquo; The PTC was not extended &ldquo;to January 1, 2014&rdquo; it was extended for projects that start construction before January 1, 2014.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup>&nbsp; The &ldquo;start of construction&rdquo; distinction is important: projects that are in service in 2014 or even later can qualify, if construction commenced in 2013.&nbsp; For a discussion of the &ldquo;start of construction&rdquo; rules, see our client alerts available <a href="http://www.akingump.com/en/news-publications/ptc-start-of-construction-guidance-worth-the-wait.html">here</a> and <a href="http://www.akingump.com/en/news-publications/irs-clarifies-begun-construction-guidance-for-production-tax.html">here</a>.</p><p>The quoted sentence&rsquo;s use of the phrase &ldquo;extension of energy tax credits&rdquo; is also questionable.&nbsp; That could sound like all the energy tax credits were extended.&nbsp; Significantly, the 30 percent investment tax credit (ITC) for solar was not extended.&nbsp; The 30 percent ITC for solar continues only to apply to projects that are placed in service by the end of 2016.</p> <p>A significant omission in the report is its failure to include the proposed Master Limited Partnership Parity Act (H.R. 1696 and S. 795).&nbsp; These bills are slightly modified version of bills first introduced last year (H.R. 6437 and S. 3275).&nbsp; The proposed legislation expands the master limited partnership tax rules to apply to renewable energy projects, so that such projects could be owned by publicly traded vehicles subject to only tax at the unit holder level.&nbsp; The legislation has bipartisan and bicameral support with the lead advocate being Sen. Coons (D-DE) and appears to be supported by Heather Zichal, deputy assistant to the president for energy and climate change.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp; The proposed MLP legislation is discussed in my blog post available <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/a-camel-s-nose-under-the-tent-mlp-legislation.html">here</a> and could significantly change the operations and economics of the renewables industry.</p> <p>Here are some of the more salient excerpts from the report:</p> <ul> <li>&ldquo;Energy policy in the United States has focused on three major goals: assuring a secure supply of energy, keeping energy costs low, and protecting the environment.&rdquo;</li> <li>&ldquo;Implementing these programs has been controversial because of varying importance given to different aspects of energy policy. For some, dependence on imports of foreign oil, particularly from the Persian Gulf, is the primary concern; for others, the indiscriminate use of fossil fuels, whatever their origin, is most important.&rdquo;</li> <li>&ldquo;Coal for many years supplied half the electricity generated nationally. In recent years its share has declined; it was about 42% in 2011, and about 36% through September 2012. Generation by natural gas has risen in importance, supplying about 25% in 2011 and 31% in 2012. To those who regard global climate change as an urgent issue, this trend is important because generating electricity from coal emits roughly twice the carbon dioxide per kilowatt-hour than generating from natural gas.&nbsp; Nuclear fission supplies about 20%, hydropower less than 10%. Petroleum, an important generating fuel in the 1970s and early 1980s, now contributes less than 1% of electricity generation. A surge of construction of wind-powered generating capacity has brought its share of total generation to about 3%.&rdquo;</li> <li>&ldquo;An additional issue involving oil and gasoline prices is the role of the Strategic Petroleum Reserve (SPR), which was set up after the Arab oil embargoes to fill temporary interruptions in the supply of oil. In principle releases from the SPR are limited to cases in which a physical lack of supply exists, but some have argued that it can be used to dampen surges in world oil prices even when current supply is adequate to meet demand. The June 2011 release of 30 million barrels from the SPR in response to the Libyan civil war has been deemed by some critics as such an attempt to influence the market when U.S. supplies were adequate.&rdquo;</li> <li>&ldquo;Limits on cross-state emissions of sulfur dioxide and nitrogen oxides, emissions of mercury and other hazardous pollutants, and regulation of greenhouse gas emissions, among other proposed regulations, have been characterized by critics as a regulatory &lsquo;train wreck&rsquo; that would impose excessive costs and lead to plant retirements that could threaten the adequacy of electricity capacity (i.e., reliability of supply) across the country, although some in the electric power industry consider those concerns overstated.&rdquo;</li> </ul> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> I.R.C. &sect;45(d)(1) (&ldquo;the construction of which begins before January 1, 2014&rdquo;).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> <em>See</em> [<a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/white-house-seeks-to-expand-energy-tax-policy.html">blog post of April 9, 2013/White House Seeks to Expand Energy Policy</a>].</p> 6301 Tue, 23 Jul 2013 00:00:00 -0400 GAO Determines U.S. Corporations Pay an Effective Tax Rate of 12.6 Percent http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/gao-determines-u-s-corporations-pay-an-effective-tax-rate-of-12.html <p>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.&nbsp; The report is available <a href="http://www.gao.gov/assets/660/654958.pdf">here</a>.</p> <p>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.&nbsp; 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.&nbsp; That means the market for tax equity is thin; therefore, the most critical component of developers&rsquo; capital structure is expensive and the economics of developing renewable energy projects are at best challenging.</p><p>Here are some excerpts from the report:</p> <ul> <li>&ldquo;For tax year 201, profitable [U.S. corporations] paid U.S. federal income taxes amounting to 12.6 percent of the [pretax] worldwide income reported in their financial statements.&rdquo; (p. 14)</li> <li>&ldquo;Even when foreign, state, and local corporate income taxes are included [profitable U.S. corporations] actually paid income taxes amounting to 16.9 percent of their reported worldwide [pretax] income.&rdquo; (p. 14)</li> <li>&ldquo;At about $242 billion corporate income taxes are far smaller than the $845 billion in social insurance taxes and the $1.1 trillion in individual income taxes that &hellip; were paid in fiscal year 2012.&rdquo; (p. 4)</li> </ul> <p>Martin Sullivan, an economist who studies tax matters, published a critique of the GAO&rsquo;s study with important insights:</p> <ul> <li>&ldquo;Although, it is common knowledge that many U.S. multinationals have used tax planning to substantially reduce their tax bills, the GAO figure is surprisingly low.&rdquo;</li> <li>&ldquo;[T]he GAO did not include foreign taxes in the widely reported 12.6 percent figure. It did in fact provide a much more conceptually defensible measure that includes foreign taxes in the numerator and arrives at a worldwide rate of 16.9 percent as a result.&rdquo;</li> <li>&ldquo;The low GAO figure for foreign tax liability is attributable to the fact that Schedule M-3 data does not include taxes paid by foreign subsidiaries &hellip; .&nbsp; [Thus GAO] was missing one of the most important aspects of the worldwide tax picture.&rdquo;<sup><a name="ftnref1" href="#ftn1">1</a></sup></li> </ul> <p>Sullivan also made several points of interest to observers of the market for tax equity.&nbsp; For instance, &ldquo;Multinationals in the oil and mining businesses generally pay very high rates.&rdquo;<sup><a name="ftnref2" href="#ftn2">2</a></sup>&nbsp; Thus, Chevron, Shell and, previously, British Petroleum&rsquo;s rationale for investing in tax equity and/or outright ownership renewable energy operations.&nbsp; &ldquo;And pharmaceutical, tech and other companies with lots of intellectual property have effective tax rates much lower than average.&rdquo;<sup><a name="ftnref3" href="#ftn3">3</a></sup>&nbsp; Thus, the market has yet to see a pharmaceutical company acting as a tax equity investor, and the only tech company that acts as such is Google.</p> <p>An aside in Sullivan&rsquo;s critique is that he notes that &ldquo;In the current environment &hellip; domestic tax credits are a relatively small part of the tax picture.&rdquo;<sup><a name="ftnref4" href="#ftn4">4</a></sup>&nbsp; Thus, when Congress considers the causes of the low corporate federal income tax rate, it would be inappropriate to focus much on tax equity investments.</p> <div><br /><hr size="1" /> <div> <p><sup><a name="ftn1" href="#ftnref1">1</a></sup> Martin A. Sullivan, <em>Economic Analysis: Behind the GAO&rsquo;s 12.6 Percent Effective Corp. Rate</em>, 140 Tax Notes 197 (Jul. 15, 2013).</p> </div> <div> <p><sup><a name="ftn2" href="#ftnref2">2</a></sup> <em>Id.</em></p> </div> <div> <p><sup><a name="ftn3" href="#ftnref3">3</a></sup> <em>Id</em>.</p> </div> <div> <p><sup><a name="ftn4" href="#ftnref4">4</a></sup> <em>Id.</em></p> </div> </div> 6328 Sun, 21 Jul 2013 00:00:00 -0400 Check-the-Box Overview for Energy Tax Planning http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/check-the-box-overview-for-energy-tax-planning.html <p>The check-the-box tax regulations are critical tool in the tax advisor&rsquo;s tool box. The rules are commonly implicated in renewable energy transactions. <a class="rubycontent-asset rubycontent-asset-23996" href="https://ruby.akingump.com/images/content/2/3/23996.pdf">This PDF</a> explains the rules for a lay reader.</p> 6274 Tue, 16 Jul 2013 00:00:00 -0400 The SAVE Act – Valuing Energy Savings http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/the-save-act-valuing-energy-savings.html <p>Consumers interested in energy-efficient homes will benefit if a recent bill, called the SAVE Act (Sensible Accounting to Value Energy), becomes law.&nbsp; 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.&nbsp;</p> <p>Current practice generally does not factor any value into the home mortgage analysis for the savings derived from an energy-efficient home.&nbsp; The bill would require these cost savings to be factored into the analysis both in terms of evaluating the borrower&rsquo;s income as compared to his or her monthly expenses and for purposes of valuing the home.&nbsp; The end result should be that a borrower would qualify for a larger loan.&nbsp;</p> <p>The SAVE Act was introduced by Senators Michael Bennet (D-Co.) and Johnny Isakson (R-Ga.) on June 6, 2013.&nbsp; It is widely supported by a coalition of business, real estate, energy and environmental groups.&nbsp;</p> <p>Here is a link to the <a href="http://cdn.akingump.com/images/content/2/3/v2/23831/SAVE-Act-S.1106.pdf">bill</a> and a link to the <a href="http://cdn.akingump.com/images/content/2/3/v2/23836/SAVE-Act-Fact-Sheet-2013.pdf">factshee</a>t for the bill.</p> 6261 Thu, 11 Jul 2013 00:00:00 -0400 Brief in “SolarCity” Cash Grant Litigation Provides Insight into Strategy http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/brief-in-solarcity-cash-grant-litigation-provides-insight-into.html <p>Covington &amp; Burling&rsquo;s reply brief to the government&rsquo;s brief in support of its motion to dismiss provides insight into SolarCity&rsquo;s strategy.&nbsp; 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.&nbsp;</p> <p>Covington&rsquo;s brief is available <a href="http://cdn.akingump.com/images/content/2/3/v2/23841/SolarCity-Brief-COFC-13-139-11.pdf">here</a>.&nbsp; Here are links to posts about the <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-sues-the-united-states-over-treasury-s-administration.html">original complaint</a> and the <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-moves-to-dismiss-solarcity-s-cash-grant-case-1.html">Government&rsquo;s motion to dismiss</a>.</p><p>The underlying complaint filed in the Court of Federal Claims was on behalf of two special purpose entities affiliated with SolarCity.&nbsp; Nonetheless, the complaint somewhat oddly included references to issues with the 1603 Cash Grant program that did not directly involve the named plaintiffs.</p> <p>One of the government&rsquo;s grounds for dismissal was that the complaint sought relief for parties other than those named in the complaint.&nbsp; To this, Covington explained why the complaint had referenced these arguably extraneous issues:</p> <ul> <li>In order to provide the Court and the Government a complete recitation of relevant facts, the Complaint refers to SolarCity Corporation and its involvement with the Plaintiffs and the Section&nbsp;1603 Program.&nbsp; But the Complaint explicitly identifies SolarCity as a &lsquo;non-party,&rsquo; and all three components of the Prayer for Relief explicitly seek relief only for the &lsquo;Plaintiffs,&rsquo; defined as Sequoia Pacific and Eiger.&nbsp; (p.&nbsp;16)</li> <li>The reference to Plaintiffs&rsquo; pending grant applications were included only to provide a thorough recitation of the facts, and to ensure that neither the Government nor the Court will be taken by surprise if and when Plaintiffs seek leave to file an amended complaint based upon additional, deficient cash grant awards.&nbsp; (p.&nbsp;17)</li> </ul> <p>The government&rsquo;s other primary ground for dismissal is that the complaint&rsquo;s discussion of various procedural shortcomings with respect to the Treasury&rsquo;s implementation of the Cash Grant program suggested that the complaint sought relief for violations of the Administrative Procedure Act (APA).&nbsp; The fundamental requirement of that act is public notice and comment prior to the creation of administrative rules, and Treasury appears potentially to have not complied with certain of those principles in the issuance of some of the Cash Grant guidance.</p> <p>The Court of Federal Claims would not have jurisdiction over such an action under the APA, so if the complaint sought such relief at least the pertinent portion of the complaint should be dismissed on jurisdictional grounds.&nbsp; Covington explained that its clients were not bringing an action under the APA:</p> <ul> <li>The Government&rsquo;s motion seeks to isolate a few paragraphs of the Complaint that describe how Treasury misapplied Section&nbsp;1603 criteria for determining cash grants, arguing that the Complaint actually seeks an APA review of Treasury&rsquo;s administration of&nbsp; the program. (p.&nbsp;12)</li> <li>[I]t would be surprising for any plaintiff to file a claim in this Court for money damages based upon a money-mandating statute without providing at least some description of the manner in which the Government erred in its application of that statute and thereby paid too little.&nbsp; (p.&nbsp;12)</li> </ul> <p>Here are other pertinent excerpts from the brief:</p> <ul> <li>Yet despite these concessions, the Government never so much as cites this Court&rsquo;s express holding that Section&nbsp;1063 is money-mandating, nor does it ever address the Complaint&rsquo;s express allegations that Treasury failed to pay the Plaintiffs specific dollar amounts to which they were entitled under the federal statute.&nbsp; (p.&nbsp;2)</li> <li>The Government&rsquo;s argument is premised upon a tortured interpretation of the Complaint that all but ignores the key paragraphs contained therein and entirely misconstrues others.&nbsp; While the Complaint does describe Treasury&rsquo;s failure properly to carry out Section&nbsp;1603 provisions regarding the calculation of cash grants, it does so only to provide context and background for Plaintiffs&rsquo; demand for the amounts to which they were rightfully entitled under Section&nbsp;1063, pursuant to the cash grant applications they made under the federal law.&nbsp; (pgs.&nbsp;3‑4)</li> <li>The Government&rsquo;s contention that Plaintiffs&rsquo; requested relief &ldquo;exceeds this Court&rsquo;s jurisdiction&rdquo; simply ignores the actual words in the Prayer for Relief.&nbsp; Paragraph A of the Prayer requests monetary relief measured by the difference between the amounts Plaintiffs received pursuant to their Section&nbsp;1603 applications and the amounts that they should have received.&nbsp; Paragraph&nbsp;B requests &ldquo;such additional monetary relief as is available under applicable law.&rdquo; &nbsp;The third and final clause, Paragraph C, requests that the Court &ldquo;[a]ward Plaintiffs such other and further relief as this Court may deem necessary and proper.&rdquo; &nbsp;It is impossible to divine how any of these claims for relief exceed the jurisdiction conferred on this Court by the Tucker Act with respect to money damages claims.&nbsp; (p.&nbsp;7)</li> <li>The Complaint does of course explain that Treasury&rsquo;s calculation of cash grants under Section&nbsp;1603 was inconsistent with that statute and Congressional intent because these facts establish that Treasury&rsquo;s calculations were wrong.&nbsp; Such allegations are entirely appropriate to lay the predicate for claims for monetary relief that are necessarily measured by the difference between what Treasury actually paid and what it should have paid under the correct application of the law.&nbsp; Thus, the Complaint clearly explains the relevance of this information: &nbsp;that &ldquo;[a]s a result of [Treasury&rsquo;s]&nbsp;.&nbsp;.&nbsp;. misapplications of the Section&nbsp;1603 Program, Plaintiff have not been paid the cash grant amounts to which they are entitled.&rdquo; &nbsp;(p.&nbsp;12)</li> </ul> <p>It appears that Court of Federal Claims is likely to not grant the government&rsquo;s motion to dismiss.&nbsp; Rather, it will require the Plaintiffs and their counsel to narrowly focus the litigation on the $8&nbsp;million shortfall in Cash Grant proceeds the Plaintiffs seek to recover and to not reference generalized problems with the administration of the Cash Grant program or losses incurred by other industry participants.</p> <p>If SolarCity suffers other Cash Grant shortfalls, it (or other affiliates) will join the litigation.&nbsp; SolarCity is likely positioning itself to join this case, rather than filing another case, so that this litigation may be advancing while Treasury evaluates pending Cash Grant applications.&nbsp; Thus, if and when SolarCity (or other affiliates) join the complaint (assuming the Court permits it to), the case procedurally will be months ahead of where a newly filed case would be.</p> 6245 Tue, 09 Jul 2013 00:00:00 -0400 Treasury Tells Congress PTC Guidance Provides the Desired Degree of Certainty in the Marketplace http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/treasury-tells-congress-ptc-guidance-provides-the-desired-degree.html <p>A letter from Treasury Assistant Secretary for Legislative Affairs Fitzpayne to Rep. Coffman (R-CO) dated June 17, 2013 addresses the IRS&rsquo; recent guidance with respect to the &ldquo;beginning construction&rdquo; requirement for PTC eligibility.&nbsp; The letter is available <a href="http://cdn.akingump.com/images/content/2/3/v2/23711/Treasury-Letter-re-2013-29-to-Rep-Coffman-6-17-13.pdf">here</a>.&nbsp; The guidance in question is Notice 2013-29.&nbsp; A client alert discussing the notice is available <a href="http://www.akingump.com/en/news-publications/ptc-start-of-construction-guidance-worth-the-wait.html">here</a> and a subsequent alert discussing a clarification to the notice is available <a href="http://www.akingump.com/en/news-publications/irs-clarifies-begun-construction-guidance-for-production-tax.html">here</a>.</p> <p>A highlight of Treasury&rsquo;s letter is the statement: &ldquo;We believe this guidance provides the <em>desired degree of certainty in the marketplace</em> and allows renewable energy projects to move forward&rdquo; (emphasis added).</p><p>Most renewable energy projects are first started by developers; it is while the project is owned by the developer that &ldquo;construction starts&rdquo; which is now the key event for PTC eligibility.&nbsp; After the project is nearly or completely constructed, the developer often enters into a transaction with a tax equity investor to provide tax and other economic benefits to the tax equity investors in exchange for an up-front cash payment that can be in one of several forms.&nbsp; Such transactions may result in a sale of the project or the transfer of the project to a new taxpayer.</p> <p>Notice 2013-29 does not provide guidance as to whether such &ldquo;tax equity&rdquo; transactions after 2013 could cause a project to lose its 2013 start of construction status necessary for PTC eligibility.&nbsp; As Treasury is well aware that such transactions predominate in the marketplace, this letter appears to provide comfort that Treasury will not play &ldquo;gotcha&rdquo; and try to disqualify projects subject to tax equity transactions after 2013.</p> <p>The letter also provides:&nbsp; &ldquo;These tests are similar to those used for payments under Section 1603 of the American Recovery and Reinvestment Act.&rdquo;&nbsp; This statement would appear to justify taxpayers looking to the 1603 guidance to interpret Notice 2013-29, except in instances when the 1603 guidance expressly varies from tax principles or the notice expressly diverges from the 1603 guidance.</p> 6193 Wed, 26 Jun 2013 00:00:00 -0400 Solar REIT Qualification – A Long Putt http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solar-reit-qualification-a-long-putt-1.html <div class="rte"> <p>In early 2013, many in the solar industry appeared to be thinking that the IRS&rsquo;s blessing of a solar REIT would be provided within weeks. It is now the middle of 2013, and it appears the thinking from a few months ago was at best irrational exuberance. Three events have triggered a change in perspective on solar REITs.</p> <p>First, Hannon Armstrong&rsquo;s private letter ruling request as to its REIT status is now public. Prior to the ruling being made public, the industry scuttlebutt was that the ruling would bless rooftop solar as REIT eligible. However, Hannon Armstrong&rsquo;s CEO Jeff Eckels best describes the actual substance of the ruling &ndash; &ldquo;We did not ask the IRS about renewables and we did not receive anything from the IRS that mentions renewables.&rdquo; The article quoting him is available <a href="http://cdn.akingump.com/images/content/2/3/v2/23598/1474551-how-hannon-armstrong-go.pdf">here</a>. &nbsp;&nbsp;What the ruling actually concluded is that certain energy efficiency improvements are able to be included in Hannon Armstrong&rsquo;s REIT qualification calculations as real estate. The redacted ruling is even more cryptic as to the specifics of those improvements. The redacted ruling is available <a href="http://cdn.akingump.com/images/content/2/3/v2/23591/Hannon-Armstrong-REIT-PLR-2013.pdf">here</a>.</p> </div><div class="rte"> <p>Second, Renewable Energy Trust Capital, Inc. submitted a private letter ruling request asking for the IRS to rule that ground-mounted solar projects are real estate for REIT purposes. Renewable Energy Trust Capital, Inc. was predicting that it would have its ruling by the end of January. It is now mid-June and that ruling has not materialized, and Renewable Energy Trust Capital, Inc. is no longer being featured in financial publications. There are no official reports, but it appears the IRS declined to issue that ruling.</p> <p>Third, three public corporations disclosed that their conversion to REIT status, which was dependent upon receipt of an IRS private letter ruling is at best delayed pending study by a newly formed IRS working group as to what assets qualify as &ldquo;real estate&rdquo; under the REIT rules.&nbsp; None of the corporations are in the solar industry. One is Iron Mountain which provides sophisticated warehouse storage for physical documents.<sup><a href="http://www.akingump.com/en/experience/industries/energy/speaking-energy/solar-reit-qualification-a-long-putt.html#ftn1">1</a></sup> The second is Lamar Advertising which owns billboards.<sup><a href="http://www.akingump.com/en/experience/industries/energy/speaking-energy/solar-reit-qualification-a-long-putt.html#ftn2">2</a></sup> The third is Equinix which owns electronic data storage centers.<sup><a href="http://www.akingump.com/en/experience/industries/energy/speaking-energy/solar-reit-qualification-a-long-putt.html#ftn3">3</a></sup></p> <p>The IRS working group appears to have at least two origins. First, certain members of Congress, many of whom have Republican leanings, were concerned about the loss of revenue from public corporations converting from C-corporation status, with two layers of tax, to REIT status with effectively a single layer of tax. Second, I suspect that the IRS had trouble articulating why ground-mounted solar did not constitute &ldquo;real estate&rdquo; for REIT purposes in light of rulings it had issued about assets such as electric transmission systems and data storage centers. This challenge may have made the IRS question the accommodating rulings it had issued in recent years.</p> <p>I believe the IRS working group will take at least six months to complete its review. In that time, any REIT eligibility rulings will be relatively plain vanilla. At the end of the review, I suspect the IRS will decide not to back track on its prior positions regarding assets like transmission, cell towers and data storage centers, but it will decline to further expand the definition of real estate for REIT purposes. Therefore, new asset classes like solar and warehouse storage for physical documents may not receive favorable rulings. Nonetheless, after the dust settles, I suspect the IRS may have a favorable view of roof-mounted solar systems that only provide power to the building on which they are mounted.&nbsp;</p> <div><br /><hr size="1" /> <div> <p><sup><a href="http://www.akingump.com/en/experience/industries/energy/speaking-energy/solar-reit-qualification-a-long-putt.html#ftnref1">1</a></sup> <a href="http://cdn.akingump.com/images/content/2/3/v2/23592/Iron-Mt-8-K-IRS-REIT-Working-Group-6-6-13.pdf">Iron Mountain Incorporated, Form 8-K, June 6, 2013</a>.</p> </div> <div> <p><sup><a href="http://www.akingump.com/en/experience/industries/energy/speaking-energy/solar-reit-qualification-a-long-putt.html#ftnref2">2</a></sup> <a href="http://cdn.akingump.com/images/content/2/3/v2/23597/Burton-Lamar-6-10-13.pdf">Lamar Advertising Company, Form 8-K, June 7, 2013</a>.</p> </div> <div> <p><sup><a href="http://www.akingump.com/en/experience/industries/energy/speaking-energy/solar-reit-qualification-a-long-putt.html#ftnref3">3</a></sup> <a href="http://cdn.akingump.com/images/content/2/3/v2/23611/Burton-Equinix-6-10-13.pdf">Equinix, Inc., Form 8-K, June 6, 2013</a>.</p> </div> </div> </div> 6153 Tue, 18 Jun 2013 00:00:00 -0400 CBO’s Carbon Tax Report -Interesting but Inconclusive http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/cbo-s-carbon-tax-report-interesting-but-inconclusive.html <p>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 <a href="http://www.cbo.gov/publication/44223">here</a>. The report highlights a number of interesting dynamics between tax and environmental policy but avoided reaching any meaningful conclusions.</p> <p><em>A Large Source of Tax Revenue</em></p> <ul> <li>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.</li> <li>A tax of $20 per ton of emissions would result in an increase in the price of gasoline of 20 cents per gallon.</li> </ul><p><em>A Beneficial but Regressive Tax Swap</em></p> <ul> <li>The report describes using the proceeds of a carbon tax to reduce income tax rates as a &ldquo;tax swap.&rdquo; The report provides, &ldquo;CBO has not quantified the effects of a tax swap.&nbsp; However, various studies &hellip; concluded that a well-designed tax swap would significantly lower the economic costs of a carbon tax, and a few studies concluded that a tax swap could lead to a net increase in output.&rdquo;</li> <li>So a tax swap could both benefit the environment and improve the economy. The policy weakness is that the cost of the carbon tax would be disportionately borne by low income households who pay little to no income taxes and thus would not benefit from lower income tax rates. The cost of a carbon tax would be disportionately borne by low income households, because an incremental increase in the cost of gasoline, electricity or heating oil would require them to spend a larger percentage of their income than a middle class household would be required to spend to meet the same cost. However, to the extent the proceeds from the carbon tax are used to compensate low income households (rather than for a reduction in income tax rates), then the carbon tax would have a greater adverse effect on the economy. The CBO writes &ldquo;lawmakers would face a trade-off between the goals of helping those households most hurt by the tax and helping the economy in general.&rdquo;</li> </ul> <p><em>Carbon Leakage</em></p> <ul> <li>A carbon tax in the United States would lead to higher prices for &ldquo;emission-intensive goods produced in the United States,&rdquo; which would result in the production of emission intensive goods moving to outside the United States.&nbsp; The report characterizes this as &ldquo;carbon leakage&rdquo; and notes that analysts have concluded that between 1 and 23 percent of the reduction in emissions from a carbon tax would be cancelled out due to carbon leakage. Carbon leakage could be addressed through tariffs on imported goods, but that leads to complexity and raises free trade issues.</li> <li>If the United States imposed a carbon tax unilaterally, it would not be an environmental panacea due to the global nature of the problem. The United States currently contributes about 18 percent of global carbon emissions. &ldquo;Acting on its own, the United States could have only a modest effect on the amount of warming.&nbsp; [E]fforts to limit global warming are likely to require significant reductions in emissions by rapidly growing economies, such as those of China and India.&rdquo;</li> </ul> <p><em>Evasive Conclusions</em></p> <ul> <li>The report has a long discussion of quantifying the environmental benefits of a carbon tax. That discussion can be summarized by saying that the level of benefit depends on modeling assumptions and particularly the discount rate applied to future environmental benefits.&nbsp;</li> <li>The report ends on a particularly mealy mouthed note:</li> </ul> <p style="margin-left: 60px;">Given the persistent nature of greenhouse gases and the dynamics of climate change, warming could continue for several decades even if emissions were quickly cut to a small fraction of today&rsquo;s levels.&nbsp; In general, the risk of costly damage is higher as the extent of warming increases and as the pace of warming picks up; thus, failing to limit emissions soon increase that risk.</p> 6119 Tue, 11 Jun 2013 00:00:00 -0400 Lease-Accounting Rules: Tinker, Don't Trash http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/lease-accounting-rules-tinker-don-t-trash.html <p>The changes proposed by FASB and IASB address a limited set of weaknesses in the existing rules that merely need some tightening, not a complete overhaul.</p> <p>The current <a href="http://www3.cfo.com/article/2013/5/gaap-ifrs_lease-accounting-iasb-fasb-elfa-" target="_blank">proposal to overhaul lease-accounting rules</a> is off base, because for most lease transactions, the existing rules work well.</p><p>The Financial Accounting Standards Board and International Accounting Standards Board should not throw away decades of experience and force lessors to spend millions of dollars updating their accounting systems to address a limited set of weaknesses in the rules. Users and preparers of financial statements would be better served if the current rules were merely tightened to address the areas that make them vulnerable to manipulation.</p> <p><strong>I. The Good: The Simplicity of the Existing Rules</strong><br /> The existing lease-accounting rules are fundamentally sound and are imbued with a simple elegance. However, in certain respects they are subject to easy manipulation that can result in questionable outcomes. The reforms suggested below would significantly address the concerns identified by the Securities and Exchange Commission in its 2005 report on off-balance-sheet arrangements.</p> <p>Further, the current rules provide information that is useful in preparing tax returns and analyzing the consequences of a bankruptcy. For instance, it is likely that for tax purposes the lessor is the owner of an operating lease and the lessee is entitled to a rental deduction. Also, in a bankruptcy analysis, it is unlikely that the lessee would be able to recharacterize an operating lease as a secured loan that could result in the creditor being paid pennies on the dollar.</p> <p><strong>II. The Bad: Exposure Drafts</strong><br /> The second exposure draft, like the first one in 2010, attempts to divine the real economics of each lease: the lessor would book an &ldquo;asset&rdquo; for the value of the property it held and a liability for its obligation to provide the property to the lessee. In contrast, the lessee would book an asset for the value of its leasehold, and a liability for its obligation to pay future rents. The accounting profession, securities analysts and issuers of financial statements all were unhappy with this approach.</p> <p>At a high level, the second exposure draft differs from the first in three ways: (1) leases of twelve months or less are excluded and continue to be accounted for under the existing rules for operating leases; (2) in calculating the assets and liabilities arising from a lease, a renewal option is included only if there is an economic incentive for the lessee to exercise them; and (3) a different amortization calculation is applied to real estate leases than is applied to equipment leases. Despite these improvements, it is likely that issuers and users of financial statements will find the new exposure draft&rsquo;s complexity justifiable, given the improvement in the quality of information conveyed by the new approach.</p> <p><strong>III.</strong> <strong>The Ugly: Opportunity for Manipulation</strong><br /> The simplicity of the current rules exposes them to manipulation. An understanding of the current rules is necessary to appreciate their vulnerabilities. FASB currently has a four-part test:</p> <ol> <li>At the end of the term, does ownership automatically transfer to the purported lessee?</li> <li>Is the term equal to or greater than 75 percent of the property&rsquo;s economic life?</li> <li>Is there a &ldquo;bargain&rdquo; purchase option?</li> <li>Does the present value of the rents exceed 90 percent of the fair market value of the property at the outset of the lease?</li> </ol> <p>If the answer to <em>any</em> of these questions is yes, lessee records on its balance sheet property, plant or equipment (PPE) as an asset and the obligation to pay &ldquo;rent&rdquo; to the lessor as a liability. With respect to the lessee, this outcome is known as a &ldquo;capital lease.&rdquo;</p> <p>Also if the answer to any of the questions is yes, the lessor books a receivable (like a loan) and a &ldquo;residual&rdquo; for the estimated value of the PPE at the end of the lease. With respect to the lessor, this is known as a &ldquo;direct finance lease.&rdquo;</p> <p>If the answer to <em>each</em> of questions from <em>the</em> <em>lessee&rsquo;s</em> perspective is no, the lessee merely has periodic rent (i.e., the average annual rent) as an expense on its income statement. This is known as an &ldquo;operating lease.&rdquo;</p> <p>If the answer to each of the questions from <em>the lessor&rsquo;s</em> perspective is no, the lessor merely books PPE as an asset on its balance sheet that it depreciates straight-line over the economic useful life of the asset (which is likely longer than the tax recovery period for depreciation purposes). This too is known as an &ldquo;operating lease.&rdquo;</p> <p>In practice, IASB&rsquo;s test is similar to FASB&rsquo;s. The international standard-setter adds a fifth element: Are the leased assets of such a specialized nature that only the lessee can use them without major modifications? That is a relatively rare situation.</p> <p><strong><em>A.</em></strong><strong> <em>Asymmetry Invites Abuse</em></strong><br /> Under current rules, a lease can be structured such that it does not result in either the lessor or the lessee depreciating PPE. The potential for asymmetry invites trouble. Rather than discarding the current rules, the boards should motivate the parties to have the PPE on one of their books. If both parties publish financial statements, the lease document should have to stipulate which party will depreciate the PPE in its financial statements. (This assumes the agreed treatment corresponds to the applicable lease accounting tests. Parties may not just arbitrarily agree that one of them depreciates the PPE.)</p> <p>If the parties are unable to agree in the lease document, they should each have to include detail about the lease in the footnotes to their financial statements. Such detail would encourage their auditors, their investors, the securities regulators and tax authorities to scrutinize the transaction.</p> <p><strong><em>B. The Same Discount Rate Is Not Required</em></strong><br /> The 90 percent present value test has a certain appeal as a financial metric. However, with care the parties can avoid using the same discount rate. If the lessee knows the discount rate used by the lessor in the lease pricing, the lessee is supposed to use that discount rate. If the lessee does not know that rate, it is supposed to use its own marginal cost of funds.</p> <p>This motivates the lessor to use a low discount rate so the present value of the rents exceeds 90 percent, but not to tell the lessee its rate. The lessee can then argue that its cost of funds is high, so the present value of the rents is less than 90 percent.</p> <p>One way to avoid this problem would be for the standards boards to publish discount rates for various-duration leases for lessees with various credit standings. Parties to a lease could avoid using the boards&rsquo; discount rate if they agreed in writing to use a mutual discount rate.</p> <p>This approach to discount rates may understate the after-tax benefit the lease provides to the lessor, if the lessor is entitled to tax benefits that enhance its return. For instance, a lessor of a solar project in the United States entitled can be entitled to a 30 percent investment tax credit, plus accelerated depreciation. Therefore, the cash rent it charges the lessee may be quite low. The published discount rate would not capture that. That tax nuance would be traded for consistency and simplicity.</p> <p><strong><em>C.</em></strong><strong> <em>Residual Value Insurance</em></strong><br /> If the lessor is unable to justify a discount rate that results in a present value of rent in excess of 90 percent, it can resort to residual value insurance. Residual value insurance is insurance that the lessor purchases; the insurer pays the lessor if, at lease expiry, the value of the property is below an agreed amount. A claim under residual value insurance is rare. First, it is difficult to meet the deductible; second, the lessor does not want to make a claim for one asset or even a class of assets and then see its deductibles go up for future leases.</p> <p>The current lease-accounting rules should be amended to eliminate potential payments from residual value insurance from the lessor&rsquo;s 90 percent present value test.</p> <p><strong><em>D.</em></strong><strong> <em>An Outdated Bargain Purchase Option Test</em></strong><br /> The bargain purchase option is a sensible test, but it needs to be updated to reflect today&rsquo;s financial structuring.</p> <p><em>1.</em> <em>First Loss Guarantees</em>.</p> <p>First, the bargain purchase option test does not consider what obligations the lessee has if it does not exercise its purchase option. Specifically, lessees have been able to characterize as operating leases those transactions in which, if the lessee does not exercise its fixed-price purchase option, the asset is sold and the lessee is responsible to pay the lessor to the extent the sales price is less than an agreed threshold. The amount is capped, so the obligation does not trip the 90 percent present value test. Often the threshold is the same as the fixed purchase option price.</p> <p>For instance, a lease could have a three-year term and a purchase option for $100. If the lessee does not exercise that purchase option, the asset would be sold and the lessee would be obligated to make the lessor whole for the difference between the actual sale price and its fixed price purchase option price (but subject to a cap on the lessee&rsquo;s liability). For example, the lessee could be obligated to pay the lessor up to 80 percent of the fixed purchase option price. So if the asset sells for $93, the lessee pays $7 to the lessor. If the asset sells for $19, the lessee pays only $80. In other words, the asset must be worth 81 percent less than expected for the lessor to bear any residual risk.</p> <p>In fairness to the current standard, that potential $80 payment is included in the 90 percent present value test; therefore, the present value of the rents before the purchase option date can only be $9.90 for the lessee to still pass the 90 percent present value test. Nonetheless, the bargain purchase option test should also have to account for that downside obligation. One way to do this would be for the accounting standards to be amended to provide a modest ceiling on how much of a residual guarantee a lessee may provide and characterize a lease as an operating lease to it.</p> <p><em>2.</em> <em>Fixed Price Early Buyout Options</em><br /> An early buyout option (EBO) is a common structuring technique. If the lessee does not exercise the EBO, the lease merely continues. However, the scheduled rents often escalate. The bargain purchase option test does not consider the effect of those post-EBO rents on the lessee&rsquo;s decision to exercise the purchase option.</p> <p>One way to address this weakness would be to add another prong for EBOs: The EBO price must exceed the sum of the present value, discounted to the EBO date, of (i) the &ldquo;avoided&rdquo; post-EBO rents and (ii) likely economic residual value at lease end. The discount rate could be the same discount rate described above.</p> <p><em>3.</em> <em>Return Conditions</em><br /> A lease may have an end-of-term purchase option that if not exercised requires the lessee to return the equipment cleaned, oiled and with updated software and packed in its original box. If the lessee forgets to keep the original box (and who keeps those boxes?), it may well decide to exercise the purchase option to avoid the cost of noncompliance with the lease.</p> <p>Further, a lease may provide that the lessee is obligated to return the equipment at its expense to a location in the United States selected by the lessor. That could be the bottom of the Grand Canyon.</p> <p>The return condition concern could be addressed by providing that if a lease is to be an &ldquo;operating lease&rdquo; for the lessee, the return conditions must be &ldquo;reasonable&rdquo; and cannot be reasonably expected to exceed a given percentage of the cumulative rents.</p> 6103 Wed, 05 Jun 2013 00:00:00 -0400 DOJ Moves to Dismiss SolarCity’s Cash Grant Case http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/doj-moves-to-dismiss-solarcity-s-cash-grant-case-1.html <p>The Department of Justice (DOJ) filed a motion for the Court of Federal Claims to dismiss SolarCity&rsquo;s<sup><a name="_ftnref1" href="#_ftn1">1</a></sup> case against Treasury with respect to the administration of the 1603 Cash Grant program. DOJ&rsquo;s brief in support of its motion is available <a href="http://cdn.akingump.com/images/content/2/3/v2/23466/DOJ-Brief-to-Dismiss-SolarCity-Case-May-2013Burton-USCFC-13.pdf">here</a>. &nbsp;</p> <p>DOJ&rsquo;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)<sup><a name="_ftnref2" href="#_ftn2">2</a></sup> while SolarCity alleges that Treasury&rsquo;s administration of Cash Grant program violated the 1603 statute.&nbsp;</p> <p>Further, DOJ asserts that SolarCity is effectively seeking the court to review Treasury&rsquo;s Cash Grant guidance for compliance with the Administrative Procedures Act, which is not within the jurisdiction of the Court of Federal Claims&rsquo;. The Administrative Procedures Act is the federal statute that requires federal agencies to provide notice and an opportunity to comment before promulgating rules.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup> Interestingly, the complaint does not actually reference the Administrative Procedure Act, probably because the plaintiffs&rsquo; counsel, Covington &amp; Burling, was trying to avoid this jurisdictional issue.</p><p>It appears to me that if the Court of Federal Claims grants DOJ&rsquo;s motion, then SolarCity will merely have to re-file the complaint. The named plaintiffs, special purpose affiliates of SolarCity, would file a shorter complaint requesting payment for the difference between the Cash Grant they applied for and the Cash Grants approved by Treasury; this is approximately $8 million in claims. Prevailing in such a case would provide a critical precedent for the rest of the renewables industry. Then SolarCity, in its own name, would file a complaint in Federal district court including allegations that Treasury&rsquo;s guidance with respect to determining &ldquo;basis&rdquo; violates the 1603 statute and the Administrative Procedures Act, and that Treasury&rsquo;s failure to process claims within 60-days violates the 1603 statute.&nbsp; This procedural detour would be only a minor hindrance for this important litigation.</p> <p>Here are some key excerpts from DOJ&rsquo;s brief:</p> <ul> <li>Taken as a whole, plaintiff&rsquo;s complaint asks this Court to review the agency&rsquo;s administration of a Federal program.&nbsp; The Court should dismiss the complaint because review being sought exceeds this Court&rsquo;s jurisdiction.</li> <li>The Court should conclude that it does not have jurisdiction to consider plaintiffs&rsquo; claims, as they seek Administrative Procedures Act-like review of Treasury&rsquo;s administration of the Section 1603 program &hellip; It is routinely acknowledged that this Court lacks jurisdiction to review agency decisions or actions.</li> <li>To the extent a plaintiff seeks to challenge the reasonableness or substantive validity of the Government&rsquo;s actions, the party may only pursue the case in the district courts, not in the Court of Federal Claims.</li> <li>Absent express, statutory authorization, however, the Court does not have jurisdiction to review whether a Federal agency has exceeded its authority.&nbsp; [The plaintiffs] ask the Court to review whether Treasury had &ldquo;authority to promulgate or enforce&rdquo; rules, which were, allegedly, &ldquo;contrary to the plain language of Section 1603.&rdquo;&nbsp; The Court should dismiss such a request for lack of jurisdiction, because no express statutory grant or jurisdiction exists.</li> <li>Certainly this Court does not have authority to invalidate an executive branch agency&rsquo;s policies.</li> <li>Plaintiffs&rsquo; alleged injuries to nonparties are beyond this Court&rsquo;s jurisdiction.&nbsp; Plaintiffs contend that Treasury&rsquo;s approach &hellip; resulted in &hellip; payments arriving after the statute&rsquo;s 60-day deadline.&nbsp; Plaintiffs, however, do not allege any specific injury to themselves from this delay &ndash; as would be expected under a properly-pled claim for compensation.</li> <li>Plaintiffs&rsquo; allegations regarding their still-pending applications further demonstrate that the complaint&rsquo;s objective is not to seek unpaid monies under the program, but to have this Court review Treasury&rsquo;s administration of the program in its entirety.&nbsp; Such a review &ndash; much like a review of pending agency actions &ndash; is beyond this Court&rsquo;s jurisdiction.</li> <li>[T]he sum of the plaintiffs&rsquo; complaint is unmistakable &ndash; plaintiffs ask the Court to review Treasury&rsquo;s management of the Section 1603 program.&nbsp; Plaintiff&rsquo;s request for damages is a small tail appended to a very large dog.&nbsp; Because the requested review is beyond the Court&rsquo;s jurisdiction, the Court should dismiss this complaint.</li> </ul> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> The named plaintiffs are actually Sequoia Pacific Solar I, LLC and Eiger Lease Co, LLC which are special purpose affiliates of SolarCity.</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> 28 U.S.C. &sect; 1491.</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup>&nbsp; The fundamental purposes of the Administrative Procedures Act are (1) to require agencies to keep the public informed of their organization, procedures and rules; (2) to provide for public participation in the rulemaking process; (3) to establish uniform standards for the conduct of formal rulemaking and adjudication; (4) to define the scope of judicial review. <em>Attorney General's Manual on the Administrative Procedure Act</em>&nbsp;(1947).</p> 6088 Sun, 02 Jun 2013 00:00:00 -0400 Supreme Court Denies Certiorari in Historic Boardwalk Hall http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/supreme-court-denies-certiorari-in-historic-boardwalk-hall.html <p>Today, the Supreme Court denied a petition to review the 3rd Circuit&rsquo;s opinion in favor of the IRS in the <em>Historic Boardwalk Hall</em> case which involved eligibility for federal historic tax credits for rehabilitation of a historic building.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>In <em>Historic Boardwalk Hall</em>, 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.</p><p>The structure included a &ldquo;call&rdquo; right for the acquisition of Pitney Bowes&rsquo; interest in the investment partnership that if it was not exercised gave Pitney Bowes the right to &ldquo;put&rdquo; its interest in the partnership. The prices to exercise either the put or the call were based on comparable formulas. The transaction also included a &ldquo;tax benefit guaranty agreement&rdquo; for the benefit of Pitney Bowes.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp; The IRS challenged the transaction. The Tax Court ruled for the taxpayer. On appeal, the 3rd Circuit reversed and ruled for the IRS.&nbsp; &nbsp;&nbsp;</p> <p>In sum, the 3rd Circuit had concluded that the parties &ldquo;in substance, did not join together &hellip; to rehabilitate and operate the East Hall. Rather, the parties&rsquo; focus from the very beginning was to effect a sale and purchase of&rdquo; tax credits. It added that &nbsp;Pitney Bowes &ldquo;had no meaningful downside risk because it was, for all intents and purposes, certain to recoup the contributions it had made &hellip; and to receive the primary benefit it sought &ndash; the [tax credits] or their cash equivalent.&rdquo;<sup><a name="_ftnref3" href="#_ftn3">3</a></sup></p> <p>The Pitney Bowes affiliate petitioned the Supreme Court to grant <em>certiorari</em> and review the 3rd Circuit&rsquo;s opinion. The brief in support of the petition provided:</p> <p>This is a case of exceptional national importance, particularly because thousands of partnership projects with HRTCs have been structured in a manner indistinguishable from the one herein. The Congressional purpose in enacting 26 U.S.C. &sect; 47 is clear and there can be no doubt that the Third Circuit's opinion imperils that mandate. The petition demonstrates that the court's reasoning and conclusions are legally indefensible, and that the opinion conflicts with the precedent of this Court and with courts of appeals. All of these factors establish an urgent need for this Court to grant review.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup></p> <p>The Supreme Court was apparently unmoved by this rationale as today it denied that petition. There is no published opinion associated with the denial, so it is difficult to deduce the Supreme Court&rsquo;s view of the case. The votes of four Supreme Court justices are required to grant the petition, so less than four Supreme Court justices were sufficiently concerned by the 3rd Circuit&rsquo;s approach to vote in favor of reviewing the case.</p> <p>The historic tax credit community appears to have been prepared for the fact that the Supreme Court would not come to its rescue. The IRS has been asked to publish a revenue ruling blessing acceptable structures for historic tax credit transaction.<sup><a name="_ftnref5" href="#_ftn5">5</a></sup> If that revenue ruling is published, it will provide helpful guidance and certainty for historic tax credit structures. Like the federal tax credit for solar project, the historic tax credit is an &ldquo;investment tax credit&rdquo;. Therefore, the revenue ruling may also provide some insights as to acceptable structure for allocating investment tax credits from solar projects.</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> Historic Boardwalk Hall v. Commissioner, 585 F.3d 425 (3d Cir. 2012), <em>cert. denied</em> 2013 WL 249846 (May 28, 2013) (No. 12-901).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> Brief of Respondent, Historic Boardwalk Hall v. Commissioner, 585 F.3d 425 (3d Cir. 2012) (No. 12-901), 2013 WL 1780821 (Apr. 24, 2013).</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup> Historic Boardwalk Hall v. Commissioner, 585 F.3d 425 (3d Cir. 2012).</p> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup> Reply Brief for Petitioner, Historic Boardwalk Hall v. Commissioner, 585 F.3d 425 (3d Cir. 2012) (No. 12-901), 2013 WL 1910987 (May 6, 2013).</p> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup> <em>Cf. </em>Letter from Rep. Niki Tsongas (D-MA) to Jack Lew, Secretary of the Treas. (Apr. 26, 2013) (available at TNT DOC 2013-11090)</p> 6065 Tue, 28 May 2013 00:00:00 -0400 SolarCity Sues the United States over Treasury’s Administration of the Cash Grant Program http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/solarcity-sues-the-united-states-over-treasury-s-administration.html <p>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&nbsp;<a href="http://cdn.akingump.com/images/content/2/3/v2/23376/SolarCity-Complaint-Court-of-Federal-Claims-2-22-13.pdf">here</a>.</p><p>Below are excerpts from the key allegations in the complaint:</p> <ul> <li>&ldquo;Section 1603 did not grant Treasury authority to promulgate rules &hellip; for determining &ldquo;cost basis,&rdquo; because Congress dictated that [the investment tax credit (ITC)] definitions would govern. Treasury nonetheless did issue such rules and regulations, most problematically in the form of so-called &ldquo;guidance&rdquo; for the determination of cost basis: &ldquo;Evaluating Cost Basis for Solar Photovoltaic Property&rdquo; (&lsquo;Cost Basis Evaluation Process Guidance&rsquo;) available&nbsp;<a href="http://www.treasury.gov/initiatives/recovery/Documents/N Evaluating_Cost_Basis_for_Solar_PV_Properties final.pdf">here</a>.</li> <li>&ldquo;Treasury&rsquo;s &lsquo;Cost Basis Evaluation Process Guidance&rsquo; is not consistent with the ITC program that it is supposed to mimic.&rdquo;</li> <li>&ldquo;The &lsquo;Cost Basis Evaluation Process Guidance&rsquo; purports to establish &lsquo;benchmark&rsquo; values for residential and commercial solar energy facilities. [S]ince its inception, the solar energy ITC program has never included benchmark values against which a would-be ITC recipient&rsquo;s cost basis is examined. [This is] inconsistent with Congress&rsquo;s intent that the program incorporate the tax and evaluation concepts of the ITC program.&rdquo;</li> <li>&ldquo;Treasury&rsquo;s practice of delaying, and then rejecting claims in excess of benchmarks coerces applicants to undervalue their solar facilities simply to get paid part value of their project. As a result, Treasury&rsquo;s tactics have skewed the data on which Treasury purportedly relies to set its benchmarks.&rdquo;</li> <li>Treasury&rsquo;s guidance provides that the &ldquo;benchmark rates are &lsquo;constantly updated (as warranted) drawing on relevant publicly available information and analyses by various experts, data from existing 1603 applications and other confidential sources, and the 1603 review team&rsquo;s experience with solar PV properties.&rsquo; By comparing an applicant&rsquo;s cost basis to a fluctuating benchmark, premised in part upon &lsquo;confidential sources,&rsquo; the &lsquo;Cost Basis Evaluation Process Guidance&rsquo; introduces great uncertainty into the Section 1603 program, contrary to Congress&rsquo;s desire that the program simply mimic the ITC. This uncertainty surrounding the cash grant program made it less likely that entities would be willing to invest in solar energy projects, the direct opposite of what Congress intended.&rdquo;</li> <li>The &ldquo;Cost Basis Evaluation Process Guidance states that determining the fair market value of energy properties under the Section 1603 program may be evaluated using one of three methods: the &lsquo;Cost Approach,&rsquo; the &lsquo;Market Approach&rsquo; or the &lsquo;Income Approach,&rsquo; but then declares that the income approach is &lsquo;the least reliable method of valuation.&rsquo; This instruction cannot be reconciled with either the Internal Revenue Service&rsquo;s guidelines governing valuation, or decisions of this and other courts that have recognized the Income Approach as a legitimate means of valuation, without preemptively declaring it &lsquo;less reliable.&rsquo;&rdquo;</li> <li>The &ldquo;Cost Basis Evaluation Process Guidance made it all but impossible for a cash grant applicant to be paid within 60 days of the later of the submission of the application or the facility&rsquo;s in service date, in violation of Section l603(c), unless the applicant simply capitulated to the improper and invalid benchmark valuation. Even where there is no question that the applicant is entitled to at least the benchmark valuation, Treasury does not pay the undisputed amount while reviewing the evidence offered for a higher basis.&rdquo;</li> <li>&ldquo;December 5, 2012, Treasury stated in an email that it was revising downward its &lsquo;Guidance&rsquo; for California and Arizona residential systems, that the revision was retroactive, and that it would apply to pending applications. The reduction was substantial, reducing benchmark values for California from $7 per watt of generating capacity to $6 per watt and reducing benchmark values for Arizona from $7 per watt to $5 per watt &ndash; resulting in drastic decreases in the size of cash grants for pending applications that had been made in reliance on the purported Guidance. Treasury gave no explanation for the change at the time, and has given none since. It made this change without even revising the Guidance.&rdquo;</li> </ul> <p>All of the allegations above raise legitimate concerns. There are four that are of particular note.&nbsp; First, the Cost Basis Evaluation Process Guidance on its face provides that the benchmarks will be updated periodically. Almost two years later and after substantial changes in solar panel prices, Treasury has yet to publish an update.&nbsp; Treasury effectively reduced the cost basis guidance for residential solar in California and Arizona. This change was only communicated by Treasury by an email to SolarCity. The industry learned of it from a SolarCity. If Treasury changed its published guidance, it at least should have published the revision.</p> <p>Second, it appears to violate administrative law principles for the Treasury to promulgate the Cost Basis Evaluation Process Guidance without notice and comment, particularly when the document on its face purports to be based on &ldquo;confidential information.&rdquo;</p> <p>Third, the Cash Grant statute clearly provides that grants are to be paid within 60 days of the application. Treasury avoids violating that rule by requesting additional information that is not specified in the application or the instructions and taking the position that the application is not complete until the information is provided. Examples include information about solar projects that affiliates of the applicant bid on or detail about contracts the construction company entered into with parties other than the applicant. Treasury is violating the statute by delaying the start of the 60-day clock by requesting information not specifically provided for in the instructions or the application.</p> <p>Finally, the statement in the Cost Basis Evaluation Process Guidance that the Income Approach is &ldquo;the least reliable method of valuation&rdquo; is inconsistent with case law, and IRS publications.&nbsp; Outside of the energy area there are tax cases in which courts have endorsed the Income Approach. For instance, the 10<sup>th</sup> Circuit affirmed a Tax Court decision in which the Tax Court judge developed his own Income Approach calculation. The 10<sup>th</sup> Circuit wrote:</p> <p style="margin-left: 30px;">[The appraisers] constructed discounted cash-flow models to determine the present value of the ranch&rsquo;s future revenue.&nbsp; This remains an acceptable method for determining the value of a real estate interest where no comparable sales are available.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>As different solar projects have different state and utility incentives, different levels of exposure to the sun and different qualities of solar panels, it often is difficult to find &ldquo;comparable sales&rdquo; within the same time period.&nbsp; Thus, the 10th Circuit&rsquo;s opinion would suggest that the Income Approach is appropriate for solar projects.</p> <p>In addition, the Tax Court has accepted the Income Approach as a means to value Federal Communication Commission licenses (&ldquo;FCC&rdquo;).<sup><a name="_ftnref2" href="#_ftn2">2</a>&nbsp; </sup>The IRS has even noted this case for this proposition in one of its publications.<sup><a name="_ftnref3" href="#_ftn3">3</a>&nbsp; </sup>The IRS manual provides:</p> <p style="margin-left: 30px;">Some fundamental methods utilized to value intangible property include: &hellip; Income-based methods focus on the income-producing capacity of intangible property.&nbsp; &hellip; The income approach usually computes the net present value of the intangible by use of the discounted cash flow approach.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup></p> <p>An IRS training guide provides: &ldquo;Widely accepted appraisal theory suggests that the market value can be estimated using one of three methods: the sales comparison approach, the cost approach, and the income capitalization approach.&rdquo;<sup><a name="_ftnref5" href="#_ftn5">5</a>&nbsp; </sup>Another IRS document provides: &ldquo;To determine whether the fair market value claimed is correct, the following steps should be taken: &hellip; Determine the fair market value of the property received using the discounted cash flow value [(which is synonymous with the Income Approach)] of the property.&rdquo;<sup><a name="_ftnref6" href="#_ftn6">6</a> &nbsp;</sup>Finally, in the business world major asset acquisitions are typically evaluated using the Income Approach.<sup><a name="_ftnref7" href="#_ftn7">7</a></sup></p> <p>Treasury is correct in criticizing the Income Approach for the fact that small changes in economic assumptions can result in large variations in the values generated by the Income Approach.&nbsp; However, Treasury should have addressed this weakness by promulgating guidance with respect to the application of the Income Approach.&nbsp; Examples of areas that Treasury could have addressed include:</p> <p style="margin-left: 30px;">How should renewable energy certificates for which there is not an established market to sell them be valued?&nbsp;</p> <p style="margin-left: 30px;">How should the discount rate used in the Income Approach compare to the returns earned by the parties to the transaction?&nbsp;</p> <p style="margin-left: 30px;">How should &ldquo;bonus depreciation&rdquo; be valued when few taxpayers have appetite for it?&nbsp;</p> <p style="margin-left: 30px;">How should state tax benefits and costs be evaluated?&nbsp;</p> <p>By providing guidance on these issues, Treasury could have eliminated some of the variability in the Income Approach without dismissing the valuation method most predominate in the business world and supported by court cases and IRS publications.</p> <p>Recently, Treasury officials speaking on their own behalf have made remarks that suggest Treasury is now less critical of the Income Approach and gives it credence in some circumstances.<a name="_ftnref8" href="#_ftn8"><sup>8</sup></a> However, Treasury has not updated its guidance to reflect that change in view.</p> <p>One possible outcome of this case is that SolarCity&rsquo;s allegations in this case are settled in conjunction with the government&rsquo;s investigation that SolarCity made misrepresentations in its Cash Grant applications. If this case does progress to a public resolution, that resolution is likely to have broad implications for the solar industry.&nbsp; If SolarCity prevails it is likely to spur other developers to bring similar actions and will likely mute the IRS&rsquo; investment tax credit audit activities.&nbsp; In contrast, if the government prevails, it is likely to spur the IRS to handle investment tax credit audits in a similar manner that Treasury handles Cash Grant applications.&nbsp;</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a> </sup><em>Trout Ranch v. Commissioner,</em> 2012 WL 3518564 (10<sup>th</sup> Cir. 2012) (determining the fair market value of conservation easements).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a> </sup><em>Jefferson-Pilot Corp. v. Commissioner,</em> 98 T.C. 435, 452-53 (1992), <em>aff&rsquo;d</em> 995 F.2d 530 (4<sup>th</sup> Cir. 1993).</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a> </sup>IRS, Coordinated Issues Papers, <em>Media and Communications, Like-Kind Exchanges Involving FCC License</em> (Apr. 2, 2007).</p> <p><sup><a name="_ftn4" href="#_ftnref4">4</a> </sup>Internal Revenue Manual, <em>Intangible Property Valuation Guidelines</em>, 4.48.5.2.4.</p> <p><sup><a name="_ftn5" href="#_ftnref5">5</a> </sup>IRS MSSP Training Guide, <em>Diminution of Fair Market Value (FMV): Verification</em>.</p> <p><sup><a name="_ftn6" href="#_ftnref6">6</a> </sup>IRS MSSP Training Guide, <em>Oil and Gas Audit Techniques</em>.</p> <p><sup><a name="_ftn7" href="#_ftnref7">7</a> </sup>Robert B. Dickie, Financial Statement Analysis and Business Valuation for the Practical Lawyer 295 (2006) (&ldquo;Other than the use of comparables &hellip; the most widely used methods of valuation are the discounted cash flow method and methods essentially derived from it&rdquo;.)</p> <p><sup><a name="_ftn8" href="#_ftnref8">8</a> </sup><em>See</em> <a href="http://www.akingump.com/en/news-publications/final-sequestration-alert-burotn.html">http://www.akingump.com/en/news-publications/final-sequestration-alert-burotn.html</a> (Mar. 4, 2013).</p> 5757 Tue, 21 May 2013 00:00:00 -0400 New Guidance Provides Taxpayers with Definitions of Units of Property http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-guidance-provides-taxpayers-with-definitions-of-units-of.html <p>On April 30, the Internal Revenue Service (IRS) issued guidance (Revenue Procedure 2013-24 <a href="http://www.irs.gov/pub/irs-drop/rp-13-24.pdf">http://www.irs.gov/pub/irs-drop/rp-13-24.pdf</a>) providing definitions of &ldquo;units of property&rdquo; and &ldquo;major components&rdquo; 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.&nbsp; This is of particular interest to utilities and independent power producers.</p> <p>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 &ldquo;unit of property&rdquo; or &ldquo;major component&rdquo; such expenditures relate.&nbsp; Generally, for this purpose, a major component is a part of a larger unit of property.</p><p>One instance where the need to identify a discrete unit of property and a major component of such unit of property may arise is in applying the general rule that an expenditure paid to restore a unit of property is generally capitalized.&nbsp; A circumstance in which an expenditure is treated as paid to restore a unit of property under this rule is if such expenditure is for the replacement of a major component of a unit of property.&nbsp; Thus, the cost to replace a major component of an energy project must generally be capitalized.&nbsp; To apply this rule, it is clearly necessary to identify both the relevant unit of property and major component.</p> <p>The Revenue Procedure provides bright line guidance to define precisely what constitutes discrete units of property and major components with respect to different types of power generation facilities.&nbsp; The IRS&rsquo; motivation for publishing the Revenue Procedure was to minimize definitional disputes with taxpayers.</p> <p>Defining what constitutes a discrete unit of property or major component can be a complex determination in a generation plant composed of numerous functionally interdependent items of machinery and equipment.&nbsp; Revenue Procedure 2013-24 identifies and defines several common &ldquo;units of property&rdquo; and &ldquo;major components&rdquo; that are typically included in various types of power plants.&nbsp; For instance, one single unit of property identified and defined for a hydroelectric power station is a &ldquo;dam,&rdquo; defined as the &ldquo;equipment that forms a barrier that impounds water and manages its flow.&rdquo;&nbsp; The Revenue Procedure further provides that &ldquo;major components&rdquo; of a dam include (1) a spillway, (2) each spillway gate, (3) intakes, including trash racks and rakes, (4) a fish passage system, and (5) instrumentation and controls.</p> <p>Rev. Proc. 2013-24 also provides procedures for obtaining automatic consent to change to a method of accounting that uses all, or some of, the unit of property definitions provided.</p> 5737 Mon, 20 May 2013 00:00:00 -0400 The Real Cost of the IRS Tea Party Scandal http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/the-real-cost-of-the-irs-tea-party-scandal.html <p>The actions of the tax professionals in the IRS&rsquo; 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.&nbsp;</p> <p>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.</p><p>Congress by being distracted by this relatively isolated event is imposing a cost on the American people: it is not attending to issues critical to the future of the American economy. To be specific, a Ways &amp; Means Committee hearing on tax reform was cancelled on Thursday, so the committee members could attend a hearing on the IRS scandal.&nbsp;</p> <p>Other issues such as the budget sequester, entitlement reform, the lack of a coherent energy policy and the student loan crisis all have a far broader effect on the economy, than a handful of IRS employees that exercised poor judgment and will be punished.</p> <p>The IRS scandal may be easier to explain on television than the sequestration, but the scandal has already received severalfold more attention than is merited. It is time for the Congressional tax writing committees to return to the real work of the people.</p> 5730 Fri, 17 May 2013 00:00:00 -0400 New York State Senate Votes to Extend NY-Sun Initiative http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-state-senate-votes-to-extend-ny-sun-initiative.html <p>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.</p> <p>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.</p><p>The New York Solar Bill would solidify a 10-year extension of NY-Sun Initiative statute, ensuring that New Yorkers benefit from a stable and predictable long-term incentive program.&nbsp; It is expected to build 2,200 megawatts (MW) of solar, which would provide enough electricity to power 400,000 New York homes.&nbsp; It is also expected to create thousands of new local jobs in New York; reduce the need for expensive fossil power plants; and spur millions of dollars of investment in the state&rsquo;s growing clean energy economy. Additional information regarding the New York Solar Bill is available <a href="http://www.nysolarjobs.org/">here</a>.</p> <p>Our prior coverage of the NY-Sun Initiative is available below:</p> <p><a href="http://www.akingump.com/en/news-publications/new-york-governor-announces-107-million-available-for-large-solar-power-installations.html">New York Governor Announces $107 Million Available for Large Solar Power Installations Through the NY-SUN Competitive PV Program (April 15, 2012)</a></p> <p><a href="http://cdn.akingump.com/images/content/5/3/v2/5323/63ST0975.pdf">New York Governor Proposes NY-SUN Initiative and Tax Benefits (March 19, 2012)</a></p> 5682 Tue, 14 May 2013 00:00:00 -0400 New York Enacts Electric Vehicle Recharging Station Tax Credit to Compliment the Federal Tax Credit http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-enacts-electric-vehicle-recharging-station-tax-credit.html <p>Included in New York State&rsquo;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.&nbsp; The credit is valid against corporate tax, corporate franchise tax and personal income tax.&nbsp; 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.&nbsp; New Yorkers with electric cars should consider taking advantage of the credit by installing charging stations at their homes.&nbsp; Also, parking garages that seek to improve their &ldquo;green&rdquo; status should consider installing electric vehicle charging equipment for their customers and claiming the credit.</p> <p>The New York tax credit compliments the federal tax credit.&nbsp; 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&rsquo;s alternative minimum tax liability, but it may be carried forward for 20 years.</p><p>The taxpayer&rsquo;s adjusted basis in the recharging equipment is reduced by the amount of the federal tax credit.&nbsp; As New York tax law generally follows federal tax law as to basis matters, the adjusted basis for New York tax purposes is reduced by the amount of the New York tax credit.</p> <p>Both the New York and federal credits have recapture rules.&nbsp; Recapture means the reversal the credit by including an amount in taxable income.&nbsp; The New York recapture rules are relatively liberal.&nbsp; For New York tax purposes, the credit is recaptured only if the equipment ceases to be used as electric vehicle charging equipment or the taxpayer transfer the property with knowledge that the transferee will not use it as electric charging vehicle equipment.&nbsp; The recapture period (i.e., the period for which the equipment must be used as a charging station) is equal to the &ldquo;recovery period&rdquo; which is not defined but appears to be the federal recovery period which is five years as provided Treasury Regulation Section &nbsp;1.179A-1(g), Exs. 3-5.</p> <p>The Treasury is to issue regulations regarding the application of the recapture rules to the federal tax credit, but it has not done so.&nbsp; One can speculate that the federal recapture rules will be similar to the recapture rules for investment tax credits: a five year vesting period with recapture triggered by a broad category of transfers.</p> <p>Click <a href="http://cdn.akingump.com/images/content/2/3/v2/23141/S2609D-2013-NY-Senate-Open-Legislation-page-90-Enacted-refun.pdf">here</a> to see a link to the enacted New York legislation.&nbsp; The legislative history for the credit is on pages 13 and 14, &nbsp;and the statutory language is on pages 93 to 97.</p> 5660 Fri, 10 May 2013 00:00:00 -0400 Treasury Provides Automatic 90- Day Extension for Submission of Final Cash Grant Applications http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/treasury-provides-automatic-90-day-extension-for-submission-of.html <p>To be eligible for a 1603 Treasury Cash Grant, a &ldquo;begun construction&rdquo; application was required to be submitted prior to October 1, 2012.&nbsp; Further, wind projects must have been <em>placed in service</em> prior to January 1, 2013, and solar projects must be <em>placed in service</em> prior to January 1, 2017.&nbsp; Treasury&rsquo;s rules provide that an application at this stage in the program must be submitted within 90 days of the project being <em>placed in service</em>.</p> <p>Some grant applicants were having trouble with this deadline.&nbsp; For instance, some applicants struggled with determining the precise date their project was <em>placed in service</em>, because the test for<em> placement in service</em> is a multi-factor test that has subjective elements.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup> Treasury has generously implemented an automatic 90-day extension. Here is a link to Treasury&rsquo;s web site http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx. Now, from the <em>placed in service</em> date, an applicant that requests the extension, has up to 180 days to submit an application.</p><p>In another accommodation, Treasury&rsquo;s web site provides that the 90 extension may be requested anytime within 180 days from the <em>placed in service</em> date.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup> Therefore, even if more than 90 days have elapsed since the project was <em>placed in service</em>, an applicant may request an extension.&nbsp; Such an extension would provide the applicant with a 180 days in total from the <em>placed in</em> <em>service </em>date to submit a final grant application.</p> <p>The extension must be requested by updating pertinent the grant application; this is done on Treasury&rsquo;s web site.&nbsp; Once requested, approval of the extension is automatic.&nbsp; Treasury has cautioned that only one extension is available per application, so after the 90-day extension there are no more reprieves.</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> <em>See</em> Rev. Rul. 76-256, 1976-2 C.B. 46 and Rev. Rul. 76-428, 1976-2 C.B. 47.&nbsp; The standard typically used by practitioners is that the project must be connected and synchronized to the grid and capable of producing and delivering commercial quantities of electricity on a regular basis. The exact boundary of what constitutes production of &ldquo;commercial quantities&rdquo; of electricity is less than clear.</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> Treasury&rsquo;s web site provides: &ldquo;This 90 day time period may be extended for an additional 90 days (you can obtain this extension, while updating the application, at any time prior to the expiration of 180 days from the placed in service date). &ldquo;</p> 5646 Tue, 07 May 2013 00:00:00 -0400 New Rules for New York Historic Credits Create Opportunities for Investors http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-rules-for-new-york-historic-credits-create-opportunities-for-1.html <p>Please click <a class="rubycontent-asset rubycontent-asset-23091" href="https://ruby.akingump.com/images/content/2/3/23091.pdf">here</a> to read <em>New Rules for New York Historic Credits Create Opportunities for Investors</em> an article by David Burton posted in the <em>Bloomberg BNA Daily Tax Report</em>.</p> 5418 Wed, 01 May 2013 00:00:00 -0400 Congressional Research Service’s Report on Energy Efficiency Tax Credits for Consumers http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/congressional-research-services-reports-on-home-energy.html <p>On April 16, 2013, the Congressional Research Service published a report on home energy efficiency tax credits for consumers.&nbsp; The report is available <a href="http://cdn.akingump.com/images/content/2/3/v2/23071/25D-25C-CRS-Report-on-Consumer-Energy-Tax-Credits-April-2013.pdf">here</a>. The tax credits arise under Sections 25C and 25D of the Internal Revenue Code.&nbsp; 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.</p> <p>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.</p><p>The Section 25D credit is discussed in the post below of April 22, 2013. Please see full report available <a href="http://cdn.akingump.com/images/content/2/3/v2/23071/25D-25C-CRS-Report-on-Consumer-Energy-Tax-Credits-April-2013.pdf">here</a>.</p> <p>The report is relatively critical of these credits. First, the report highlights problems with fraudulent claims.&nbsp; Second, the report suggests that most of the taxpayers that claim the credits would make the improvements without the credits. Third, the report asserts that lower income individuals who need the credits to afford these improvements are unlikely to owe any federal income tax, so the credits are of no value to them. It appears that the report&rsquo;s analysis is questionable with respect to lumping the Section 25D and the Section 25C credits together in a single critique. The report&rsquo;s critique may very well be valid with respect to the Section 25C credit for windows and mechanicals. For those items, the taxpayer is generally replacing an existing item that needs to be replaced in relatively short order. In such circumstances, most people will select the energy efficient item over the non-energy efficient item, even it means a slightly higher cost. However, the solar panels covered by the Section 25D credit are a different dynamic. They cost tens of thousands of dollars and are a significant capital improvement, rather than merely replacing a broken item. Therefore, the Section 25D credits do promote investment in renewable energy that would not be made in absence of the credit. Further, it makes the residential solar market more healthy for homeowners to have the ability to claims the tax credit themselves, rather than being dependent on a solar investment company to monetize the credit for them.</p> 5410 Mon, 29 Apr 2013 00:00:00 -0400 In Honor of Earth Day http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/in-honor-of-earth-day.html <p>April 22, 2012, the 43<sup>rd</sup> Anniversary of Earth Day, was an important reminder of the need to remain committed to our environment.&nbsp; 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.</p> <p>What I&rsquo;m referring to is something called a &ldquo;master limited partnership&rdquo; (or MLP).&nbsp; 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.&nbsp; Oil, natural gas, coal and pipeline projects have been using this structure to expand their access to capital since the 1980s.&nbsp; (For additional discussion of MLPs, see David Burton&rsquo;s post of March 12, 2013 - &ldquo;A Camel&rsquo;s Nose Under the Tent: MLP Legislation&rdquo;).</p><p>Sen. Coons announced yesterday that he, along with Sens. Jerry Moran (R- Kan), Debbie Stabenow (D-Mich) and Lisa Murkowski (R-Alaska), will introduce a bill in the Senate on Wednesday, April 24 that would extend the MLP structure to wind farms, solar energy facilities and other renewable energy projects.&nbsp; The bill is expected to be similar to a bill introduced by Coons in 2012, but with expanded reach to include waste-heat to power, carbon capture and storage, biochemicals, and energy-efficient building projects.</p> <p>I hope Coons&rsquo; legislation will fare better this year than last. &nbsp;Sen. Murkowski says there is bi-partisan support in both houses of Congress for allowing clean energy companies to use the MLP structure.&nbsp; (Bloomberg Businessweek, &ldquo;Murkowski Sees Wider Support for Clean Energy Tax Break,&rdquo; April 22, 2013).&nbsp; Those who support the bill argue that by expanding the industry&rsquo;s access to the capital markets, the bill will attract more investment in clean energy projects.&nbsp; Additional investment should lead to lower capital costs, which in turn should mean expanded project development in renewables.&nbsp; &nbsp;&nbsp;</p> <p>It was encouraging to hear public support yesterday from Sen. Wyden, a member of the Senate Finance Committee and someone who is actively involved in energy tax reform.&nbsp; While Wyden will not add his name to the bill, he did comment that the idea of extending the MLP structure to clean energy projects is consistent with one of his key values. &nbsp;According to Bloomberg BNA&rsquo;s Daily Tax Report (April 23, 2013), Wyden stated in an interview with reporters:&nbsp; &ldquo;It would say renewables would get, in effect, parity with these other energy perks &hellip; which is really one of my bedrock principles.&rdquo; Business Roundtable and Heather Zichal, the White House deputy assistant to the president for energy and climate change, are also reported as supporting expanded access to the MLP structure. &nbsp;(Bloomberg BNA&rsquo;s Daily Tax Report (April 23, 2013); for more about Zichal, see David Burton&rsquo;s post of April 9, 2013 &ndash; &ldquo;White House Seeks to Expand Energy Tax Policy&rdquo;).</p> <p>Wyden&rsquo;s comment about parity should be a wake-up call to all of us. Tax policy to encourage investment in clean energy need not be limited to controversial tax credits and other tax benefits that some claim are unfair subsidies to the industry (a topic for a different day).&nbsp; Passage of a bill that extends the MLP structure to alternative energy projects should be a no-brainer.&nbsp; In honor of Earth Day, we must not forget that the absence of parity has the effect of discouraging investments in the types of energy we need to develop for the sake of our environment.</p> 5388 Tue, 23 Apr 2013 00:00:00 -0400 Installing Solar on Your House and Keeping the Tax Credits http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/installing-solar-on-your-house-and-keeping-the-tax-credits.html <p>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?</p> <p>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&rsquo;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.</p> <p>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 &ldquo;solar panel(s) or other property installed as a roof (or portion thereof)&rdquo;, even if &ldquo;it constitutes a structural component of the structure on which it is used.&rdquo;</p><p>The credit is available for solar panels installed on a &ldquo;dwelling unit that is located in the United States and is used as a residence by the taxpayer&rdquo;. Thus, solar panels installed on vacation homes are eligible for the credit.&nbsp; Further, the credit is on a home-by-home basis &ndash; so you can claim the credit once, sell your home, buy a new home and claim the credit for solar panels on the new home.</p> <p>The credit is not available to the extent the cost relates to equipment used to heat a swimming pool or a hot tub.</p> <p>The Section 25D tax credit is not subject to the &ldquo;passive activity loss rules&rdquo; of Code Section 469, so the Section 25D tax credit may be used to offset the income tax liability associated with your salary or investment portfolio.&nbsp;</p> <p>The Section 25D credit does reduce the tax basis of the solar panels. The reduction is for the full amount of the credit (in contrast to the Code Section 48 investment tax credit, claimed by investors, for which tax basis is reduced by 50 percent of the investment tax credit). As a practical matter, the reduction in tax basis should not matter, until the home is sold. And then for the sale of a principal residence (i.e. not a vacation home), there is an exemption for the first $250,000 of gain (or $500,000 for married taxpayers filing jointly).</p> <p>There are drawbacks of owning a home solar system yourself. First, you cannot deduct the depreciation while a solar company can. Second, there may be additional maintenance services provided by a solar company providing solar panels that may not be provided to homeowners that own their own solar systems.</p> <p>But what about state tax credits? A helpful resource that has information on every state is <a href="http://www.dsireusa.org/">http://www.dsireusa.org/</a>. A word about New York State:&nbsp; New York has a tax credit of 25 percent of the cost of the solar system; however, the credit is capped at $5,000. In addition, there also is a New York credit for lease and power purchase agreement payments. The New York solar tax credit is limited to principal residences located in New York, so no vacation homes. Further, even if you pay New York income taxes on your salary from a New York employer, you cannot claim the credit for solar panels on your home in Connecticut or any other state other than New York.</p> 5382 Mon, 22 Apr 2013 00:00:00 -0400 PTC Start of Construction Guidance may be Clarified http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/ptc-start-of-construction-guidance-may-be-clarified.html <p>As the renewable energy industry absorbs the IRS&rsquo; production tax credit (PTC) guidance, Notice 2013-29 (<a href="http://www.irs.gov/pub/irs-drop/n-13-29.pdf">http://www.irs.gov/pub/irs-drop/n-13-29.pdf</a>) that was issued Monday, two glitches have surfaced: liquidated damages and master contracts.&nbsp; The notice is summarized in a Client Alert available <a href="http://www.akingump.com/en/news-publications/ptc-start-of-construction-guidance-worth-the-wait.html">here</a>.</p> <p>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.&nbsp; If the developer uses work by or payments to a contractor to achieve this, the arrangement with the contractor must be a &ldquo;binding written contract&rdquo;.</p><p>Under the Treasury Cash Grant guidance and prior tax precedent, a contract was considered &ldquo;binding,&rdquo; so long as the potential damages due thereunder were not limited to less than five percent of the payments due under the contract.&nbsp; However, Notice 2013-29 appears to preclude any limitation on damages. The notice provides the contract must &ldquo;not limit damages to a specified amount (for example, by use of a liquidated damages provision). &ldquo; <sup><a name="_ftnref1" href="#_ftn1">1</a></sup> Reportedly, the IRS did not intend to vary from the 5 percent liquidated damages standard used in the Treasury Cash Grant guidance and is considering publishing further PTC guidance to clarify this point.</p> <p>In addition, the notice enables developers to have a parent legal entity enter into a &ldquo;master contract&rdquo; with a manufacturer and then have the work performed under that contract assigned to the parent entity&rsquo;s affiliates that are developing particular projects.&nbsp; The notice appears to preclude the application of this arrangement to five percent safe harbor and to only make the arrangement available in the context of &ldquo;physical work of a significant nature&rdquo;.&nbsp; This suggestion stems from the fact that the &ldquo;master contract&rdquo; rule is only referenced in that portion of the notice specifying the requirements for physical work of a significant nature and there is no cross-reference in the five percent safe-harbor.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup>&nbsp;&nbsp;&nbsp; Such a change is a variation from the Treasury Cash Grant guidance.&nbsp; Reportedly, the IRS did not intend to exclude the application of the master contract rule to the five percent safe harbor and is considering publishing further guidance to clarify this point.&nbsp;</p> <p>The industry hopes that the IRS communicates these points soon, so that taxpayers have clarity as to what is required to ensure eligibility for PTCs.</p> <p>&nbsp;</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> Notice 2013-29, &sect; 4.03(1).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> <em>See</em> Notice 2013-29, &sect; 4.03(2).</p> 5375 Fri, 19 Apr 2013 00:00:00 -0400 Effect of Potential Passthrough Reform on Renewables Industry http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/effect-of-potential-passthrough-reform-on-renewables-industry.html <p>On March 12, Dave Camp (R-MI), who is chair of the House of Representatives&rsquo; Ways &amp; Means Committee, released a revised discussion draft for tax reform focusing on simplifying the taxation of small business owners.&nbsp; Part of the proposed reform is to bring closer together both passthrough regimes:&nbsp; the &ldquo;partnership&rdquo; and &ldquo;S-corporation&rdquo; regimes under subchapter K and subchapter S, respectively.&nbsp;</p> <p>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.&nbsp; Recent comments by government officials during a KPMG webinar suggest that flip partnerships would continue to be a viable structure.&nbsp;</p><h3>Option One</h3> <p>Option One would involve making certain isolated and targeted modifications to key provisions of both subchapters K and S.&nbsp; A few of the particular changes that have been proposed for subchapter K are the repeal of the &ldquo;guaranteed payment&rdquo; rules and the rules relating to payments made to retiring partners. Further, Section 754-type inside basis mark-to-market adjustments would become mandatory for all partnerships upon distributions in kind and transfers of partnership interests, and require corresponding adjustments to lower-tier partnerships.&nbsp; Revisions would also be made to the rules applicable to distributions of unrealized receivables and inventory items, and the timing limitation of the so-called &ldquo;mixing bowl&rdquo; transaction rules would be eliminated.</p> <h3>Option Two</h3> <p>Option Two of the Camp proposal is far more ambitious and would entail a full repeal of current subchapters K and S.&nbsp; Contemporaneously, a new &ldquo;unified passthrough regime&rdquo; would be introduced applicable to entities treated as &ldquo;passthroughs&rdquo; for U.S. federal income tax purposes.&nbsp;</p> <p>The scope of the entities eligible for passthrough treatment would be broadened, and would become elective for certain corporations that are currently subject to subchapter C, but not for publicly traded corporations.</p> <h3>Implications for Renewables under Option Two</h3> <p>Significantly for renewable energy tax equity partnerships, the new distributive share of a partner would generally be computed pursuant to the partnership agreement; however, there would be a restriction on making &ldquo;special allocations.&rdquo; Creating different distributive shares of certain items to the same owner would not be possible within each of three specified categories: (i) ordinary income items (including Section 1231 gain or loss (<em>i.e.</em>, gains and losses realized with respect to certain property used in a trade or business)); (ii) capital gain or loss items; and (iii) tax credits.&nbsp; This means special allocations of investment or production tax credits would continue to be possible, but the allocation percentage would apply for all allocations of tax credits that the partnership&rsquo;s business gives rise to.&nbsp; It is not clear if the scope of this requirement would include state credits.&nbsp; The same approach would likely apply to depreciation deductions, (i.e., they would be part of the first category of allocations). It remains to be seen what this proposal means for the current rules, which provide that the allocation of production and investment tax credits must follow the allocation of profit and loss for the year in question.</p> <p>New also would be that withholding would apply to the distributive share of net passthrough income to <em>each </em>partner, with an exception for interest holders already subject to Section 1446 withholding (<em>i.e.</em>, withholding on income of the partnership which is effectively connected with the conduct of a U.S. trade or business). This withholding would be treated as a deemed distribution and owners would be entitled to a refundable income tax credit for the amount withheld.</p> <p>Although many of the operative provisions of the unified regime would more closely resemble the provisions of current subchapter K, a significant departure would be that partnerships would be required to recognize gain on distributions of either cash or property in excess of a partner&rsquo;s outside tax basis.&nbsp;</p> <h3>Conclusion</h3> <p>The Camp proposal is interesting and will spark debate about passthrough reform.&nbsp; Harold Hancock, tax counsel to the Ways &amp; Means Committee, has recently confirmed that the Committee welcomes comments from interested parties on virtually all aspects of the proposal.&nbsp; Since broader tax reform can be expected sooner rather than later, it will be interesting to see which elements of the proposed reform are favored in the relevant industries.&nbsp;</p> <p>For more information on the proposal, officially entitled &ldquo;Strengthening the Economy and Increasing Wages by Making the Tax Code Simpler and Fairer for America&rsquo;s Small Businesses,&rdquo; click <a href="http://waysandmeans.house.gov/taxreform/">here</a>.</p> <p>For the text of the Discussion Draft, click <a href="http://waysandmeans.house.gov/uploadedfiles/final_sm_bus_passthrough_legislative_text_03.12.13.pdf">here</a>.</p> <p>For the Technical Explanation, click <a href="http://waysandmeans.house.gov/uploadedfiles/final_sm_bus_passthrough_technical_explanation_03_12_13.pdf">here</a>.</p> 5365 Thu, 18 Apr 2013 00:00:00 -0400 Obama Administration’s Budget Proposal http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/obama-administration-s-budget-proposal.html <p>The Obama Administration&rsquo;s budget proposal for fiscal year 2014 would make the production tax credit <em>permanent</em> and <em>refundable</em>.&nbsp; Refundability would mean that developers without sufficient tax liability to use the credits would receive a cash refund from the IRS.&nbsp; If enacted in the form proposed, projects that start construction <em>after </em>December 31, 2013 would be eligible. The question is whether such an expansion would pass the Republican-controlled House of Representatives.</p> <p>If enacted the Administration&rsquo;s budget would end the sequestration rules that since March 1st have applied to Treasury&rsquo;s Cash Grant payments for renewable energy <a href="http://www.akingump.com/en/news-publications/final-sequestration-alert-burotn.html">projects</a> 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 &ldquo;grand compromise&rdquo; with respect to tax reform, entitlements and other spending.</p><p>The Administration proposes to repeal 11 fossil fuel incentives and extend the amortization period for certain fossil fuel geological and geophysical expenses.</p> <p>The proposal includes a number of technical changes in the interest of simplification. One change is to repeal the &ldquo;technical termination&rdquo; of partnerships. A technical termination occurs when 50 percent or more of the total interests in a partnership are transferred within a 12-month period. A typical tax equity partnership agreement requires a transferor to either deliver a tax opinion that its transfer will not cause a technical termination or provide an indemnity for the tax consequences incurred by the other partners as a result of such a termination. This proposal would eliminate the need for that complex drafting.</p> <p>The budget proposal is silent on the expansion of the real estate investment trust or master limited partnership rules to renewable energy projects; however, future action by the Administration in those areas is expected.&nbsp; Please see blog post of April 9,2013 <a href="http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/white-house-seeks-to-expand-energy-tax-policy.html">here</a>.</p> 5306 Thu, 11 Apr 2013 00:00:00 -0400 White House Seeks to Expand Energy Tax Policy http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/white-house-seeks-to-expand-energy-tax-policy.html <p>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&rsquo;s (R-Kan.) bill to expand the ability of master limited partnerships (MLPs) to invest in renewables by treating renewable energy income as &ldquo;good&rdquo; income for purposes of the 90 percent qualifying income test and (ii) permitting solar projects to be &ldquo;qualifying&rdquo; assets for real estate investment trusts (REITs). The MLP bill is discussed in the blog post below of March 13.</p> <p>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.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>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 &ldquo;real property&rdquo; 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.</p><p>The Coons-Moran MLP bill is a good first step in expanding the ability of renewable energy developers to raise equity in the public markets. When that bill is reintroduced in this Congress, it would be helpful if it also provided that tax-exempt unit holders of the MLP would not trigger any reduction in the accelerated depreciation or tax benefits available to projects in which the MLP has an interest.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup> Addressing the tax-exempt unit holder point that would enable MLPs to execute transactions with tax equity investors to monetize tax credits and accelerated depreciation that are of little benefit to their unit holders, who are typically individuals subject to the passive activity loss and at-risk rules. For an explanation of those rules applicability to individual taxpayers, please see [<a href="http://cdn.akingump.com/images/content/4/4/v2/4462/Project-Perspectives-Newsletter-Summer2012.pdf">Hunting Unicorns, Project Perspectives</a>].</p> <p>It is important to note that neither the MLP nor the REIT expansion would solve the problem of the renewable energy industries shortage of tax equity investors; neither would change or be a substitute for the energy tax credits that have been the foundation of renewable energy in the United States to date.&nbsp;</p> <p>The initiatives above are worthy policy changes, but there also technical issues that the Administration in short order could address in notices, revenue rulings or regulations that would meaningfully facilitate renewables investment:</p> <ul> <li>The investment tax credit rules require that the taxpayer that claims the investment tax credit owns the project before it is "placed in service" (<em>i.e.</em>, commercially operational). The rule does not apply in production tax credit transactions and it has a limited scope in the Treasury cash grant program.&nbsp; Further, for sale-leaseback investment tax credit transactions, the lessor is permitted to enter the transaction anytime within the first three months following placement in service. It would be helpful to expand the three-month rule to include flip partnerships,<sup><a name="_ftnref3" href="#_ftn3">3</a></sup> pass-through leases<sup><a name="_ftnref4" href="#_ftn4">4</a></sup> and service contracts<sup><a name="_ftnref5" href="#_ftn5">5</a></sup> in which the party that developed the project has a continuing role in the transaction.</li> <li>The investment tax credit rules require recapture of the investment tax credit if there is a transfer of the project in the first five years.<sup><a name="_ftnref6" href="#_ftn6">6</a></sup>Such rules in the Treasury cash grant program were limited to transfers to tax-exempt entities; further, the rules are inapplicable in production tax credit transactions. &nbsp;The following clarifications would expand the market for tax equity investors willing to be exposed to recapture risk: <ul> <li>Exempt foreclosures by a lender from triggering recapture. Concern that a lender will foreclose and trigger recapture results in many tax equity investors declining to invest in levered projects; however, leverage often is a key component of the optimal capital structure.</li> <li>Provide that a change in the allocation of tax attributes among partners does not result in recapture.&nbsp; This hampers the partnership agreements from being drafted in a manner that produces the optimal economics for the projects.</li> </ul> </li> <li>The investment tax credit rules generously provide that the tax credit may be claimed prior to placement in service for <em>qualified production expenditures</em> (QPEs). Please click <a href="http://cdn.akingump.com/images/content/2/2/v2/22173/Project-Perspective-Newsletter-Winter13.pdf">here</a> for a discussion of QPEs generally. The investment tax credit for QPEs is rarely claimed, because tax equity investors prefer to invest once the project is substantially constructed. That leads to the following questions: if a developer incurs $100 of QPEs and forms a partnership with a tax equity investor that invests $1 during construction period, may the tax equity investor with its $1 investment be allocated the 30 percent tax credit for the $100 of QPEs?&nbsp; An accommodating answer to this question could encourage more tax equity investors to make capital contributions during construction, which is a time projects have a critical need for capital.</li> <li>Residential solar is growing rapidly and has the potential to grow even faster. As few homeowners want to pay for solar panels out of pocket, leasing is a common solution.&nbsp; The term of the leases is often 25 years. The primary guidance on leasing is the leveraged leasing ruling guidelines which, are almost four decades old,<sup><a name="_ftnref7" href="#_ftn7">7</a></sup> but such guidelines are not easily applied to today&rsquo;s residential solar leases. It would encourage tax equity investors to enter the market if residential solar leases could be provided their own safe-harbor that was more in line with market expectations than the leveraged lease ruling guidelines. Further, some homeowners request to prepay their solar leases, as they may have money in the bank earning interest at a lower rate than the leasing company will charge them.&nbsp; Providing guidance on permissible prepayments would encourage more tax equity investors to participate in these common transactions.</li> </ul> <p style="text-align: center;">***</p> <p>As the White House appears to have decided to use tax policy to promote renewable energy, the renewable energy industry should seize this opportunity to address not only large legislative issues, like MLP, but also technical rules that hinder the expansion of the tax equity market and would require little, if any, of the President&rsquo;s political capital to resolve.&nbsp;</p> <p>&nbsp;</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> Ari Natter, <em>Official Says White House Seeking Changes To Tax Policy to Benefit Renewable Energy</em>, Daily Tax Rep. G-9 (Apr. 9, 2013).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> See I.R.C. &sect;&sect; 50(b)(4)(A), 168(h)(6).</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup> <em>E.g.,</em> Rev. Proc. 2007-65, , 2007-45 I.R.B. 967.</p> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup> <em>See</em> I.R.C. &sect; 50(d)(5) (referencing old &sect; 48(d)).</p> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup> <em>See </em>I.R.C. &sect; 7701(e).</p> <p><sup><a name="_ftn6" href="#_ftnref6">6</a></sup> <em>See</em> I.R.C. &sect; 50(c).</p> <p><sup><a name="_ftn7" href="#_ftnref7">7</a></sup> Rev. Proc. 2001-28, 2001-1 CB 1156 (substantially re-issuing Rev. Proc. 75-21, 1975-1 C.B. 715), so these guidelines are fundamentally unchanged since 1975.</p> 5294 Tue, 09 Apr 2013 00:00:00 -0400 Class Action Bar Targets Residential Solar http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/class-action-bar-targets-residential-solar-1.html <p>SunRun, Inc. (&ldquo;SunRun&rdquo;) 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 &ldquo;class&rdquo; so that they can sue SunRun in a single action. The class action complaint is <a href="http://forms.greentechmedia.com/Extranet/95679/Reed-v.-SunRun-complaint.pdf">available here</a>. &nbsp;Akin Gump is not involved in this lawsuit.</p> <p>The lawsuit has three allegations:</p> <p>1. It was deceptive for SunRun to include predictions of increased energy prices in California in its marketing materials. SunRun&rsquo;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.</p> <p>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&rsquo;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.</p> <p>3. At the time the system was installed on the plaintiff&rsquo;s home, SunRun did not have a California contractor&rsquo;s license.&nbsp; SunRun started installing solar systems in 2007, but did not obtain a California contractor&rsquo;s license until February 2012.</p><p>I find the first two allegations to be preposterous as claims for damages. Projecting future price increases is a standard marketing technique in the home real estate industry and the securities industry.&nbsp; For instance, stockbrokers and financial advisors frequently reference the tremendous appreciation in stock prices since 1929 as a justification for investing in equities. Similarly, it is common for real estate agents to pitch the increase in home prices since the 1950s. No prudent person would interpret these facts as a guarantee of future appreciation or believe he or she could sue his or her stockbroker or real estate agent if prices did not increase. A prudent person should have also been capable of realizing the same is true of electricity prices.</p> <p>As to the second allegation, everyone knows that, if you lease a car, even if you do not want the car, you are still obligated under the lease. During the term, you cannot just return it to the dealership and wash your hands of it. Similarly, a prudent person should realize that, if he or she leases a solar system and then sells the house upon which it is installed, either the buyer will need to be an assignee of the lease and accept responsibility for the payments for the solar system or the solar company will be due a termination payment. Further, financing a solar system is a relatively large-ticket and complex consumer transaction. Consumers should be expected to either have sufficient sophistication to understand what they are signing or realize that they need a lawyer, and it is not realistic that the contracts should be written on a fifth-grade reading level in a manner to assuage every possible misimpression.</p> <p>To be fair, the complaint also alleges that SunRun&rsquo;s marketing representatives suggested to the plaintiff that, upon selling his house, he had no further obligation for the solar lease. That is a difficult allegation to prove, since it is a classic &ldquo;he said, she said&rdquo; situation. The plaintiff will insist the representative said such a thing; SunRun will insist that its representatives are clearly trained to not say such things. Importantly, such issues are not appropriate for class action litigation, which is what the plaintiff and his counsel are attempting to initiate here, because each plaintiff/homeowner would have to testify and each marketing representative would have to testify.&nbsp; Class action cases are supposed to be based on relatively common facts that do not require testimony from each plaintiff (e.g., airline passengers all of whom were charged a questionable fee in the price of their tickets).&nbsp;</p> <p>I cannot offer much insight as to the third allegation. The plaintiff&rsquo;s counsel makes an interesting point that SunRun started operating in California in 2007 and only obtained a contractor&rsquo;s license in 2012.&nbsp; Oftentimes, solar companies contract out the installation. I have no experience in contract licensing law in California, but it seems plausible to me that there may have been a reasonable analysis that it was sufficient if the installer who actually did the work was licensed. SunRun may have then decided to obtain a contractor&rsquo;s license as a &ldquo;belt and suspenders&rdquo; measure.</p> <p>Finally, in my experience, most California consumers who leased solar equipment had their utility bills decline by more than their lease payments (i.e. &ldquo;net-net&rdquo; they saved money).&nbsp; Solar companies generally try to structure their leases to show some savings even at the outset.&nbsp; If that is true in this instance, then Mr. Reed has no damages, and the case should be dismissed.</p> <p>Unfortunately, this lawsuit will likely start a trend, and we will see similar actions with respect to the marketing materials and contract termination provisions filed against SolarCity, Sungevity and the other residential solar players. We can only hope that the courts apply an appropriate standard of business sophistication to homeowners who enter into contracts for expensive and complex solar systems, and that these lawsuits do not cause a drag on an industry that is both improving the environment and creating blue-collar jobs.</p> 5275 Fri, 05 Apr 2013 00:00:00 -0400 Treasury & IRS to Issue PTC Guidance as Soon as Possible http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/treasury-irs-to-issue-ptc-guidance-as-soon-as-possible.html <p>Treasury Assistant Secretary for Legislative Affairs, Alastair Fitzpayne, wrote Senator Michael Bennet (D-CO) on March 28 that the &ldquo;start of construction&rdquo; production tax credit guidance that the wind industry is eagerly awaiting will be issued &ldquo;as soon as possible.&rdquo; The letter provided no other color. It will be interesting to see what &ldquo;as soon as possible&rdquo; means to Treasury.</p> <p>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.</p> <p>To read PTC letter from Treasury to Senator Michael Bennet click <a class="rubycontent-asset rubycontent-asset-22877" href="https://ruby.akingump.com/images/content/2/2/22877.pdf">here</a>.</p> 5266 Wed, 03 Apr 2013 00:00:00 -0400 IRS Inflation Adjustment Increases PTC to 2.3 cents per KwH http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/irs-inflation-adjustment-increases-ptc-to-2-3-cents-per-kwh.html <p>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.&nbsp;</p> <p>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.</p> <p>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.</p><p>The tax credit for refined coals sold in 2013 is $6.59 per ton sold in 2013. Finally, the tax credit for Indian coal is $2.308 per ton sold in 2013.</p> <p>More details are available from CCH <a href="http://www.cchgroup.com/wordpress/index.php/tax-headlines/federal-tax-headlines/inflation-adjustments-and-reference-prices-for-renewable-energy-production-credit-released-notice/">here.</a></p> 5229 Tue, 02 Apr 2013 00:00:00 -0400 GAO Report on Federal Wind Incentives http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/gao-report-on-federal-wind-incentives.html <p>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.&nbsp;</p> <p>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.</p><p>Interestingly, the report&rsquo;s recommendations were focused on the Department of Energy and the Department of Agriculture: &ldquo;GAO recommends DOE and USDA formally assess and document whether the federal financial support of their initiatives is needed for applicants&rsquo; wind projects to be built.&rdquo;&nbsp; &nbsp;&nbsp;</p> <p>The report is available <a href="http://gao.gov/products/GAO-13-136">here</a>.</p> 5220 Mon, 01 Apr 2013 00:00:00 -0400 Germany Debates How to Pay for Renewables http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/germany-debates-how-to-pay-for-renewables.html <p>Germany has been praised for its political ambition to shift from nuclear and fossil fuels to renewable sources of energy.&nbsp; Its so-called &ldquo;Energiewende&rdquo; has sparked debate on how to address rising costs for consumers while supporting the renewables policy.&nbsp;</p> <p>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.&nbsp;</p> <p>The federal ministers also proposed to partially shift the economic burden of the Energiewende from consumers to producers.&nbsp; Their proposals include a new &ldquo;energy solidarity tax&rdquo; charged to new, as well as existing, solar and wind energy generators; the cancellation of a biogas promotion bonus (the so-called &ldquo;G&uuml;llebonus&rdquo;); 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.</p><p>Although there is a common understanding that the renewable energy legislation needs fundamental reform, the federal government&rsquo;s plans are not going uncriticized by opposition parties, who have a majority in the Bundesrat. &nbsp;Meanwhile, the minister for the environment of the state of Bavaria attempted to reach a compromise that would include either short-term reductions of energy taxes for consumers or an exemption of the renewable energy surcharge from value-added taxation (VAT).&nbsp; He also proposed replacing the fixed renewable energy pricing with a system of predetermined fees the amount of which would depend on the type of producer.&nbsp; This alternative would allow the renewable energy price to fluctuate with the market price and would protect consumers from unnecessary taxation in case the market price drops.</p> <p>We can only hope that this debate results in Germany finding a viable way to encourage renewables and spread the cost equitably.&nbsp; If it does, it could be a model for other nations.</p> <p>For more information <a href="http://www.spiegel.de/international/germany/german-environment-ministry-plans-to-cap-subsidies-for-renewables-a-880301.html">click here</a>.</p> 5191 Wed, 27 Mar 2013 00:00:00 -0400 New York Times Magazine Advises on the Ethics of Being a Tax Lawyer http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-times-magazine-advises-on-the-ethics-of-being-a-tax.html <p>Tax lawyers were the topic of the weekly ethics column in<em> The</em> <em>New York Times Magazine. </em>An unnamed New York tax lawyer wrote the ethicist asking, &ldquo;Is advising wealthy companies of ways to reduce their tax bills through sophisticated legal structures ethically permissible?&rdquo; The ethicist responded, &ldquo;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.&rdquo; The column is available <a href="http://www.nytimes.com/2013/03/24/magazine/a-tax-lawyers-quandary.html?ref=magazine&amp;_r=0">here.</a></p> <p>One advantage to a practice focused on the tax aspects of renewable energy is that such ethical questions do not really arise. Using one&rsquo;s tax expertise to maximize tax credits funding renewable energy that leads to lower carbon emissions is, generally, a worthy endeavor by any measure.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p><p>However, the Third Circuit&rsquo;s recent opinion in <em>Historic Boardwalk Hall</em> demonstrated that the federal courts do not give tax planning for a good cause a free pass on legal issues like the risk and rewards that a purported partner must bear in order to be respected as a partner by the tax law (and accordingly entitled to the resulting tax benefits).<sup><a name="_ftnref2" href="#_ftn2">2</a></sup> &nbsp;</p> <p>In <em>Historic Boardwalk Hall</em>, an affiliate of Pitney Bowes invested in a partnership that owned a refurbished historic building on the Atlantic City Boardwalk. The court held that the Pitney Bowes affiliate was not a true partner, because arrangements like puts and calls, protection provided by broad contractual indemnities and security from a guaranteed investment contract insulated it from exposure to any of the economics of the historic building.</p> <p>Thus, tax lawyers who practice in the area of investment and production tax credits may not have ethical qualms about the use to which they put their skills, but they still must exercise independent professional judgment with respect to challenging technical issues.</p> <hr size="1" /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a> </sup>One may question whether the tax law is the most efficient means to support renewable. However, that is a question for Congress; for the moment Congress, has decided that the tax law is the means to support renewables in the United States.</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a> </sup>Historic Boardwalk Hall, LLC v. Comm&rsquo;r, 694 F.3d 425 (3d Cir. 2012).</p> 5176 Mon, 25 Mar 2013 00:00:00 -0400 Bloomberg Publishes Optimistic Article on IRS PTC Guidance http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/bloomberg-publishes-optimistic-article-on-irs-ptc-guidance.html <p>Christopher Martin of Bloomberg in an article dated March 21 writes that &ldquo;The Internal Revenue Service is poised to release guidance&rdquo; with respect to the &ldquo;start of construction&rdquo; 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&rsquo;s the <a href="http://www.bloomberg.com/news/2013-03-21/u-s-wind-industry-hangs-on-irs-defining-construction-.html">link</a>. For more coverage, see the post below of January 31.</p> 5170 Fri, 22 Mar 2013 00:00:00 -0400 Sen. Wyden Gets the Message: Oil and Gas Incentives Are Inconsistent with Energy Technology Parity http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/sen-wyden-gets-the-message-oil-and-gas-incentives-are.html <p>Today, Sen. Wyden (D-OR) spoke to the Edison Electric Institute. He said, &ldquo;On energy, the guiding principles [should] be technology neutrality&mdash;that you don't favor one technology over another&mdash;and what amounts to parity.&hellip; You just distort the market if some sources get these enormous incentives and others don&rsquo;t.&rdquo; The senator went on to acknowledge that a goal of parity would require examining oil and gas tax incentives.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>Sen. Wyden&rsquo;s comments about oil and gas tax incentives are consistent with a post on this blog of March 6, &ndash; <em>Level Playing Fields.</em></p> <p>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. <sup><a name="_ftnref2" href="#_ftn2">2</a></sup></p><p>Energy technology parity would also mean a reduction in tax incentives for renewables.&nbsp; However, renewables are quickly approaching grid parity with fossil fuels, if both forms of energy must compete without tax incentives. If the tax incentives for renewables must be sacrificed to a balanced budget, the same should happen to fossil fuels. Then, let the various technologies battle it out in the free marketplace.</p> <p>The above also does not reflect the fact that the fossil fuels industry has socialized the cost of carbon. Because carbon pollution contributes to lung disease, we all pay for it in terms of higher health insurance premiums and higher taxes to fund Medicare and Medicaid. If that cost is factored into fossil fuels, renewables would be the clear winner.</p> <hr size="1" /> <p><sup><a name="ftn1" href="#_ftnref1">1</a></sup> Wyden Calls for Energy Tax Reform That Could Put Oil, Gas Subsidies at Risk,<em> BNA Daily Tax RealTime Update</em> (March 21, 2013).</p> <p><sup><a name="ftn2" href="#_ftnref2">2</a></sup> Section 101 (Findings) of the Sustainable Energy Act (unenacted) introduced on February 14, 2013.</p> 5169 Thu, 21 Mar 2013 00:00:00 -0400 Holders of Refundable Tax Credit Energy Bonds Face 8.7 Percent Sequester http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/holders-of-refundable-tax-credit-energy-bonds-face-8-7-percent.html <p>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.</p> <p>The Internal Revenue Service has <a href="http://www.irs.gov/Tax-Exempt-Bonds/Effect-of-Sequestration-on-Certain-State-and-Local-Government-Filers-of-Form-8038CP">announced</a> 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.</p><p>The sequester percentage and the effective date are the same as for the Cash Grant program for renewable energy projects.</p> <p>A bond holder who prefers to avoid the sequester could opt to not file Form 8038-CP and instead take its benefit as actual tax credits. Actual tax benefits, whether from tax credit bonds or in the form of the investment tax credit or the production tax credit are not subject to sequestration.</p> <p>Other refundable tax credit bonds subject to the 8.7 percent sequester are Build America Bonds, Qualified School Construction Bonds and Qualified Zone Academy Bonds.</p> <p>These are bonds that provide certain qualified borrowers with a below-market rate of interest. The bond holder is eligible for tax credits for the difference between what the borrower paid and a stipulated rate. The bond holder may elect to convert the tax credits into a &ldquo;refund&rdquo; (i.e., cash).</p> 5136 Fri, 15 Mar 2013 00:00:00 -0400 Senator Coburn Suggests to Treasury a Cut to Cash Grant Payments http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/senator-coburn-suggests-to-treasury-a-cut-to-cash-grant-payments.html <p>Senator Coburn&rsquo;s (R-OK) <a href="http://www.coburn.senate.gov/public/index.cfm?a=Files.Serve&amp;File_id=6a03582c-1146-4912-8d6e-b43dc4d7b7d1">letter</a> 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.</p> <p>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.</p> <p>Senator Coburn&rsquo;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.</p><p>The senator&rsquo;s letter has a questionable analysis in the following:</p> <p>First, if the senator is concerned about Cash Grants for wind farms, there will be no more wind farms eligible for the Cash Grant: wind farms had to be &ldquo;placed in service&rdquo; in 2012 or before to be Cash Grant eligible.</p> <p>Second, Senator Coburn&rsquo;s suggestion does not distinguish between Cash Grants for wind versus other renewable energy technologies; however, his rationale for further Cash Grant cuts due to benefiting foreigners referenced only Cash Grants for wind and ignored other industries like solar. For instance, the senator appears unaware of the blue-collar jobs created for residential solar installers.</p> <p>Third, the senator is correct to observe that many wind developers are affiliates of European utilities. However, merely because a Cash Grant payment is made to the United States subsidiary of a European utility, it does not mean the Cash Grant created no benefit in the United States.&nbsp; For instance, the developers with European parents have employees and offices in the United States.</p> <p>Fourth, Senator Coburn gives no recognition to the fact that Siemens and Vestas are major wind turbine manufacturers and are based in Europe, but they have both added wind operations in the United States during the existence of the Cash Grant program. In February, Siemens announced it is building a wind energy training facility in Orlando that will train 2,400 employees annually and create 50 full-time jobs. Further, Vestas expanded its Oregon North American headquarters in 2010; Vestas had to cut jobs at its Colorado factory, opened in 2008, when turbine orders lagged in 2012 due to uncertainty about the future of the production tax credit, a fact politicians who purport to be concerned about U.S. jobs should keep in mind when considering energy policy.</p> <p>Fifth, once the wind Cash Grant statistics are updated to reflect the massive 845 MW Shepherds Flat Wind Project that deploys General Electric turbines, the ratio of United States made turbines that qualified for Cash Grants will improve.</p> <p>Sixth, the senator&rsquo;s letter goes on to suggest a freeze in iPhone purchases for Treasury personnel and a reduction in travel for conferences; by grouping the Cash Grant program with iPhones and travel appears to suggest that the Cash Grant program is subject to the discretion of the Secretary.&nbsp; The Cash Grant program is mandated by a statute -Section 1603 of the American Recovery and Reinvestment Tax Act of 2009, as amended.&nbsp; Therefore, the Senator should be raising his concerns with his colleagues in Congress and not the agency that merely administers it.</p> <p>In sum, the rationale, scope, means and audience for Senator Coburn&rsquo;s Cash Grant reduction proposal merits reconsideration.</p> 5133 Thu, 14 Mar 2013 00:00:00 -0400 A Camel’s Nose under the Tent: MLP Legislation http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/a-camel-s-nose-under-the-tent-mlp-legislation.html <p>The oil and gas industry benefits from the master limited partnership (MLPs) rules.&nbsp; 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.&nbsp; MLPs enable the oil and gas industry to raise capital from retail investors at tax advantaged rates.</p> <p>Advocates for the renewable energy industry point out that the Internal Revenue Code requires that 90 perecent of an MLP&rsquo;s income to come from qualified sources (<em>e.g.</em>, oil or gas operations) and income from renewable energy projects is not a <em>qualified source</em>.&nbsp; Thus, the advocates suggest that Congress should amend the definition of qualified sources to include income from renewable energy projects.</p> <p>The next phase of the conversation is that the industry&rsquo;s most significant problem is a lack of tax equity providers.&nbsp; 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.</p><p>Senators Chris Coons (D-Del.) and Jerry Moran (R-Kan.) in 2012 introduced a bill to amend the MLP rules to make income from renewable energy projects &ldquo;qualifying income.&rdquo; &nbsp;However, it does not address the passive activity loss rules or the at-risk rules, so it would not enable MLPs to be tax equity providers.&nbsp; That is, MLPs under this amendment would only provide cash equity or debt to renewable energy projects.</p> <p>That leads to the question of whether the renewables industry should support the Coons-Moran bill or hold out for a bill that also fixes the passive activity loss rules and the at-risk rules.&nbsp; Fixing those rules is difficult, because they were enacted in the 1980s in response to allegedly abusive tax shelters sold to the public.&nbsp; The tax lawyers that serve on Congressional staffs do not want to risk a return to aggressive tax shelters sold to retail investors.&nbsp; Thus, they cling to those rules like a security blanket, and tell their bosses in Congress not to support any dilution of them. &nbsp;(See page 14 of the <a href="http://cdn.akingump.com/images/content/4/4/v2/4462/Project-Perspectives-Newsletter-Summer2012.pdf">Summer 2012 Project Perspectives</a>.)</p> <p>The renewables industry should vigorously support the Coons-Moran bill.&nbsp; First, a liquid supply of cash equity and debt could do much to lower the cost of capital.&nbsp; Developers, rather than seeking equity infusions from private equity funds demanding double digit returns, could raise equity from the public at far lower rates.&nbsp; Further, MLPs could be buyers of renewable energy projects that have exhausted most of their tax benefits: generally five years for solar and 10 years for wind.&nbsp; Thus, MLPs could provide developers with a viable exit strategy.</p> <p>Finally, the change to the MLP rules is a camel&rsquo;s nose under the tent.&nbsp; If the renewables industry behaves itself and shows an ability to exercise prudence in structuring deals, it could over time persuade Congress that it can loosen the grip on the security blanket and make a renewable energy exception to the passive activity loss and at-risk rules for investments made through an MLP.&nbsp;</p> 4995 Tue, 12 Mar 2013 00:00:00 -0400 Level Playing Fields http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/level-playing-fields.html <p>Many opponents of &nbsp;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.&nbsp; An assumption in this statement is that other forms of energy do not benefit from tax subsidies.&nbsp; Let&rsquo;s examine the tax benefits for natural gas and oil.</p> <p>Finite natural resources, like oil and gas, are subject to a cost-recovery calculation for tax purposes known as depletion.&nbsp; It is their equivalent to depreciation.&nbsp; There are two types of depletion: percentage and cost.&nbsp; Big players, like ExxonMobil, are required to use cost depletion.&nbsp; Cost depletion is analogous to straight-line depreciation and is not that sexy.</p><p>However, smaller players which produce fewer than one million barrels (or the natural gas equivalent) a year are permitted to use percentage depletion.&nbsp; Percentage depletion is a deduction equal to 15 percent of the gross income from the oil or natural well for the year in question.&nbsp; However, there is no cap on the amount of the deduction.&nbsp; If the well keeps producing for decades, the owner of it gets to deduct 15 percent of the gross income every year. So eventually more than the cost of the oil can be deducted cumulatively. Although, ExxonMobil and its ilk are huge producers, more oil and gas are produced by small players eligible for percentage depletion than by the mega corporations.</p> <p>The next tax benefit is expensing of intangible drilling costs.&nbsp; Intangible drilling costs (IDC) are effectively start-up costs for an oil or gas well.&nbsp; Similar costs in the renewable energy industry, and other industries, are required to be capitalized.&nbsp;&nbsp; IDCs, however, can be expensed in the year in which they are incurred.</p> <p>A third benefit is the master limited partnership (MLP) tax rules.&nbsp; The Internal Revenue Code generally requires publicly traded entities to be taxed as corporations.&nbsp; This means the corporation pays tax on its profits, and the shareholders pay tax on dividends and capital gains.&nbsp; The MLP rules are an exception to that requirement.&nbsp; They permit an oil and gas venture to be publicly traded and for the tax liability to pass through the business entity to its owners (a single layer of tax).&nbsp;</p> <p>The MLP rules provide a tremendous financial advantage.&nbsp; There are a host of technical tax requirements to be met to become an MLP.&nbsp; The most important of which is that 90 percent of income must come from qualifying sources (so called &ldquo;good income&rdquo;).&nbsp; Congress has not included income from renewable energy projects as <em>good income</em> for this 90 percent test, but income from oil and gas is.</p> <p>It is difficult to quantify the net effect of these three tax benefits, but it is substantial.&nbsp; It seems unfair to ask renewables to play on a level playing field, while the oil and gas industry cruises down a bunny slope.</p> 4996 Wed, 06 Mar 2013 00:00:00 -0500 Barclays Shutters U.K. Tax Unit and Adopts Sweeping Standard for Future Transactions http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/barclays-shutters-u-k-tax-unit-and-adopts-sweeping-standard-for.html <p>On February 12, the CEO of Barclays announced that the bank is shuttering its U.K. tax-structuring unit.&nbsp; The unit had previously been extremely lucrative and high-profile in structuring and executing tax-advantaged transactions in the United Kingdom.<sup><a name="_ftnref1" href="#_ftn1">1</a></sup></p> <p>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.</p><p>Barclays also announced that, going forward, all transactions must meet each of five criteria:</p> <p>1. support genuine commercial activity<br />2. comply with generally accepted custom and practice, domestic law and the United Kingdom Code of Practice on Taxation of Banks<br />3. be of a type that tax authorities would expect<br />4. take place with only customers and clients sophisticated enough to assess their risks<br />5. be consistent with, and be seen as consistent with, the bank&rsquo;s purpose and value.<sup><a name="_ftnref2" href="#_ftn2">2</a></sup></p> <p>The third criterion is particularly interesting: &ldquo;be of a type that tax authorities would expect&rdquo;. Few, if any, tax advisors in the United States or the United Kingdom would articulate such a standard as either a legal or ethical requirement. Nonetheless, there are indications that similar principles are finding their way into U.S. tax law.</p> <p>For instance, if tax planning is based on interpretation of a statute that is ambiguous on its face, the Supreme Court has held that legislative history is to be considered.<sup><a name="_ftnref3" href="#_ftn3">3</a></sup> In the context of the tax law, determining whether a transaction is supported by legislative history often implicitly means considering whether the transaction is of a type that Congress intended to address with the law in question; such a consideration is quite close to whether a transaction is &ldquo;a type that tax authorities would expect.&rdquo;&nbsp;</p> <p>Another example of this standard creeping into our tax law is the Federal Circuit&rsquo;s decision in the ConEdison &ldquo;lease-in/lease-out&rdquo; case. In that case, the Federal Circuit disallowed substantial up-front rental deductions to a New York utility that had contracted to be the lessee of a power plant in the Netherlands.<sup><a name="_ftnref4" href="#_ftn4">4</a></sup></p> <p>The court did not find that the transaction violated any statute, regulation or specific existing common law doctrine. Instead, the court created an entirely new doctrine: a leasing transaction fails if there is a fixed- price purchase option that is &ldquo;reasonably likely&rdquo; to be exercised. It cited no precedent supporting such a standard for analyzing a purchase option in a lease. Further, it offered no explanation as to how the standard jibed with (i) the seminal Supreme Court case upholding a lease with multiple fixed-price purchase options<sup><a name="_ftnref5" href="#_ftn5">5</a></sup> or (ii) a revenue ruling holding that a fixed-price purchase option will not undermine true lease treatment so long as the purchase price is not nominal in relation to the expected value of the property, as determined at the time of entering into the agreement, or relatively small compared to the total payments due under the lease.<sup><a name="_ftnref6" href="#_ftn6">6</a></sup></p> <p>The best rationale I have for understanding the Federal Circuit&rsquo;s holding is that the court was influenced by the principle cited by Barclays: a transaction must be of the type that the tax authorities would expect. The court did not say so, but it appears to me that the outcome was driven by the Federal Circuit&rsquo;s reaction to the transaction as being outside the bounds of the types of transactions to which the tax accounting rules for rent were intended to apply.</p> <hr /> <p><sup><a name="_ftn1" href="#_ftnref1">1</a></sup> David D. Stewart, <em>U.K. Banking Giant Barclays Shutters Tax Planning Unit</em>, 2013 World Tax Daily 30-6 (Feb. 13, 2013).</p> <p><sup><a name="_ftn2" href="#_ftnref2">2</a></sup> Id.</p> <p><sup><a name="_ftn3" href="#_ftnref3">3</a></sup> See Wisc. Public Intervenor v. Mortrier, 501 U.S. 597 609, n. 4 (1991).&nbsp;&nbsp;</p> <p><sup><a name="_ftn4" href="#_ftnref4">4</a></sup> Consolidated Edison Co. of N.Y. v. United States, 703 F.3d 1367 (Fed. Cir. 2013).</p> <p><sup><a name="_ftn5" href="#_ftnref5">5</a></sup> Frank Lyon v. U.S., 435 U.S. 561 (1978).</p> <p><sup><a name="_ftn6" href="#_ftnref6">6</a> </sup>Rev. Rul. 55-540, 1955-2 C.B. 39.</p> 5054 Wed, 27 Feb 2013 00:00:00 -0500 FASB Surprised by the Sequester Too http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/fasb-surprised-by-the-sequester-too.html <p>&nbsp;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.</p> <p>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).</p><p>To provide funding for the FASB, the S.E.C. charges public companies a fee that it funnels to the FASB. The pass through of that fee is subject to sequestration.</p> <p>Apparently, the sequestration will apply to $1.3 million of the FASB&rsquo;s funding, which is 5.1 percent of the estimated $25.5 million in fees collected by the S.E.C. for the FASB.<a name="_ftnref1" href="#_ftn1"><sup>1</sup></a> Teresa Polly, President of the Financial Accounting Foundation said, &ldquo;This came as a surprise to us.&rdquo; <a name="_ftnref2" href="#_ftn2"><sup>2</sup></a> Many in the renewables energy industry felt the same way upon learning from the Office of Management &amp; Budget that they too were in the sequester&rsquo;s sights.</p> <p>The funding for the FASB was mandated in 2002 by the Sarbabes-Oxley Act to ensure the FASB had the means to be financially independent of the accounting industry.</p> <div><br /><hr size="1" /> <div> <p><sup><a title="" name="_ftn1" href="#_ftnref1"><sup>1</sup></a> <em>FASB's Accounting Support Fees, Passed Through S.E.C., Subject to Sequestration, OMB Says</em>, Daily Tax RealTime (Feb. 26, 2013).</sup></p> </div> <div> <p><a title="" name="_ftn2" href="#_ftnref2"><sup>2</sup></a> Id.</p> </div> </div> 5053 Tue, 26 Feb 2013 00:00:00 -0500 New York State Green Energy Incentives for Consumers: Use Them Since You Are Paying For Them http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-state-green-energy-incentives-for-consumers-use-them.html <p>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.<a name="_ftnref1" href="#_ftn1"><sup>1</sup></a></p> <p>In that same time period, the Authority was provided with funding of $289.9 million through a &ldquo;system benefit&rdquo; 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.<a name="_ftnref2" href="#_ftn2"><sup>2</sup></a></p><p>The program is relatively efficient. It is estimated that, for every dollar spent by the authority, consumers taking advantage of the benefit save $2.70 in energy bills. In 2011, fossil fuel reductions that resulted from the authority&rsquo;s programs reduced carbon dioxide emissions by 3.7 million tons, which is the equivalent of taking 744,000 cars off the road.<a name="_ftnref3" href="#_ftn3"><sup>3</sup></a></p> <p>Since New York consumers pay for these programs by the additional charge on their gas and electric bills, they should take advantage of them. The details of renewable and energy conservation incentives in New York are available <a href="http://www.dsireusa.org/incentives/index.cfm?re=0&amp;ee=0&amp;spv=0&amp;st=0&amp;srp=1&amp;state=NY">here</a>.</p> <div><hr size="1" /> <div> <p><a title="" name="_ftn1" href="#_ftnref1"><sup>1</sup></a> Garia, Erica, &ldquo;$32.3M in incentives saves homeowners, businesses cash, energy&rdquo;, <em>The Journal News</em>, Feb. 21, 2013, p. 1.</p> </div> <div> <p><a title="" name="_ftn2" href="#_ftnref2"><sup>2</sup></a> Id<em>.</em> at p. 3.</p> </div> <div> <p><a title="" name="_ftn3" href="#_ftnref3"><sup>3</sup></a> <em>I</em>d<em>.</em></p> </div> </div> 5055 Sun, 24 Feb 2013 00:00:00 -0500 New York State Rules Only one Solar tax Credit per Principal Residence http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-york-state-rules-only-one-solar-tax-credit-per-principal.html <p>New York State provides individuals with an income tax credit for a solar system purchased by the taxpayer for the taxpayer&rsquo;s principal residence.&nbsp; The credit is capped at $5,000.</p> <p>In a recent New York state tax ruling, a taxpayer intended to install two solar systems: (1) in the spring of 2012 a 10 pole-mounted system that would generate 2.45 KW for a cost of $20,900 and (2) in the spring of 2013 a six-pole-mounted system that would generate 1.47 KW for a cost of $7,350.&nbsp; Each system would &ldquo;have its own distinct placed-in-service date.&rdquo;</p> <p>The taxpayer asked if the $5,000 cap could be applied to each system separately, so the taxpayer would be entitled to a total of $10,000 in New York State income tax credits.</p><p>The Department of Taxation and Finance ruled that the taxpayer was entitled to only a single $5,000 New York State income tax credit, because the cap was intended to apply on a principal- residence basis (rather, than on a system-by-system basis).&nbsp;</p> <p>The advisory opinion is available <a href="http://www.tax.ny.gov/pdf/advisory_opinions/income/a13_1i.pdf">here</a>.&nbsp; More information about New York State solar tax credits is available <a class="rubycontent-page-link rubycontent-page-4000" href="/en/news-publications/new-york-provides-homeowners-solar-power-tax-credit.html">here</a>.</p> 4997 Wed, 20 Feb 2013 00:00:00 -0500 New England’s Cold Snap Makes the Case for Renewable Energy http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/new-england-s-cold-snap-makes-the-case-for-renewable-energy.html <p>Colder than average temperatures and a severe snowstorm caused an increase in demand for natural gas for home heating purposes in New England.&nbsp; However, home heating is not the only need for natural gas in the region; after the closure of many of the region&rsquo;s coal and oil-fired power plants, natural gas now fuels much of the region&rsquo;s energy production.&nbsp; The spike in demand for natural gas for heating caused the price of natural gas to increase, which caused the price of electricity to increase sharply.</p><p>The <a href="http://www.nytimes.com/2013/02/16/business/electricity-costs-up-in-gas-dependent-new-england.html?_r=0">New York Times reported</a> that a megawatt-hour of electricity typically costs $30 to $50 and an MMBtu of natural gas less than $4.&nbsp; Recently, natural gas has been $12 per MMBtu and a megawatt-hour of electricity $103.</p> <p>New England has relatively little electric generation from renewable energy.&nbsp; If it did, renewables would have partially mitigated the spike in electricity prices.&nbsp; Winter is an optimal season for generating electricity from wind.&nbsp; Further, sunshine during daylight hours most days in the winter is available for solar power.&nbsp; If New England had meaningful electric production from renewables, the cold snap&rsquo;s effect on the cost of natural gas would have had a smaller effect on the price of electricity.&nbsp; This spike in electricity prices demonstrates the need for an &ldquo;all of the above&rdquo; energy policy, rather than relying exclusively on natural gas.</p> 5000 Sun, 17 Feb 2013 00:00:00 -0500 Tax Reform: Renewable Energy’s Boogey Man http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/tax-reform-renewable-energy-s-boogey-man.html <p>The boogey man (or is it boogey person in this era?) of the U.S. renewable energy industry is tax reform.&nbsp; Tax reform proposals typically follow the approach of the Tax Reform Act of 1986: lower tax rates by broadening the base.&nbsp; The translation of <em>broadening the base</em> includes the elimination of tax credits and accelerated depreciation.&nbsp; As tax credits and accelerated depreciation can constitute two-thirds of the economic value of some projects, the renewable energy industry fears for its future prospects.</p> <p>For the first time, the renewable energy industry appears to have a defender from the boogey person.&nbsp; Brian Deese, the Deputy Director of the President&rsquo;s National Economic Council, made a <a href="http://thehill.com/blogs/e2-wire/e2-wire/279027-white-house-official-corporate-tax-reform-should-boost-green-energy#ixzz2JDdd7SOD">public statement acknowledging that special consideration needs to be given to renewable energy</a> during the tax reform process: &ldquo;the way that corporate tax reform gets done could have a dramatic effect, long-term, [on] the incentives for investment in the United States for ... technologies and renewable technologies.&nbsp; We have got to keep an eye on those things and got to make that a priority.&rdquo;</p><p>It is unclear what this assurance means.&nbsp; Does it mean energy tax credits and accelerated depreciation for renewable technologies would be carved out of tax reform?&nbsp; Does it mean the U.S. would adopt a European-style feed-in tariff (basically, a cash subsidy) in lieu of tax credits?&nbsp; Or does it mean that some new tax benefit would be enacted in place of the current ones?</p> <p>With these assurances, now at least when cocktail party chatter turns to the benefits of tax reform, those who support our industry do not have to stare at their feet and pretend the conversation is inaudible.</p> <p>&nbsp;</p> 4998 Tue, 05 Feb 2013 00:00:00 -0500 Waiting for Guidance: the Details of the PTC Sunset http://www.akingump.com/en/experience/practices/global-project-finance/tax-equity-telegraph/waiting-for-guidance-the-details-of-the-ptc-sunset.html <p>Wind industry groupies have been forming betting pools on when guidance providing details on the production tax credit (PTC) sunset would be published by the government.&nbsp; (The PTC sunset requires wind projects to start construction in 2013 to be PTC eligible.)&nbsp; The over/under was a publication date of July 1, 2013.&nbsp; Many worried that July would be too late for the majority of wind developers to meet the requirement in 2013.&nbsp; However, an <a href="https://www.wind-watch.org/news/2013/01/25/awea-reveals-insight-into-wind-energy-ptc-implementation-rules/">American Wind Energy Association (AWEA) official has predicted guidance in one to two months</a>.&nbsp;</p> <p>That time frame would be fantastic news for the wind industry and the American economy. Unfortunately, that time frame sounds like the IRS moving at light speed: it can take longer than that for the IRS to write a private letter ruling about whether crop fertilizer is to be capitalized or expensed.&nbsp; One can only hope that the AWEA prediction is based on conversations with government officials and is not merely wishful thinking.</p> <p>In addition to receiving the guidance soon, the wind industry hopes that the guidance defines &ldquo;start of construction&rdquo; as spending 5 percent of the cost as was the case for the Treasury cash grant program.&nbsp; And further, that the 5 percent does not have to be tracked on a turbine-by -turbine basis; such a record keeping exercise would make developers spend their precious capital on accountants, rather than on putting steel in the ground.</p> 4994 Thu, 31 Jan 2013 00:00:00 -0500