On Friday, the IRS issued a heavily redacted Chief Counsel Advice (CCA) memorandum, which addresses the intersection of solar investment tax credit partnership flip transactions and the wind production tax credit partnership safe harbor in Revenue Procedure 2007-65. The CCA reaches two conclusions that are little more than stating the obvious.
First, the CCA concludes that Revenue Procedure 2007-65 does not apply to solar projects. Second, the CCA concludes that if a taxpayer wants to avail itself of the safe harbor in Revenue Procedure 2007-65, the taxpayer’s structure must meet all of the requirements of the safe harbor.1 Both of these conclusions from the CCA are entirely apparent in the second sentence of the Revenue Procedure: “This revenue procedure establishes the requirements (the Safe Harbor)… under which the [IRS] will respect the allocation of Section 45 wind energy production tax credits by partnerships . . . .”
More Questions than Answers
The CCA raises more questions than it provides answers.
First, what is the consequence of the tax credit partnership in question in the CCA being outside of Revenue Procedure 2007-65’s safe harbor? The CCA is silent with respect to what the IRS believes should happen to the solar investment tax credits and accelerated depreciation that are available to the solar project in question.
Second, other than stating that the transaction is outside the administrative safe harbor, what is the substantive analysis that should be applied to the solar partnership? For instance, what case law and regulations are applicable to a partnership that owns a solar project eligible for the investment tax credit that has income and loss allocations that change over time?
Third, the CCA provides: “Revenue Procedure 2007-65 applies to a production tax credit, the amount of which varies over time based on how much wind energy the partnership produces. The requirements of such a credit are different than an investment tax credit, such as the Section 48 energy credit, which is an upfront credit.” Then why does the CCA not discuss Revenue Procedure 2014-12? That revenue procedure provides a similar safe harbor for partnership flip transactions involving investment tax credits for the cost of rehabilitating historic properties. The investment tax credit for historic properties is also an upfront credit.
Revenue Procedure 2014-12 likely was issued after the transaction in the CCA was executed; the public cannot be certain because the dates related to the transaction are redacted from the CCA. Nonetheless, if the CCA is providing a substantive legal analysis, that analysis should explain the relationship of Revenue Procedure 2014-12 to solar transactions.
Optimism from the IRS
Interestingly, the day before the CCA was made public, an IRS lawyer from the same branch that issued the CCA spoke at a tax conference. A press report about the conference quotes Christopher T. Kelley as stating that Revenue Procedure 2007-65 “‘still provides pretty useful guidance by analogy to other areas’ including solar and biomass.”2
An optimist could interpret Mr. Kelley’s unofficial comment as the IRS trying to brace the solar industry for the release of the CCA the next day, by messaging to the industry that it could still rely on the safe harbor in Revenue Procedure 2007-65. Reading between the lines of the comments at the conference and the CCA, possibly the message to the solar industry is to rely on Revenue Procedure 2007-65 but conform more closely than the taxpayer in the CCA did.
In the CCA, despite noting the inapplicability of Revenue Procedure 2007-65 in the context of Sectionl48 tax credits related to solar energy, the IRS analyzes whether a taxpayer claiming such credits had in fact met the 10 safe harbor requirements of Revenue Procedure 2007-65. The inclusion of this analysis arguably suggests that Revenue Procedure 2007-65 is in fact relevant to situations beyond wind production tax credit transaction.
Why Not a Safe Harbor for Solar
The solar industry now reportedly employs more people in the United States than the coal industry. It would seem likely that it also employs more people than the historic building rehabilitation industry or the wind industry, which each have their own safe harbor. Further, solar executives regularly state that tax equity is their most critical capital source and the supply of it is not keeping up with the growth of the solar industry.3 Yet, there is no safe harbor for solar tax equity structuring. It would seem that the country’s job growth and climate change objectives would each be well served by providing the solar industry with such a safe harbor.
1 The 10 safe harbor requirements generally require that investors in the partnership clearly demonstrate a genuine investment relationship with the partnership that extends beyond simply being allocated a guaranteed quantity of tax credits in exchange for paying for an interest in the partnership. For example, the fourth requirement stipulates that at least 75 percent of the sum of a partner’s investment in the partnership must be fixed and determinable as opposed to contingent on the amount or certainty of tax credits received.
2 Joyce E. Cutler, Dormant Wind Energy Credit Still Good Blueprint for Partnerships, IRS Attorney Says, Bloomberg BNA, Daily Tax Report (June 12, 2015).
3 See generally, Ucilia Wang, SolarCity Teams Up with Bank of America to Reel in Tax Equity Investors, Forbes (May 28, 2015).