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”.
Under the Treasury Cash Grant guidance and prior tax precedent, a contract was considered “binding,” so long as the potential damages due thereunder were not limited to less than five percent of the payments due under the contract. However, Notice 2013-29 appears to preclude any limitation on damages. The notice provides the contract must “not limit damages to a specified amount (for example, by use of a liquidated damages provision). “ 1 Reportedly, the IRS did not intend to vary from the 5 percent liquidated damages standard used in the Treasury Cash Grant guidance and is considering publishing further PTC guidance to clarify this point.
In addition, the notice enables developers to have a parent legal entity enter into a “master contract” with a manufacturer and then have the work performed under that contract assigned to the parent entity’s affiliates that are developing particular projects. The notice appears to preclude the application of this arrangement to five percent safe harbor and to only make the arrangement available in the context of “physical work of a significant nature”. This suggestion stems from the fact that the “master contract” rule is only referenced in that portion of the notice specifying the requirements for physical work of a significant nature and there is no cross-reference in the five percent safe-harbor.2 Such a change is a variation from the Treasury Cash Grant guidance. Reportedly, the IRS did not intend to exclude the application of the master contract rule to the five percent safe harbor and is considering publishing further guidance to clarify this point.
The industry hopes that the IRS communicates these points soon, so that taxpayers have clarity as to what is required to ensure eligibility for PTCs.
1 Notice 2013-29, § 4.03(1).
2 See Notice 2013-29, § 4.03(2).