IRS Chief Counsel Memo on Excess Treasury Grants for Renewable Energy Projects

The IRS recently released a Chief Counsel’s memo addressing the federal income tax treatment of “excess” grant payments for renewable energy projects made by the Treasury to a taxpayer under section 1603 of the American Recovery and Reinvestment Act of 2009. AM2011-004 (9/27/2011).

The memo concludes that excess section 1603 payments are taxable income to the grant applicant/taxpayer upon receipt, notwithstanding the provision contained in section 48(d)(3)(A) of the Internal Revenue Code, which states that section 1603 payments are not includible in a taxpayer’s gross income. The portion of the grant payment that was in excess of what the applicant was entitled to does not result in the special 50% tax basis adjustment that follows the investment tax credit rules. The applicant is entitled to a tax deduction upon refunding the excess payment to the government. If the excess payment is received and refunded in the same taxable year, then its tax consequences are ignored. 

In addition, the memo discusses whether an excess section 1603 grant payment could be a “contribution to capital” for tax purposes pursuant to section 118 of the Internal Revenue Code. In an effort to avoid the imposition of certain state taxes, some tax advisors had argued that section 1603 grants are contributions to capital. The memo rejects such arguments in the federal context, because it concludes that the government had “no intent to make a contribution to capital.”

The memo also provides some insight into the government’s review of section 1603 grants received by taxpayers. There had been reports that Treasury’s Inspector General had been auditing grant applicants. This memo notes that the IRS is also auditing grant applicants and has identified certain excess grants. Based on examples in the memo, the IRS appears to be auditing whether renewable energy projects were “placed in service” in the required year, the amount paid for projects and “inverted lease” structures.

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