The change applies to Cash Grants paid on or after October 1, 2015, and on or before September 30, 2016, regardless of when the application was submitted to Treasury.
Tax Court Levels Taxpayer’s Weak Theories in Rent Accrual Case
In this article that was published in Tax Notes, David Burton analyzes a recent tax court case in which the court considered a taxpayer’s unsuccessful arguments to invoke Section 467 of the Internal Revenue Code in order to defer tax on a payment it received in conjunction with leasing real estate. The article is available here.
Here is a link to an article by David Burton and Richard Page published on Solar Industry’s website.
The article describes a recent Internal Revenue Service (IRS) private letter ruling that blesses individual taxpayers claiming a 30 percent tax credit under Section 25D of the Internal Revenue Code for owning solar modules that are part of a community solar project. The facts of the ruling are that the individual owners of the community solar project benefit from a net metering program with the regional utility so that the value of the electricity that the project provides to the grid reduces the electric bills for the project owners' residences. Prior IRS guidance regarding community solar had not sanctioned this type of net metering arrangement. The ruling was first made public by an industry group. Since the article was written, the IRS has also released the ruling and assigned a number to it. Here is a link to P.L.R. 201536017 (Jul. 28, 2015).
An article by David Burton and Richard Page analyzes a recent Tax Court opinion regarding the definition of a capital asset. The Tax Court case involved a real estate developer that sold its real estate and sought to treat the transaction as a sale of a capital asset, but the court held that it was the sale of an ordinary asset. The article discusses lessons from the case for renewable energy developers seeking to structure their exit strategies so as to realize capital gains. The article is available here.
Here is a link to a North American Windpower article that David Burton and Richard Page published that discusses rules enacted in Colorado to provide for an election for tax credits for renewable energy projects in “enterprise zones” in Colorado to be refundable.
The governor of Iowa has signed into law House File 645 (the “Act”) modifying statutory provisions related to Iowa’s renewable energy tax credits, effective June 26, 2015.1 There are four primary changes, three of which are beneficial to renewable energy investors and one of which is detrimental.
For taxpayers who decide to pursue Iowa’s solar energy system tax credits as opposed to Iowa’s renewable energy tax credits (you cannot claim both),2 the value of the solar energy system tax credits has been revised downward, from a rate of 60 percent, to a new rate of 50 percent, of the corresponding federal tax credits applicable to the taxpayer.3 The applicable federal tax credits a taxpayer would rely on to claim Iowa’s solar energy system tax credits would be either (1) the residential energy-efficient property credits related to solar energy provided in Sections 25E and 25D of the Internal Revenue Code, or (2) the energy credits related to solar energy systems provided in Section 48 of the Internal Revenue Code,4 which is commonly referred to as the “federal Investment Tax Credit,” or simply the “ITC.”
On July 14, the Internal Revenue Service (IRS) published Notice 2015-51, which postpones the effective date of safety and performance standards mandated by Notice 2015-4. The standards in Notice 2015-4 originally applied to small wind turbines acquired or placed in service after February 2, 2015. A small wind turbine is defined as one with a nameplate capacity of 100 KW or less. Notice 2015-51 postpones the effective date to December 31, 2015 for small wind turbines with a rotor swept area of more than 200 square meters; for small wind turbines with rotor swept area of 200 square or less the effective date remains February 2, 2015.
The first notice is discussed in the blog post of January 15, which can be viewed here. The extension of the grace period from February 2 to December 31 was apparently triggered by certain small wind manufacturers communicating to the IRS that it was more time-consuming and costly to obtain the required certifications than the IRS had anticipated. Such manufacturers found themselves shut out of the U.S. market, since purchasers were reluctant after February 2, to buy turbines that did not currently have the necessary certification. Owners of such turbines would not be eligible to claim the 30 percent investment tax credits available for the turbines if the documentation of the required certification did not appear on the manufacturer’s website prior to the due date for the owner’s tax return on which it claimed the investment tax credit.
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 . . . .”
Click here to view the poster that David Burton presented at the WINDPOWER conference in Orlando, Florida. The poster details the various structures for tax credits available to wind projects. The poster, using green, yellow and red icons, highlights the strengths and weaknesses of each structure and then provides a diagram of each one. It is specific to wind; however, since 2009, wind projects have had the option to claim the production tax credit or the investment tax credit, and the investment tax credit aspects of the poster also pertain to solar.
David Burton and Richard Page authored an article reviewing the good news and the bad on North Carolina’s budding renewable energy industry. The article was published in Power Finance & Risk. Here is a link to the article.
David Burton gave an interview to the Stratton Report discussing the prospects for growth in the YieldCo sector.
Stratton Report: Can you give us a brief description of a yieldco?
David Burton: Before I do that, I should note that the term, “yieldco,” isn’t a tax term; it’s not an accounting term; it’s a term that investment bankers thought up to market a new structure. Basically what it has come to mean is a publicly traded corporation that owns contracted energy producing assets that generate accelerated depreciation and possibly tax credits. The accelerated depreciation and any tax credits generally shelter the corporation’s tax liability for the first ten years or so. Therefore, most of the corporation’s net revenue is available for distribution to its shareholders, and the yieldco commits to making very large distributions to its investors—typically about 80% of their cash flow. The yieldco has fixed-price power sales contracts with utilities and other off takers for long periods of time, say up to 20 years. As a result, the yieldco can tell investors, “I have signed well-qualified buyers up with contracts to purchase my electricity. You can be pretty sure because of my contracts that I will have a steady supply of cash for the next 20 years. Because I can use tax credits and accelerated depreciation, I won’t have to use my cash to pay taxes, so I will have plenty left over to pay out to you as dividends.”
The legal profession has been atwitter with the discussion of the Second Circuit’s opinion regarding Simpson Thacher inadvertently consenting to the release of JP Morgan’s (JPM) lien, as agent on behalf of a group of lenders, over certain equipment securing a term loan made in 2006 to General Motors (GM).1
The inadvertent release of the lien over the collateral for the term loan occurred in 2008, prior to GM’s bankruptcy filing. At the time of the inadvertent lien release, GM had sought to terminate a synthetic lease entered into in 2001 and obtain release of the liens over the equipment that had been the subject of that transaction.
The United States Tax Court has released an opinion regarding a dispute between taxpayers and the IRS regarding whether non-need-based, excess refundable state tax credits are taxable income under federal law. The Tax Court sided with the IRS in finding that such excess credits are taxable. Moreover, such excess credits are taxable in the year they are earned, even if the taxpayer would be willing to carry them forward to offset future taxable income. This was a case of first impression, neither side disputed the facts.
Please click here to read the rest of the article, which appeared on Law360.com.
Last week, New York State enacted a bud- get for the fiscal year 2015-16 (i.e., April 1, 2015 to Mar. 31, 2016) that continues two tax incentives for the installation of solar energy systems: (1) tax credits conferred to partially offset the costs of such installations, and (2) a sales tax exemption for the retail sale and installation of residential and commercial solar equipment.
In 2012, we expected New York State’s solar energy tax incentives to spur a significant increase in solar energy systems across the state. That expectation has materialized. From 2012 to present, more solar energy equipment was installed in New York State than in the entire decade prior. In 2014, enough solar power was installed in New York State to power 25,000 homes. Accord- ing to the Solar Energy Industries Associa- tion, only six states added more solar energy capacity in 2014. In the order of capacity added, these states are California, North Car- olina, Nevada, Massachusetts, Arizona, and New Jersey. This article briefly summarizes the continuing tax-related solar incentives provided by New York State.
In March, the IRS published Notice 2015-25. The rules in the notice will facilitate wind projects raising financing and give projects that had started construction in 2013 but were facing obstacles an additional year to navigate those obstacles.
Please click here to read the rest of the article, which appeared on RenewableEnergyWorld.com.
Bill Introduced in North Carolina Senate Seeks to Extend the State’s Renewable-Energy Tax Credit Through 2020
This week, a bill was introduced in the North Carolina Senate to extend the state’s renewable-energy tax credit to eligible property that is placed in service by the end of 2020. Eligible renewable-energy property would include property that is used for either business or nonbusiness purposes. The credit is currently set to expire at the end of 2015. This is a positive step for the North Carolina renewable-energy industry, since the North Carolina Senate has been relatively lukewarm in its support of this credit over the last several years, as compared to the North Carolina House of Representatives. The tax credit, which is equal to 35 percent of the costs of renewable-energy property, is among the most generous of such state incentives in the United States and has helped North Carolina become one of the top states in the nation for new solar-energy construction.
The opinion, available here, of March 24 from the U.S. District Court for Nevada granted in part and denied in part Ormat’s motion to dismiss an action brought by ex-Ormat employees under the False Claims Act. The ex-employees are alleging fraud by Ormat in its preparation of three Section 1603i cash grant (Cash Grant) applications for geothermal projects. In theory, either party could appeal, but that seems unlikely. Background about the case and the False Claims Act is available in my prior blog post.
Ormat was unsuccessful in its effort to have the case dismissed under the “tax bar” rule, which provides that, since the Internal Revenue Service (IRS) is the designated enforcer of the tax law, tax matters are not subject to the False Claims Act. The court’s rationale was that (i) the amounts at issue were grants and not tax benefits, and (ii) the IRS is not empowered to recover inappropriate Cash Grant awards.
David Burton and Richard Page authored an article reviewing the cash and state tax benefits for corporate investors in solar projects in ten states. The article was published in Power Finance & Risk. Here is a link to the article.
The Infocast Wind Power Finance & Investment Summit 2015 was held from February 10 to 12 in San Diego. Below are selected sound bites regarding the tax equity market and other finance related matters.1
IRS PTC Eligibility Start of Construction Guidance
Multiple speakers expressed the sentiment that the market believes it is likely the IRS will extend the placed-in-service safe harbor deadline in Notice 2013-60, that allows a project owner to avoid the applicable continuous work or continuous efforts requirements of the production tax credit (PTC) eligibility rules, from the end of 2015 to the end of 2016 to reflect the one-year extension enacted by Congress at the end of 2014.
Ormat1 is a successful developer of geothermal energy projects. Two former employees have brought a lawsuit alleging that Ormat made inaccurate 1603 Cash Grant2 submissions to obtain grants for projects that should not have qualified for such grants. The complaint filed in the U.S. District Court for the Southern District of California by the ex-employees is available here.3 The venue has been changed to Nevada.4
The complaint arises under the Federal False Claims Act (the Act). In contrast to typical civil litigation, the Act provides for treble damages that may not be waived by a judge.5 There is also an additional penalty of up to $11,000 per false claim per project application.6
The United States Court of Federal Claims on January 12 rendered an opinion in W.E. Partners II, LLC v. U.S. sustaining the Treasury Department’s reduction by approximately two-thirds of a Cash Grant1 for a cogeneration open-loop biomass facility that sells steam to a Perdue chicken-rendering plant.
To challenge Treasury’s award, the Cash Grant applicant’s only option was the Court of Federal Claims, since the Tucker Act provides the court with exclusive jurisdiction to hear claims for money damages against the federal government that arise under a federal statute.2 The case is relevant to taxpayers and their advisors because the Cash Grant rules “mimic” the investment tax credit (ITC) rules; thus, the principles of the case are likely to be applicable to ITC matters.3
On January 13, the Internal Revenue Service (IRS) released Notice 2015-4 which specifies the performance and quality standards that small wind turbines must meet in order to qualify for the 30 percent investment tax credit (ITC).
To qualify as a small wind turbine, the turbine must (i) have a nameplate capacity of 100 KW1 or less and (ii) meet any performance and quality standards specified by the Secretary of the Treasury, after consultation with the Secretary of Energy.2 The Secretary of the Treasury has delegated this authority to the IRS, which often prefers to issue notices rather than promulgate regulations, since the issuance of a notice has fewer procedural hurdles.
The standards adopted by the IRS in Notice 2015-4 are the American Wind Energy Association Small Wind Turbine Performance and Safety Standard 9.1-2009 and the International Electrotechnical Commission 61400-1, 61400-2 and 61400-11. A small wind turbine is required to meet only one of the standards.3
The following blog post was published in Power Finance & Risk on December 23, 2014.
Below is a summary of state tax developments in 2014 relating to energy tax credits:
Arizona: On May 20, 2014, the State of Arizona Department of Revenue rejected a taxpayer’s ruling request that certain pool covers qualify as passive solar-energy devices within the meaning of A.R.S. §§ 42-5001 and 44-1761.1 The taxpayer had hoped that the pool covers in question would qualify for the credit. The taxpayer noted that the pool covers were designed specifically to retain heat. However, the State of Arizona Department of Revenue cited a U.S. Department of Energy study finding that, on net, pool covers reduce a pool’s heat because they reduce solar energy absorption. Additionally, the State noted that other features of solar energy devices were not included with the pool covers, such as collectors, heat exchangers or storage units, as they are defined under A.R.S. § 44-1761.
On December 11, 2013, which admittedly was a few weeks before 2014, contrary to the green trend in state tax credits, Arizona legislators voted to continue a tax credit that allows utility companies to write off 30 percent of the sales tax they pay on the purchase of coal.2 Most of the power in the state is supplied by Arizona Public Service Co., which operates two coal power plants, with a total capacity of 3,245 megawatts.
Yesterday, Sol-Wind filed its S-1 with the Securities & Exchange Commission for its listing on the NYSE. Its ticker symbol will be SLWD.
Here is a link to my structure diagrams for Sol-Wind and comparisons of it to a yieldco, a private equity fund manager MLP and an oil and gas MLP.
The Tax Increase Prevention Act of 2014, H.R. 5771, was passed by the Senate on December 16 and by the House on December 3. The President is expected to sign the bill in the coming days.
H.R. 5771 extends to the end of 2014 the dozens of tax incentives that expired at the end of 2013. For the production tax credit (PTC), Section 155 of the act provides that a wind project must “start construction” before January 1, 2015, to be eligible for tax credits, rather than the lapsed deadline of starting construction before January 1, 2014.
As is the case with the last extension, this extension does not have a deadline for wind projects to be placed in service (i.e., operational) in order to qualify for tax credits, so long as the project started construction prior to January 1, 2015. The Internal Revenue Service (IRS) in Notice 2013-29 took the position that it would not consider a project to have started construction by the deadline, unless the project owner engaged in “continuous” activity toward completing construction from the start date to the date the project is placed in service. A discussion of Notice 2013-29 is available here and here.
Akin Gump tax partner David Burton writes that despite the importance of the ‘‘developer fee’’ in renewable energy transactions, there is very little guidance in the tax law for determining when a developer’s fee will be respected as reasonable and included in the asset’s basis for tax purposes. Burton examines how the fees are treated by institutions such as the IRS, the use of developer fee notes in projects and best practices for structuring developer fees in a transaction.
To read the rest of the article, please click here.
Today, the House passed H.R. 5771. To become law, H.R. 5771 must still pass the Senate and be signed by the president. We expect both of those steps to occur by the end of the year.
H.R. 5771 would extend the 50 tax incentives that expired at the end of 2013 through the end of 2014. For the production tax credit (PTC), Section 155 of the bill provides that a wind project must “start construction” prior to January 1, 2015, to be eligible for tax credits. This would be a change from the current deadline of January 1, 2014.
Some industry participants and observers are confused about what the investment tax credit (ITC) rules for solar will be on January 1, 2017. In an effort to provide some clarity to this issue, below are frequently asked questions about the pending changes to the solar ITC.
1. Absent a change in law, what percentage of the ITC will be available for investors in solar systems on January 1, 2017?
Answer: Ten percent.1
On October 31, the IRS released Private Letter Ruling 201444025, which was addressed to a manufacturer of solar systems that are mounted on real estate. The nature of the real estate, along with many other interesting facts, was redacted from the version of the ruling released to the public.
The ruling is a reminder that, with respect to solar power systems, only “equipment that uses solar energy to generate electricity, and includes storage devices, power conditioning equipment, transfer equipment, and parts related to those items” are eligible for the investment tax credit provided for under section 48 of the Internal Revenue Code.1
With the election on Tuesday, the wind industry’s attention is particularly focused on the prospects for the extension of the production tax credit (PTC). There have been four interesting developments related to the extension of the PTC.
First, in the current 113th Congress, only 185 bills have been signed into law. Many observers characterized the 112th Congress as unproductive, but the 113th Congress has managed to enact only 80 percent of the numbers of bills that the 112th Congress did.1 Of course, in the post-election, lame- duck session, there is still hope for the 113th Congress to find its footing and extend the PTC and address other important issues. It is my view that it is more likely than not that the PTC will be extended through 2015 during the lame-duck session, and the Senate Finance Committee has already passed a bill that extends the PTC for projects that start construction prior to the end of 2015. A blog post discussing the Finance Committee’s approval of that bill is available here.
On October 2, the Congressional Research Service (CRS) published an overview of the production tax credit (PTC). The report is available here. It contains a helpful summary of the history of the PTC and an insightful discussion of the PTC and the alternative minimum tax.
The report’s only shortcoming as discussed below is not applying a particularly critical eye to either a cited study regarding tax incentives for renewables from the National Academy of Sciences that employed a questionable methodology or to President Obama’s proposal to replace the investment tax credit (ITC) for solar and other technologies with the PTC.
Discovery Order Issued in “SolarCity” Cash Grant Litigation — Treasury to Provide Benchmarking Materials
On October 6, 2014, Judge Eric G. Bruggink of the U.S. Court of Federal Claims issued an order on the disputed production of documents and interrogatory responses requested from the U.S. Department of the Treasury by plaintiffs, investors in cash-grant-eligible solar projects sponsored by SolarCity, in connection with their challenge to Treasury’s calculation of their Section 1603 cash grant awards. Judge Bruggink heard oral argument on the discovery disputes on August 29, 2014. That hearing is covered in a September 3 blog post, which also references earlier posts providing background and early developments in the case.
Consistent with his rulings issued from the bench during the August 29 oral argument, Judge Bruggink ordered Treasury to produce documents sufficient to identify the “benchmark” or “threshold” amounts it used in evaluating Section 1603 solar project applications and, to the extent such benchmarks were higher than the amounts claimed in plaintiffs’ applications, documents sufficient to identify how such benchmarks were derived. He also ordered Treasury to produce all documents and information, including materials submitted by third parties in connection with the Section 1603 program, upon which Treasury relied in evaluating plaintiffs’ Section 1603 applications.
The Joint Committee on Taxation (JCT) on September 16 published a report analyzing federal energy tax incentives. The report is available here. The report is generally insightful; however, it has a misguided job-creation discussion.
With respect to the issue of job creation, the report provides: “Commensurate with its relatively small contribution to the overall U.S. energy portfolio, the renewable electricity sector is not a major source of employment in the United States.” A footnote provides the statistics behind the report’s conclusion:
The Bureau of Labor Statistics estimates that, for 2011, there were 3,780 private-sector green goods and services jobs in hydroelectric power generation, 2,724 in wind power generation, 1,166 in biomass power generation, 1,017 in geothermal power generation and 522 in solar power generation. Bureau of Labor Statistics, News Release: Employment in Green Goods and Services - 2011, USDL-13-0476, March 19, 2013.
The Department of the Treasury has announced that for fiscal year 2015 the Cash Grant 1 sequester rate will be increased from 7.2 to 7.3 percent. The announcement is available here. The change applies to Cash Grants paid on or after October 1, 2014, and on or before September 30, 2015, regardless of when the application was submitted to Treasury.
The effect of the sequester is that if a solar project has an “eligible basis” of $1,000 then the 30 percent Cash Grant would have been $300; however, the 7.3 percent sequester results in it being only $278.10. If a project owner wishes to avoid the sequester, it has the option to claim the 30 percent investment tax credit under Section 48 of the Internal Revenue Code; however, efficient use of that credit requires a federal income tax liability that can be offset by the credit.
On August 29, 2014, Judge Bruggink heard oral argument and ruled on plaintiffs’ motion to compel the production of documents and information requested from the Department of the Treasury (“Treasury”) regarding plaintiffs’ challenge to Treasury’s calculation of Section 1603 cash grant awards for solar projects. Plaintiffs, special-purpose entities that invested in cash-grant-eligible solar projects sponsored by SolarCity, filed a complaint in the Court of Federal Claims on February 22, 2013, challenging adjustments made by Treasury that resulted in reduced cash grant awards.
Background and early developments in the case are covered in blog posts of May 21, June 2, July 9, August 14 and September 20, the most recent of which concerns Judge Bruggink’s denial of the Department of Justice’s (DOJ) motion to dismiss the complaint. Since that time, discovery disputes have slowed the progress of the litigation, leading plaintiffs to file the motion to compel at issue in the hearing held last Friday.
On August 20, the American Wind Energy Association (AWEA) held a webinar to discuss Internal Revenue Service (IRS) Notice 2014-46, which clarified the rules for wind projects to be grandfathered for production tax credit (PTC) eligibility purposes as having started construction in 2013. A prior post discussing Notice 2014-46 is available here.
The highlight of the panel was that it included representatives of the IRS who commented on Notice 2014-46 and answered questions from the other panelists. The IRS’s primary representative was Christopher Kelley, who recently rejoined the IRS after a stint at Treasury. Mr. Kelley was joined by his IRS colleagues Jaime Park, Philip Tiegerman and Jennifer Bernardini.
The Congressional Research Service (CRS) has issued a report analyzing the economic effects of bonus depreciation. CRS has very little to say that is positive about bonus depreciation. CRS views it as neither an effective economic stimulus nor as a means of promoting a level playing field for economic growth among various sectors of the American economy. The report is available here.
SolarCity Corporation and Sunrun Inc. (collectively, the “Companies”) filed suit on June 30, 2014 challenging the Arizona Department of Revenue’s (ADOR) position that certain solar systems owned by the Companies (the “Systems”) are subject to property tax. The ADOR’s interpretation of the relevant statutes, if upheld, could result in millions of dollars in property taxes. 1
The property taxes challenged in the complaint, which can be found here, are with respect to leased solar equipment. The Companies pay the upfront costs of the Systems and are responsible for installing and maintaining them at the customers’ properties. The rent that the customers pay for the use of the Systems is less than what they would otherwise pay for electricity – a savings of approximately $30 per month in the case of a three-bedroom home. The lease is essentially a means of financing the cost of the Systems, which enables the customers to make lease payments that are less than what they would otherwise pay to their electric utility companies.
On Friday, Christopher Kelley of the Treasury Office of Tax Legislative Counsel announced that the IRS would be issuing additional guidance to determine whether projects started construction in 2013 as is necessary to be eligible for production tax credits. Kelley’s comments were made in at an American Bar Association Section of Taxation meeting in Washington, DC.1
The guidance is in response to requests from the wind industry for further clarification as to two issues. First, what level of physical work was required for projects, which did not opt to satisfy the 5% safe harbor, to be deemed to have started construction in 2013 as is necessary for production tax credit eligibility? Second, what level of legal stake must a developer have had in a project in 2013 to have purchased equipment pursuant to a master supply agreement with a manufacturer that is subsequently transferred to the project in order to enable the project to satisfy the 5% safe harbor?
Here’s the link to the poster that I presented at WindPower on master limited partnerships (MLPs), real estate investment trusts (REITs) and YieldCos.
The poster explains (i) the limited extent to which MLPs and REITs, each of which have a tax-advantaged status, can invest in wind projects under current tax law, (ii) how proposed changes in tax law if enacted would permit MLPs to expand their ability to invest in wind projects and (iii) how the yieldco vehicle, which is a publicly traded C-corporation without any special tax status, is being used for wind projects in lieu of MLP vehicles.
With both chambers of Congress considering the extension of the production tax credit (PTC), the Congressional Research Service published a report on April 7, 2014, The Renewable Energy Production Tax Credit: In Brief. The report is available here.
The report is relatively even handed and provides a number of interesting data points. Overall, the report is generally supportive of the PTC but suggests that a direct tax on carbon emissions would be more efficient. A tax on carbon would eliminate the costs associated with executing tax equity transactions. That is tax equity investors do not provide wind developers with a dollar-for-dollar benefit for each dollar of PTC allocated to them. From a policy perspective, I find it difficult to favor the PTC over a direct carbon tax; however, a direct tax on carbon is not a viable legislative strategy given the current composition of Congress. In contrast, the PTC has greater political viability, in the form of bipartisan support since its enactment in 1992, and promotes reduction in carbon emissions.
The National Renewable Energy Laboratory (NREL), which is a component of the U.S. Department of Energy, has published a report analyzing the implications of the extension of the production tax credit (PTC) for U.S. manufacturing and employment levels. The report is available here.
The report finds that significant manufacturing facilities have opened in the U.S. due to the growth of wind electricity production which is bolstered by the PTC. The report concludes (1) that to maintain the current level of U.S. manufacturing related to the industry would require wind deployment levels at the average that occurred from 2008 to 2012 and (2) to maintain that level of deployment would require extension of the PTC through 2021.
Developers Turn to Tax Opinion Insurance to Solve the “Starting Physical Work of a Significant Nature” PTC Eligibility Issue
Industry reports suggest that three developers have purchased tax opinion insurance to provide financial assurance to tax equity investors that their projects will be production tax credit (“PTC”) eligible. Use of this insurance product appears to be how the developers are bridging the gap between what their law firms are prepared to opine constituted “starting physical work of a significant nature” 1 in 2013 and the PTC eligibility risk certain cautious tax equity investors are prepared to bear.
Below is a description of tax opinion insurance generally followed by background with respect to the PTC eligibility issue in question.
Today, the Senate Finance Committee approved and reported the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act. It includes an extension of the 2.3 cents per kilowatt hour production tax credit for wind for projects that "start construction" before the end of 2015.
Although, Senator Wyden (D-OR) created some nervousness by not including the production tax credit extension in the bill he initially introduced on April 1, it is not surprising to see the Senate Finance Committee approve the extension of the production tax credit given the support it has from Senators Cantwell (D-WA), Grassley (R-IA), Wyden and others. Senator Toomey (R-PA) introduced an amendment to strike the production tax credit and other renewable energy incentives from the extension bill, but his amendment was defeated by a committee vote of 6-18.
The passage of the Expire Act by the Senate Finance Committee is a first step in a long legislative journey and may not on its own to create enough confidence to spur investment in the development of new projects.
Senator Wyden (D-OR), chairman of the Senate Finance Committee, stated that he will release his “extenders” bill on March 31 and that the included provisions will be renewed through the end of 2015. Senator Rockefeller (D-WV) stated that Wyden’s bill will not include “offsets” for the cost of the extenders.1
An extension through 2015 would be good news for the wind industry; however, there are still questions that the wind industry will not have answered until it sees the bill on March 31. For instance, will Wyden retain the “start of construction” approach from the last extension or revert to the customary “placed-in-service” standard? There is a significant difference, since start of construction would merely require that a wind project start construction by the end of 2015, while a placed-in-service standard would require the project to be operational by the end of 2015.
Akin Gump is pleased to announce our winter 2014 edition of the Project Perspectives Newsletter. Please click here to read Project Perspectives.
|Oil and Gas Industry Discussion.||1|
|The False Claims Act: The Government’s Sword in Cash Grant Audits||7|
|Is a 50 Percent Renewables Portfolio Standard in California’s Future?||9|
|State Tax Update: A Summary of Recent State Renewable Energy Tax Law Developments||11|
|Why End-Users Are Investing (Big) In Distributed Generation||13|
|An Analysis of U.S. Energy Policy Objectives: Green and Brown Power Options Examined||18|
|U.S. Solar M&A Market Update||21|
|Will Residential Solar Debt Financing Eclipse The Third-Party Ownership Model?||23|
In President Obama’s 2014 State of the Union address, he said: “Every four minutes, another American home or business goes solar; every panel pounded into place by a worker whose job can’t be outsourced. Let’s continue that progress with a smarter tax policy that stops giving $4 billion a year to fossil fuel industries that don’t need it, so that we can invest more in fuels of the future that do.”
With such an endorsement, the solar industry thought its tax priorities were in a prime position in the executive branch, but five weeks later the administration’s fiscal year 2015 budget proposal was released and included a proposal to completely repeal the solar investment tax credit after 2016.1
Here’s a chart that compares how Pres. Obama’s fiscal year 2015 budget proposal addresses renewable energy to how Rep. Camp’s (R-MI) proposal for fundamental tax reform addresses renewable energy. Camp is chairman of the Ways and Means Committee.
A prior blog post addressed former Sen. Baucus’s (D-MT) energy tax reform proposal. Sen. Baucus introduced his proposal in his capacity as chairman of the Finance Committee but shortly thereafter accepted an appointment to be ambassador to China. This has left his proposal without a champion.
Here’s an article that I recently published in Tax Notes Today. It discusses the 2013 case Brown v. Commissioner in which the Tax Court did not accept an insurance salesman’s conclusion that his personal Bombardier Challenger aircraft was placed in service in 2003, despite the fact that it was flown to business meetings in 2003. The Tax Court analysis in part relied on cases involving a wind farm and a hydroelectric dam, so the case has relevance in analyzing whether renewable energy projects have been placed in service.
As natural gas prices sit at a five year high, it is important to remember a fundamental economic principle, that is, commodities do not stay low priced forever. Demand for and regulation of natural gas is likely to increase. Therefore, although, natural gas is relatively inexpensive today, it is unlikely to remain so indefinitely. As utilities in the Northeast and Midwest are experiencing this winter with the demand for natural gas for home heating purposes driving the price up, renewables are an excellent hedge against natural gas price increases.
In that theme, click here for a link to Fierce Energy’s interview. The focus of the interview was what tax credits, MARCS and the possibility of MLP status for renewables means for utilities.
The Washington Post in an editorial of January 20 described the extension of the production tax credit (PTC) for wind as “wasteful.” The Post’s editorial is available here.
However, The Post’s editorial board has penned multiple editorials expressing concern about climate change and noting that the United States lacks a coherent policy to address it. Below is my letter to the editor responding to the mischaracterization of the PTC and noting the inconsistency in being concerned about climate change and then characterizing the PTC as wasteful.
On December 17, the Treasury Inspector General for Tax Administration released Review of Section 1603 Grants in Lieu of Energy Investment Tax Credit which is available here. Either there is some confusion associated with the report or the 1603 grant samples included in the study referenced in the report were unusual.
The summary of the report is:
"The IRS is currently conducting a Compliance Initiative Project on taxpayers that received Section 1603 grants primarily in 2009. . . . The Large Business and International Division selected and examined 16 taxpayers and reportedly identified significant issues in eight. Similarly, the Small Business/Self-Employed Division selected 83 taxpayers for examination and identified changes in 51."
The Congressional Research Service (CRS) published a whitepaper addressing the tax provisions that lapsed at the end of 2013. The whitepaper is available here. Of particular interest to the renewable energy industry is the extension of the production tax credit (PTC) and the ability to elect the investment tax credit in lieu thereof. The whitepaper also touches on the new market tax credit (NMTC) for economically disadvantaged communities that lapsed at the end of 2013 and the Section 1603 Treasury Cash Grant Program which lapsed in earlier years.
In general, the whitepaper paints the concept of extenders (i.e., tax provisions that are enacted with a sunset and then regularly extended in subsequent legislation) as poor tax policy. For this and other reasons, the Obama administration has proposed to make the PTC permanent as did Senator Baucus’s tax reform proposal for energy. That proposal is discussed in my blog post available here.
Revenue Procedure 2014-12 provides a safe harbor for historic tax credit (i.e., the Section 47 rehabilitation tax credit) partnership transactions. On January 8, the IRS issued a revised version of it that provides a clarification of two technical issues. The revised revenue procedure is available here and a redline comparison against the prior version is available here. The clarifying revisions are certainly welcome; however, the revised revenue procedure still suffers from all but one of the ambiguities discussed in prior blog posts available here and here.
The revenue procedure provides that a tax equity investor may have the benefit of a “put” option; provided, the option price is the fair market value of the tax equity investor’s interest as determined at the time of the exercise of the option. The original revenue procedure required that in determining the fair market value of the tax equity investor’s partnership interest that contracts between related parties were not to be considered. As discussed in the blog post here it was unclear as to how the tax equity investor’s interest in master tenant partnership structure (i.e., an inverted lease) was to be determined because in that structure the head lease is between related parties and is the source much of the economics for the tax equity investor. A diagram of the master tenant partnership structure is available here.
The IRS recognized this problem and revised the revenue procedure to permit consideration of related party contracts in the fair market value determination, so long as such contracts are on arm’s length terms and with economics consistent with arrangements in real estate development projects that do not qualify for historic tax credits.1
Informal conversations with the drafters of Revenue Procedure 2012-14 (the “Revenue Procedure”) have clarified the safe harbor’s pretax economics requirements. The Revenue Procedure is available here.
The Value Requirement
The Revenue Procedure includes the requirement that the tax equity investor’s “interest must [have] a reasonably anticipated value commensurate with the [tax equity investor’s] overall percentage interest in the Partnership, separate from any federal, state and local tax deductions, allowances, credits and other tax attributes to be allocated” (the “Value Requirement”).1
The IRS released Revenue Procedure 2014-12 on December 30. It is available here. It addresses the structuring of historic tax credit transactions (i.e., transactions involving rehabilitation tax credits provided for in section 47 of the Internal Revenue Code (the “Code”)). It is similar in scope to Revenue Procedure 2007-65, 1 which addresses the structuring of production tax credit partnership transactions involving wind farms.
Revenue Procedure 2014-12 provides a safe harbor for only a partnership’s allocation of tax credits. It does not address any other issues (e.g., economic substance or tax ownership). Thus, the actual safe harbor is rather narrow. Nonetheless, the conventional wisdom is that, if a transaction satisfies a published safe harbor, the IRS may be unlikely to attack it on audit with respect to issues beyond the scope of the safe harbor.
Today, the chairman of the Senate Finance Committee, Max Baucus (D-MT), released his proposal for energy tax incentives as part of overall tax reform. The proposal is thoughtful and merits serious consideration by the renewable energy industry. Importantly, it eliminates the discrepancy in the tax benefits available to different types of energy technologies. Here are links to the official documents: a one page summary, an eight page summary, a 30 page legislative history and the statutory language.
The Congressional Research Service (CRS) on October 30 published a report on the Obama Administration’s proposal to repeal or modify certain tax benefits provided to the oil and gas industry. The report is available here.
Two of the changes are repealing tax credits that have phase outs when oil prices are high (under the theory that, when oil prices are high, further encouragement from the Internal Revenue Code is not necessary). Since oil prices have been high for several years, the credits have not been applicable for some time.
Four of the changes apply to only independent oil and gas producers. The changes conform the tax provisions to apply to the independents as they presently apply to the “major” oil and gas companies (e.g., ExxonMobil). Because the majors have managed to achieve record profits under these tax provisions, it is difficult to forecast too dire a result for the independents due to these changes.
Akin Gump partners, David Burton, Adam Umanoff and Josh Williams hosted a webinar earlier in November that discussed the new IRS guidance with respect to the start of construction rules to qualify for the production tax credit (PTC) or for qualified technologies the investment tax credit (ITC). The presentation is available here and the webinar discussed the following:
- What clarifications did the recent IRS guidance offer on the expanded “start of construction” safe harbor for renewable energy projects?
- What steps should projects take to meet the start of construction requirements?
- What are solutions to typical problems confronted by project owners seeking to start construction in 2013?
Senator Coons (D-DE), the lead sponsor of the Master Limited Partnership Parity Act (S. 795), has received the scoring estimate for that bill from the Joint Committee on Taxation. According to the senator’s office, it is scored at a $1.3 billion cost over its first 10 years.1 Ten years is the period used for scoring. One would hope it would be relatively easy to find “revenue raisers” to offset that modest cost. Revenue raisers are often closing what are perceived by the public to be tax loopholes.
The typical cost of a one-year extension of the production tax credit is usually several times the estimate for the permanent legislative changes proposed in the MLP Parity Act; however, tax credits are also far more valuable to the renewables industry than the MLP Parity Act is. See here. Thus, the MLP Parity Act should be passed to give renewables the same tax advantage provided to fossil fuels, rather than as a trade for not extending tax credits for renewables.
In a letter dated November 18, Senator Jeff Sessions (R-AL) wrote Secretary of the Treasury Jacob Lew a critical letter with questions regarding the Cash Grant program, SolarCity’s purported practices and the investment tax credit. The letter is available here.
It is unfortunate that Senator Sessions does not appreciate how cautious and deliberate Treasury has been in administering the Cash Grant program. In fact, the SolarCity litigation that the letter references is essentially a response to Treasury’s exceedingly high level of caution and deliberation in the administration of the Cash Grant program. There are projects with Cash Grants that have been delayed over a year.
The letter was apparently triggered by an August 31 article in Barron’s titled Dark Clouds Over SolarCity; the article is referenced in a footnote to the letter. It is not clear why the senator’s office opted to produce this letter two and half months after the article.
Economists Lawrence Goulder and Marc Hafstead in October published Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide on behalf of Resources for the Future. The paper is available here. The paper analyzes the effect on the U.S. economy of the adoption of a $10 per ton carbon tax starting in 2013 that increases 5 percent per year to the year 2040. The paper considers three scenarios for using the revenue raised by the carbon tax: (i) cash rebates to households; (ii) a reduction in personal income tax rates; and (iii) a reduction in corporate income tax rates. However, in all scenarios, 15 percent of the revenues from the carbon tax are used to provide “tradeable exemptions” for companies in the 10 industries projected to suffer the largest reductions in profits due to the carbon tax. Further, in none of the scenarios is an economic benefit included for the health or environmental benefits of reduced carbon emissions.
Congress asked the National Research Council, National Academy of Science, the National Academy of Engineering and the Institute of Medicine to study the effect of U.S. tax policy on carbon and other greenhouse gas emissions. The full report of June 20 is available here. Below are key excerpts from the report. The report is relatively pessimistic with respect to tax policy improving greenhouse gases; however, as explained below the report used flaw assumptions for the cost of wind and natural gas that skewed its conclusions.
The excerpts from the report are divided into four topics: percentage depletion, renewable energy tax credits, renewable energy portfolio standards (RPS) and the availability of accelerated depreciation for equipment generally (e.g., manufacturing equipment, computers).
Treasury has issued an updated message on sequestration on its 1603 Program website, which can be accessed here. The sequestration message specifies that the reduction percentage applicable to any Section 1603 cash grant award made on or after October 1, 2013 through September 30, 2014, will be 7.2%, irrespective of when the application was received by Treasury. Cash grant awards made on or after March 1, 2013 through September 30, 2013 had been subject to an 8.7% sequestration reduction percentage. The 7.2% reduction percentage applicable through September 30, 2014 is slightly lower than the projected 7.3% reduction percentage indicated in the April 10, 2013 Office of Management and Budget report titled OMB Sequestration Preview Report to the President and Congress for Fiscal Year 2014 and OMB Report to the Congress on the Joint Committee Reductions for Fiscal Year 2014 (which can be accessed here. The sequestration reduction rate will be applied unless and until the federal government enacts a law that cancels or otherwise impacts the sequester.
Here is a one page chart comparing structuring alternatives for transactions involving energy tax credits. The chart is intended to assist developers and financiers in understanding the trade-offs involved in each structure. For instance, the chart considers upfront proceeds, exit costs and the degree to which tax benefits are monetized.
AWEA recently held its annual Wall Street conference. Below are selected sound bites from panelists speaking on September 10th about finance, the state of market for wind in the United States, and the health of the tax equity market. An effort was made to be as loyal as possible to what the panelists said, but this was prepared without the benefit of a transcript or a recording. Further, edits were made in the interest of clarity. The sound bites are organized by topic, rather than appearing in the order in which they were said.
Tax Equity Volume in 2013
“Eleven deals totaling $1.75 billion have been awarded.
“Four deals totaling $.4 billion are closing to being awarded.
“Seven more deals will be in the market before year end.
“This year there will be more deals than in either of the prior two years. There could be $4 billion of tax closed in 2013.”
John Eber, Managing Director Energy Investments, J.P. Morgan
Today, Judge Bruggnick of the Court of Federal Claims denied the Department of Justice’s (DOJ) motion to dismiss the complaint filed by two special purpose entities affiliated with SolarCity regarding the Treasury’s calculation of the 1603 cash grant awards for solar projects. The judge’s order is available here. Unfortunately, the order is quite short and does not contain any legal discussion but rather references reasons stated during oral argument.
Although, surviving a motion to dismiss is a far cry from winning the case, the judge’s determination is a positive indication for this case and for similarly situated Cash Grant applicants that are considering bringing actions to contest how Treasury has administered the 1603 Cash Grant program. The outcome of this litigation has implication both for 1603 Cash Grant applicants and for the tone of future IRS audits of investment tax credit transactions because Treasury was supposed to be following the investment tax credit rules for calculating the amount of the Cash Grant award. Thus, principles decided in this litigation in theory will also apply to investment tax credit transactions.
Today, at the American Wind Energy Association’s Finance & Investment Seminar in Manhattan Attorney-Advisor Christopher Kelley of the U.S. Treasury, speaking on his own behalf, said that the Treasury and IRS are considering further guidance to clarify the requirement that wind projects start construction in 2013 and then pursue continual work towards completion in order to be eligible for production tax credits. His comments were qualified and made it clear that there is a possibility that no further guidance would be provided. It was acknowledged that if such guidance was published in mid-November that it would be too late to spur much in the way of equipment orders.
Another Treasury official on June 17 had written Congress that Treasury “believe[d] that Notice 2013-29 provides the desired degree of certain in the marketplace and allows renewable energy project to move forward.” A blog post discussing this Treasury letter is available here, and client alerts discussing Notice 2013-29 are available here and here. Treasury appears to be having second thoughts as to whether “desired degree of certainty” was in fact provided by Notice 2013-29.
Here is a link to my letter to the editor of Tax Notes that corrects statements in an article by Lee Sheppard, a noted tax journalist, that provided that the renewables industry was prepared to trade tax credits for legislatively expanding the definition of “qualified” income for purposes of the master limited partnership rules to include income from renewable energy projects.
If a publicly traded partnership (known as “master limited partnership” (MLP)) has at least 90 percent of its income from “qualified” sources, then it is eligible to avoid the corporate level income tax typically imposed on U.S. publicly traded entities. I.R.C. § 7704. Bills have been introduced in Congress to amend the definition of “qualified” income to include income from renewable energy projects. The proposed legislation is discussed in blog posts of [Aug. 1], [Apr. 9] and [Mar. 12]. The letter to the editor quotes statements from leaders in the renewable energy industry that make it clear that although the industry would like the expansion of the MLP rules, the industry is not prepared to trade tax credits in order to obtain such an expansion.
The letter also corrects misstatements in the article about the tax and the GAAP treatment of leasing transactions.
The Solar Energy Industry Association (SEIA) has published a white paper that addresses the income tax rules for determining fair market value. The white paper is available here.
Fair market value is critical in analyzing the tax benefits of solar projects because in many structures it determines the amount of investment tax credit and accelerated depreciation available to the owner of the project. The white paper highlights both best practices and common pitfalls. For those involved in the renewable energy industry, even if not as a tax professional, the fair market value and tax basis concepts in the white paper are worth being familiar with. Further, the tax principles described in the white paper are broadly applicable to tax planning generally, even outside of the renewables area.
The white paper was prepared by SEIA’s Tax Working Group (of which I am a member); however, the accounting firm CohnReznick deserves much of the credit for being the driving force in authoring it.
Akin Gump is pleased to announce our summer 2013 edition of the Project Perspectives Newsletter. Please click here to read Project Perspectives.
In July, the New York Public Service Commission increased the solar net metering limits for businesses and residences.
The limit for businesses was increased from 50 kilowatts to 200 kilowatts. This is significant for warehouses, factories, big box stores and other businesses with substantial roof space. The limit for residences was increased from 7 kilowatts to 25 kilowatts. Click here to see a summary of the New York net metering rules. Few homes have the roof space for more than 10 kilowatts; therefore, if a homeowner wants to use the full 25 kilowatts, a ground-mounted array would likely be needed.
Senator Jeffrey Merkley (D-OR) along with 26 of his Democratic colleagues and Angus King (I-ME) wrote to Senators Baucus and Hatch of the Finance Committee to advocate for renewable energy tax incentives in the context of tax reform. The letter is available here.
The letter is not specific as to how long tax credits should be extended for, but it is clear that the credits would not be permanent as it references changing the sunset rules for all technologies from the placed in service date to the start of construction date.1 In addition, the letter does not reference MACRS depreciation. MACRS can be worth almost as much to a project as tax credits, so it is odd that the letter left that out. Is it a signal that in the tax reform process the Senate Democrats are prepared to trade MACRS for tax credits? The combined implication of these two references in the letter is somewhat concerning. Are the signatories of the letter planning to trade MACRS which is a permanent provision of the Internal Revenue Code for tax credits that would be “long-term” but nonetheless have a sunset date?
On August 12, the Department of Justice filed a brief in response to the plaintiffs’ opposition to DOJ’s motion to dismiss. A copy of the brief is available here. The plaintiffs are special purpose entities that invested in cash grant eligible solar projects sponsored by SolarCity, and they allege that the Treasury paid smaller grants than they were entitled to. Background about the Court of Federal Claims litigation is available in blog posts of May 21, June 2 and July 9.
Introduction of Renewable Energy Parity Act of 2013 Extending 30 Percent ITC to Solar Projects Beginning Construction Prior to 2017
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 here.
Senator Grassley Proposes Repeal of Fossil Fuel Tax Incentives if any Renewables Tax Incentives Expire
The tax press is reporting comments made by Senator Grassley (R-IA) at a Department of Energy forum on biomass. Senator Grassley is reported to have said: “Congress should ‘do away with the incentives for oil’ tax breaks if tax breaks for alternative energy are repealed or allowed to expire.” The report goes on to provide: “Grassley … declined to specify which incentives he was referring to, simply saying ‘any of them.’”1
Senator Grassley has a long history of being a staunch supporter of renewables; the renewable energy industry likely appreciates the spunk reflected in his comments. However, given the almost century of support that Congress has provided the fossil fuel industry in comparison to the relatively recent significant support the nascent renewables industry has received, the suggested scenario is far from equitable.
The Environment America Research & Policy Center released a report on July 23 that ranks what the center has determined are the twelve best states for solar. Information about the report is available here. The criteria include total installed capacity, capacity installed in the past year, actual production of solar energy and policies that encourage solar energy. The states from first to twelfth are:
On July 31, 2013, the Senate Finance Subcommittee Energy, Natural Resources, and Infrastructure held a hearing on the Master Limited Partnership Parity Act (S. 765). The bill would extend the master limited partnership (MLP) tax rules to renewable energy assets. The MLP rules provide a means to raise equity from retail investors while avoiding the “corporate” layer of income tax. These rules and the proposed legislation are discussed in the post below. Click here to see a link to our March 12, 2013, blog post.
The bill is sponsored by Senators Coons (D-DE), Moran (R-KA), Murkowski (R-AK) and Stabenow (D-MI). It also has bi partisan support in the House. Senator Stabenow chairs the subcommittee that held the hearing, so she made the opening remarks, and her written comments avoided directly referencing the bill.
The Congressional Research Service published a report on July 15, 2013 on bonus depreciation and expensing allowances. The report is available here.The report is lukewarm at best as to the economic benefits of these tax incentives.
Expensing arising under Section 179 and permits a taxpayer to deduct in full its first $500,000 of investment in new equipment it places in service in 2013. It is of little interest to tax equity investors, so the remainder of this post will focus on bonus deprecation.
The bonus depreciation rules permit a taxpayer to deduct in 2013 50 percent of the cost of new equipment placed in service in 2013; provided the equipment has a recovery period of twenty years or less. Renewable energy assets qualify, as do gas fired power plants and electric transmission lines. In addition to the 50 percent deduction, the taxpayer is entitled to claim the applicable MACRS percentage deduction on the remaining 50 percent of the cost.
On July 17, the Congressional Research Service released a report: Energy Policy: 113th Congress Issues. The report is available here.
The report has little analysis and mostly summarizes the current energy debate between those concerned about greenhouse gasses and those concerned about the economic costs of addressing the same.
Oddly, the report mischaracterizes the extension of the production tax credit (PTC) that was enacted this January: “The 112th Congress[‘s] … most significant action was extension of energy tax credits, including the PTC for wind energy, to January 1, 2014, as part of P.L. 112-240, the American Taxpayer Relief Act of 2012.” The PTC was not extended “to January 1, 2014” it was extended for projects that start construction before January 1, 2014.1 The “start of construction” distinction is important: projects that are in service in 2014 or even later can qualify, if construction commenced in 2013. For a discussion of the “start of construction” rules, see our client alerts available here and here.
In a report from the Government Accounting Office (GAO) to Congress that was made public on July 1, the GAO determined that in 2010 profitable U.S. corporations with assets of $10 million or more paid 12.6 percent of their pretax worldwide income in federal taxes. The report is available here.
The report may seem too wonky to be of interest to a sexy industry like renewable energy, but so long as the American energy policy is effectuated through corporate income tax incentives the report should be of particular interest to renewable energy developers and the associated industries. If large American corporations are paying only 12.6 percent of their worldwide income in federal taxes, they are likely to have little interest in tax credits and accelerated depreciation from renewable energy projects. That means the market for tax equity is thin; therefore, the most critical component of developers’ capital structure is expensive and the economics of developing renewable energy projects are at best challenging.
The check-the-box tax regulations are critical tool in the tax advisor’s tool box. The rules are commonly implicated in renewable energy transactions. This PDF explains the rules for a lay reader.
Consumers interested in energy-efficient homes will benefit if a recent bill, called the SAVE Act (Sensible Accounting to Value Energy), becomes law. The law, if enacted, would require Fannie Mae, Freddie Mac and the Federal Housing Administration to take energy savings into account when underwriting home mortgages.
Current practice generally does not factor any value into the home mortgage analysis for the savings derived from an energy-efficient home. The bill would require these cost savings to be factored into the analysis both in terms of evaluating the borrower’s income as compared to his or her monthly expenses and for purposes of valuing the home. The end result should be that a borrower would qualify for a larger loan.
The SAVE Act was introduced by Senators Michael Bennet (D-Co.) and Johnny Isakson (R-Ga.) on June 6, 2013. It is widely supported by a coalition of business, real estate, energy and environmental groups.
Covington & Burling’s reply brief to the government’s brief in support of its motion to dismiss provides insight into SolarCity’s strategy. The complaint appears to be as much about providing SolarCity with leverage in negotiations with the Treasury regarding its pending 1603 Cash Grant applications as it is about recovering the $8 million Cash Grant shortfall referenced in the complaint.
A letter from Treasury Assistant Secretary for Legislative Affairs Fitzpayne to Rep. Coffman (R-CO) dated June 17, 2013 addresses the IRS’ recent guidance with respect to the “beginning construction” requirement for PTC eligibility. The letter is available here. The guidance in question is Notice 2013-29. A client alert discussing the notice is available here and a subsequent alert discussing a clarification to the notice is available here.
A highlight of Treasury’s letter is the statement: “We believe this guidance provides the desired degree of certainty in the marketplace and allows renewable energy projects to move forward” (emphasis added).
The Congressional Budget Office (CBO) on May 22, 2013 published a report with respect to the potential economic and environmental consequences of the imposition of a carbon tax in the United States. The report is available here. The report highlights a number of interesting dynamics between tax and environmental policy but avoided reaching any meaningful conclusions.
A Large Source of Tax Revenue
- If the carbon tax were set at $20 per metric ton of greenhouse emissions in 2012 and inflated at 5.6 percent a year, then in a ten year period it would raise $1.2 trillion in taxes. This is comparable to the revenues raised from all excise taxes (e.g., taxes imposed on tobacco, alcohol and gasoline) and exceeds the proceeds of estate and gift taxes.
- A tax of $20 per ton of emissions would result in an increase in the price of gasoline of 20 cents per gallon.
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.
The current proposal to overhaul lease-accounting rules is off base, because for most lease transactions, the existing rules work well.
The Department of Justice (DOJ) filed a motion for the Court of Federal Claims to dismiss SolarCity’s1 case against Treasury with respect to the administration of the 1603 Cash Grant program. DOJ’s brief in support of its motion is available here.
DOJ’s grounds for dismissal are that the Court of Federal Claims has a specific jurisdiction to hear patent and copyright cases, government contract cases and claims for payments from the federal government (including tax refund cases)2 while SolarCity alleges that Treasury’s administration of Cash Grant program violated the 1603 statute.
Further, DOJ asserts that SolarCity is effectively seeking the court to review Treasury’s Cash Grant guidance for compliance with the Administrative Procedures Act, which is not within the jurisdiction of the Court of Federal Claims’. The Administrative Procedures Act is the federal statute that requires federal agencies to provide notice and an opportunity to comment before promulgating rules.3 Interestingly, the complaint does not actually reference the Administrative Procedure Act, probably because the plaintiffs’ counsel, Covington & Burling, was trying to avoid this jurisdictional issue.
Today, the Supreme Court denied a petition to review the 3rd Circuit’s opinion in favor of the IRS in the Historic Boardwalk Hall case which involved eligibility for federal historic tax credits for rehabilitation of a historic building.1
In Historic Boardwalk Hall, an affiliate of Pitney Bowes entered into a highly structured transaction in which it was insulated from much of the risk and reward with respect to the operation of a convention hall in Atlantic City; nonetheless, the transaction was intended to result in the allocation of a large federal investment tax credit to Pitney Bowes.
SolarCity in the name of two special purpose entities filed a complaint in February in the Court of Federal Claims. The complaint alleges that the United States Treasury failed to follow applicable law in administering the Cash Grant program. The complaint seeks in excess of $8 million dollars in damages. The complaint is available here.
New Guidance Provides Taxpayers with Definitions of Units of Property and Major Components For Capitalizing Power Generation Property Expenditures
On April 30, the Internal Revenue Service (IRS) issued guidance (Revenue Procedure 2013-24 http://www.irs.gov/pub/irs-drop/rp-13-24.pdf) providing definitions of “units of property” and “major components” that taxpayers may use to determine whether expenditures to maintain, replace or improve steam or electric power generation property must be capitalized (and depreciated, rather than expensed) under Section 263(a) of the Internal Revenue Code. This is of particular interest to utilities and independent power producers.
At a high level, to determine which expenditures are deductible as repairs or capitalized as improvements in this context, a determination must be made regarding to which discrete “unit of property” or “major component” such expenditures relate. Generally, for this purpose, a major component is a part of a larger unit of property.
The actions of the tax professionals in the IRS’ Tax Exempt division in discriminating against applications for tax-exempt status based on the apparent political views of the applicant are offensive and worthy of punishment. The IRS Commissioner and leader of the division have already lost their jobs and more IRS employees will be punished.
The problem with the tax-exempt application process was identified and publicized by the Treasury Inspector General for Tax Administration. This should give the public comfort that at some level there are functioning checks and balances at the IRS.
The New York State Senate unanimously passed the New York Solar Bill (S.2522), which would extend the NY-Sun Initiative, an existing public-private partnership aimed at significantly increasingly the amount of solar electricity generated in the state, through 2023. The NY-Sun Initiative currently provides incentives for the expansion of solar electricity generating facilities in New York State through grants for the construction of solar production facilities and tax credits for residential homeowners and commercial businesses that install solar panels on their rooftops and properties. The New York Solar Bill would also provide a tax credit for manufacturers of solar energy production and storage equipment located in the state. The Bill awaits passage in the New York State Assembly.
We understand that the New York Solar Bill is part of a larger legislative effort currently underway in the New York State Legislature and that additional bills and action by the Legislature and New York Governor Andrew M. Cuomo are expected in the near future.
Included in New York State’s recently enacted fiscal plan is a tax credit for electric vehicle recharging equipment equal to the lesser of 50% of the cost and $5,000 for each installation. The credit is valid against corporate tax, corporate franchise tax and personal income tax. The credit expires after December 31, 2017. The credit is not refundable and does not reduce New York alternative minimum tax liability; however, it may be carried forward fifteen years. New Yorkers with electric cars should consider taking advantage of the credit by installing charging stations at their homes. Also, parking garages that seek to improve their “green” status should consider installing electric vehicle charging equipment for their customers and claiming the credit.
The New York tax credit compliments the federal tax credit. The American 2012 Taxpayer Relief Act extended the federal credit for refueling equipment placed in service before January 1, 2014. The federal credit is 30 percent but limited to $50,000 per taxpayer; therefore, the federal credit is not much help to companies that want to install many recharging stations across a region. The federal tax credit is not refundable; it does not reduce a taxpayer’s alternative minimum tax liability, but it may be carried forward for 20 years.
To be eligible for a 1603 Treasury Cash Grant, a “begun construction” application was required to be submitted prior to October 1, 2012. Further, wind projects must have been placed in service prior to January 1, 2013, and solar projects must be placed in service prior to January 1, 2017. Treasury’s rules provide that an application at this stage in the program must be submitted within 90 days of the project being placed in service.
Some grant applicants were having trouble with this deadline. For instance, some applicants struggled with determining the precise date their project was placed in service, because the test for placement in service is a multi-factor test that has subjective elements.1 Treasury has generously implemented an automatic 90-day extension. Here is a link to Treasury’s web site http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx. Now, from the placed in service date, an applicant that requests the extension, has up to 180 days to submit an application.
Please click here to read New Rules for New York Historic Credits Create Opportunities for Investors an article by David Burton posted in the Bloomberg BNA Daily Tax Report.
On April 16, 2013, the Congressional Research Service published a report on home energy efficiency tax credits for consumers. The report is available here. The tax credits arise under Sections 25C and 25D of the Internal Revenue Code. The tax credits are available to individuals without regards to the passive activity loss rules that generally limit the ability of individuals to use tax credits.
The Section 25C credit is for the purchase of energy efficient windows and doors and energy efficient mechanicals, such as air conditioners, heat pumps and hot water heaters. The credit for windows and doors is for 10 percent of the cost of the windows or doors and has a lifetime cap of $200. For the energy efficient mechanicals, each item of equipment has its own tax credit amount and all of the mechanicals have a lifetime cap of $500. The Section 25C credits are not available for vacation homes, investment properties or any new construction. The Section 25C credit may not be carried forward or back, so if the taxpayer does not have a tax liability in the year in which the improvements are made the credit is of no value. The credit expires at the end of this year.
April 22, 2012, the 43rd Anniversary of Earth Day, was an important reminder of the need to remain committed to our environment. Thankfully, Sens. Chris Coons (D-Del) and Ron Wyden (D-Ore) did not miss the opportunity, and spoke yesterday about what should be non-controversial legislation to allow alternative energy projects to benefit from a tax-advantaged financing structure that has been available to fossil fuel energy projects for decades.
What I’m referring to is something called a “master limited partnership” (or MLP). An MLP is an entity that is taxed as a partnership (in other words, no entity level tax), but which has widely held interests that can be traded much like shares of stock. Oil, natural gas, coal and pipeline projects have been using this structure to expand their access to capital since the 1980s. (For additional discussion of MLPs, see David Burton’s post of March 12, 2013 - “A Camel’s Nose Under the Tent: MLP Legislation”).
Many homeowners have opted to fund the cost of adding solar panels to their homes by entering into a lease or a power purchase agreement with companies like SunPower or OneRoof. But what are the tax rules if you want to own the system yourself and use the tax credits to reduce your own taxes?
Internal Revenue Code Section 25D provides an income tax credit equal to 30 percent of the cost of solar panels (including installation costs) on the taxpayer’s residence. The credit is available even if the taxpayer is subject to the alternative minimum tax, as many homeowners are in states like California and New Jersey where solar is popular. The credit does not apply to solar panels installed after 2016.
The Section 25D credit broader in scope than the Code Section 48 investment tax credit claimed by investors: it is expressly available for expenditures for “solar panel(s) or other property installed as a roof (or portion thereof)”, even if “it constitutes a structural component of the structure on which it is used.”
As the renewable energy industry absorbs the IRS’ production tax credit (PTC) guidance, Notice 2013-29 (http://www.irs.gov/pub/irs-drop/n-13-29.pdf) that was issued Monday, two glitches have surfaced: liquidated damages and master contracts. The notice is summarized in a Client Alert available here.
As discussed in the Client Alert, a taxpayer to have its project eligible for PTCs must in 2013 either (i) start physical work of a significant nature or (ii) incur at least 5 percent of the cost of the project. If the developer uses work by or payments to a contractor to achieve this, the arrangement with the contractor must be a “binding written contract”.
On March 12, Dave Camp (R-MI), who is chair of the House of Representatives’ Ways & Means Committee, released a revised discussion draft for tax reform focusing on simplifying the taxation of small business owners. Part of the proposed reform is to bring closer together both passthrough regimes: the “partnership” and “S-corporation” regimes under subchapter K and subchapter S, respectively.
The Committee is currently looking into two options for making this passthrough reform. The second proposal, which is discussed below, has raised some concerns within the renewable energy industry about whether flip partnerships with tax equity investors would be permissible. Recent comments by government officials during a KPMG webinar suggest that flip partnerships would continue to be a viable structure.
The Obama Administration’s budget proposal for fiscal year 2014 would make the production tax credit permanent and refundable. Refundability would mean that developers without sufficient tax liability to use the credits would receive a cash refund from the IRS. If enacted in the form proposed, projects that start construction after December 31, 2013 would be eligible. The question is whether such an expansion would pass the Republican-controlled House of Representatives.
If enacted the Administration’s budget would end the sequestration rules that since March 1st have applied to Treasury’s Cash Grant payments for renewable energy projects and certain other federal programs. It appears unlikely that any headway will be made on this issue until midsummer when, in the context of the debt ceiling, it is expected that the Congress and the President will negotiate a “grand compromise” with respect to tax reform, entitlements and other spending.
The White House by legislative or administrative action intends to expand tax policy with respect to renewable energy. Two areas under consideration by the Administration are (i) Senators Coons (D-Del.) and Jerry Moran’s (R-Kan.) bill to expand the ability of master limited partnerships (MLPs) to invest in renewables by treating renewable energy income as “good” income for purposes of the 90 percent qualifying income test and (ii) permitting solar projects to be “qualifying” assets for real estate investment trusts (REITs). The MLP bill is discussed in the blog post below of March 13.
Heather Zichal, deputy assistant to the President for energy and climate change, made these comments yesterday. The strategy is apparently based on a political judgment that an energy bill would be unlikely to garner sufficient support to be enacted; therefore, changes to tax policy are seen as a viable second choice.1
With respect to REITs, the White House may not need to wait for Congress. As widely reported, Renewable Energy Trust Capital, Inc. has filed a private letter ruling request with respect to utility scale ground mounted solar being effectively “real property” for purposes of the REIT rules. That ruling was expected at the end of January, but there has yet to be a public report of it being issued.
SunRun, Inc. (“SunRun”) has been targeted by a consumer class action lawsuit. Mr. Shawn Reed of California is the named plaintiff in the complaint against SunRun. Mr. Reed and his lawyers, Hagens Berman Sobol Shapiro LLP, seek similarly situated consumers to be designated as a “class” so that they can sue SunRun in a single action. The class action complaint is available here. Akin Gump is not involved in this lawsuit.
The lawsuit has three allegations:
1. It was deceptive for SunRun to include predictions of increased energy prices in California in its marketing materials. SunRun’s marketing materials referenced a 6 percent annual average increase in electricity prices nationwide over the last 30 years. The plaintiff asserts that this fact confused him and caused him to assume that prices would increase in California to make his investment in a home solar system more lucrative.
2. The plaintiff was misled to believe that, if he sold his house and the buyer did not want to continue to pay for the solar system, SunRun would come and remove the system, and he would have no further liability. This is based on SunRun’s contract referencing the fact that, at the end of the stipulated term, SunRun would come and remove the system at no cost to the homeowner (if the homeowner does not purchase the system or renew the contract). The plaintiff thought this provision also applied to a termination during the term, despite there being an express provision in the contract that a termination during the term accelerated the obligation to make the payments due for the remainder of the term.
3. At the time the system was installed on the plaintiff’s home, SunRun did not have a California contractor’s license. SunRun started installing solar systems in 2007, but did not obtain a California contractor’s license until February 2012.
Treasury Assistant Secretary for Legislative Affairs, Alastair Fitzpayne, wrote Senator Michael Bennet (D-CO) on March 28 that the “start of construction” production tax credit guidance that the wind industry is eagerly awaiting will be issued “as soon as possible.” The letter provided no other color. It will be interesting to see what “as soon as possible” means to Treasury.
Lack of guidance is impeding the development of new renewable energy projects; favorable government guidance would likely spark orders for turbines and the construction of projects. Such activity would benefit the still-high unemployment rate in the United States as well as spur the economy generally.
To read PTC letter from Treasury to Senator Michael Bennet click here.
The IRS has published its annual inflation adjustment for production tax credits. The adjustment results in the production tax credit increasing from 2.2 cents per kilowatt hour to 2.3 cents per kilowatt hour for wind, closed-loop biomass and geothermal. This is good news for developers as each hour of electricity generated by their qualified projects is slightly more valuable for tax credit purposes.
The production tax credit in 2013 is 1.1 cents per kilowatt hour for open-loop biomass, small irrigation, landfill gas, trash combustion, qualified hydropower and marine and hydrokinetic energy facilities.
Further, the phaseout that in theory applies to production tax credits when energy prices are raised to a level where the production tax credit is thought to be unnecessary, will not be triggered in calendar year 2013. No one in the industry worries too much about the phaseout, but it is good to know that it will not be a problem in 2013.
The Government Accounting Office (GAO) published a report analyzing 82 federal incentives for wind projects, some of which also apply to other types of renewable power generation. Three of the incentives were found to have not provided any support to wind projects in fiscal year 2011. The incentives are implemented by nine federal agencies. As is the case for most activities of the federal government, it is not surprising that the GAO found some inefficiencies and duplication.
As readers of this blog are aware, most of the federal support for wind power generation is facilitated by means of the Internal Revenue Code. In addition, to the production tax credit, the investment tax credit (only available if a project elects to forego the production tax credit) and accelerated depreciation, the GAO identified two subsidized bond programs: a credit for building manufacturing facilities for renewable energy components; and a credit for individuals that purchase renewable energy equipment for their homes.
Germany has been praised for its political ambition to shift from nuclear and fossil fuels to renewable sources of energy. Its so-called “Energiewende” has sparked debate on how to address rising costs for consumers while supporting the renewables policy.
At a first joint meeting on February 14, 2013, the federal ministers for the environment and for economics and technology have proposed legislation that would freeze the renewable energy surcharge consumers currently pay through 2014 and cap further increases of the surcharge at 2.5 percent per year as of 2015.
The federal ministers also proposed to partially shift the economic burden of the Energiewende from consumers to producers. Their proposals include a new “energy solidarity tax” charged to new, as well as existing, solar and wind energy generators; the cancellation of a biogas promotion bonus (the so-called “Güllebonus”); higher cost sharing by energy-intensive industries, mandatory direct marketing by large plant operators as opposed to access to fixed feed-in tariffs; and lower reimbursements for curtailment.
Tax lawyers were the topic of the weekly ethics column in The New York Times Magazine. An unnamed New York tax lawyer wrote the ethicist asking, “Is advising wealthy companies of ways to reduce their tax bills through sophisticated legal structures ethically permissible?” The ethicist responded, “You need to do your job to the best of your abilities, within the existing rules. You should, however, voice your moral apprehension about the use of such loopholes to the company you represent.” The column is available here.
One advantage to a practice focused on the tax aspects of renewable energy is that such ethical questions do not really arise. Using one’s tax expertise to maximize tax credits funding renewable energy that leads to lower carbon emissions is, generally, a worthy endeavor by any measure.1
Christopher Martin of Bloomberg in an article dated March 21 writes that “The Internal Revenue Service is poised to release guidance” with respect to the “start of construction” rules to qualify wind projects for production tax credits that expire for projects that start construction after this year. I hope the IRS proves the author to be correct. Here’s the link. For more coverage, see the post below of January 31.
Today, Sen. Wyden (D-OR) spoke to the Edison Electric Institute. He said, “On energy, the guiding principles [should] be technology neutrality—that you don't favor one technology over another—and what amounts to parity.… You just distort the market if some sources get these enormous incentives and others don’t.” The senator went on to acknowledge that a goal of parity would require examining oil and gas tax incentives.1
Sen. Wyden’s comments about oil and gas tax incentives are consistent with a post on this blog of March 6, – Level Playing Fields.
The oil and gas tax incentives are permanent fixtures of the Internal Revenue Code, so they do not draw the attention that the production and investment tax credits do when they have to be renewed every few years. Nonetheless, including tax and other government benefits, the Environmental Law Institute found that, from 2002 to 2008, the United States spends almost six times as much on subsidies for fossil fuels versus renewables. 2
Cash Grant applicants are not the only participants in the clean energy industry subject to the sequester. Holders of New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds will feel the pain of sequester too.
The Internal Revenue Service has announced that any holder of an eligible bond that files Form 8038-CP (the form to elect to receive a cash payment, rather than a tax credit) after March 1, 2013 will have their refundable tax credit payments reduced by 8.7 percent. The percentage is subject to change either when Congress acts or after the close of the fiscal year on September 30, 2013.
Senator Coburn’s (R-OK) letter of March 13 to Treasury Secretary Lew suggests ways to reallocate spending at Treasury to mitigate the effect of sequester on funding for tax enforcement efforts.
The letter notes that it is estimated the sequester will result in a $187 million reduction in Treasury Cash Grants. The senator is not happy with that reduction, and his letter appears to suggest that Treasury should further reduce Cash Grant payments beyond the 8.7 percent mandated by the sequester.
Senator Coburn’s rationale for targeting Cash Grants is that the Cash Grants for wind projects have been paid disproportionately to developers with foreign ownership, and, at one point, more than two-thirds of the turbines that had qualified for Cash Grants were made by foreign manufacturers.
The oil and gas industry benefits from the master limited partnership (MLPs) rules. Those rules provide that oil and gas businesses (and certain other businesses) may raise equity in the public markets but without liability for corporate income tax. MLPs enable the oil and gas industry to raise capital from retail investors at tax advantaged rates.
Advocates for the renewable energy industry point out that the Internal Revenue Code requires that 90 perecent of an MLP’s income to come from qualified sources (e.g., oil or gas operations) and income from renewable energy projects is not a qualified source. Thus, the advocates suggest that Congress should amend the definition of qualified sources to include income from renewable energy projects.
The next phase of the conversation is that the industry’s most significant problem is a lack of tax equity providers. And merely making renewable energy eligible for MLP treatment would not address that shortage, because the investors that buy units in the MLP would be mostly individuals: individual investors would still be subject to the passive activity loss rules and the at-risk rules that would prevent them from using the tax credits and accelerated depreciation in an efficient manner.
Many opponents of renewable energy use the rhetoric that tax benefits for renewable energy should be eliminated, so renewables compete on a level playing field with conventional forms of energy. An assumption in this statement is that other forms of energy do not benefit from tax subsidies. Let’s examine the tax benefits for natural gas and oil.
Finite natural resources, like oil and gas, are subject to a cost-recovery calculation for tax purposes known as depletion. It is their equivalent to depreciation. There are two types of depletion: percentage and cost. Big players, like ExxonMobil, are required to use cost depletion. Cost depletion is analogous to straight-line depreciation and is not that sexy.
On February 12, the CEO of Barclays announced that the bank is shuttering its U.K. tax-structuring unit. The unit had previously been extremely lucrative and high-profile in structuring and executing tax-advantaged transactions in the United Kingdom.1
It is unclear if the move was the result of a change in the appetite for such transactions in the United Kingdom market or represented a change of view by Barclays about the transactions.
As the effective date of March 1 for sequestration approaches, we continue to learn more about its scope. Surprisingly, the Financial Accounting Standards Board (FASB) will feel the pain of the sequester too.
The FASB, unlike the Treasury cash grant program, is not taxpayer funded. The Securities and Exchange Commission (S.E.C.) has delegated to the FASB the responsibility to promulgate generally accepted accounting principles (GAAP).
In fiscal year 2010-2011, the New York State Energy Research Development Authority spent $413.9 million statewide on various energy programs, most of which are focused on encouraging consumer energy conservation and green energy use.1
In that same time period, the Authority was provided with funding of $289.9 million through a “system benefit” charge paid by gas and electric customers. On a typical bill, that charge is 2 percent for electricity customers and 1 percent for natural gas customers.2