Two cases involving qualified renewable energy property (wind facilities) that elected to receive Section 1603 grants for specified energy property in lieu of tax credits will go forward to trial after the Claims Court denied the government's request for summary judgement.

Background

Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603) allows a cash grant to the owners of qualified renewable energy property that elect the grant as an alternative to the investment tax credit under Section 48 (ITC) or the production tax credit under Section 45 (PTC). Qualifying renewable energy property includes qualified property (within the meaning of Section 48(a)(5)(D)) that is part of a qualified investment credit facility (within the meaning of Section 48(a)(5)(C)). For purposes of Section 1603, qualified investment credit facilities include wind energy facilities that are described in Section 45 and satisfy certain other requirements, including a requirement that construction begin before 2012.

Facts

In Bishop Hill Energy LLC, et al. v. USA and California Ridge Wind Energy LLC, v. USA, each developer built a wind energy production facility with the expectation of receiving a Section 1603 grant equal to 30% of the amount the developer claimed as the wind facility's cost basis. Treasury awarded each developer a reduced amount, stating in its motion for summary judgment that the reduction was appropriate for the following reasons:

1. The claimed cost basis included a "development fee" that was based on the amount realizable in a sale of the property, not an amount that the developer paid as fees for services.
2. The development fee was the result of a "circular cash transaction" in which the developer paid the development fee into an account, and then on the same day the payee returned the same amount.
3. The transaction was "an effort to boost the Section 1603 payment by inflating the claimed qualified cost basis of the eligible property."

The Court determined that it could not reach the level of certainty needed to rule that there are no genuine issues of material fact and thus could not resolve the cases on summary judgment. Accordingly, both cases will go forward to trial.

Implications

These cases could help to clarify a number of ambiguous issues related to the determination of grant and tax credit eligible basis in renewable energy projects. In particular, the industry has struggled with determining the amount of development fees that can be included in the cost of tangible assets (i.e., assets that qualify for a grant or tax credit) and the extent to which any remaining costs ought to be allocated to intangible assets (i.e., assets that do not qualify for a grant or tax credit).

In Utilicorp United, Inc. & Subsidiaries v. C.I.R., T.C. Memo. 1997-47, the taxpayer was allowed to include a development fee equal to 20% of cost basis as part of tax credit eligible basis. This precedent, paired with continuing challenges from the IRS, has made many practitioners wary of including development fees in excess of this percentage. The resolution of these cases should help developers approach the issue of eligible cost basis determination with more confidence.

On the allocation issue, the Claims Court concluded in Alta Wind I Owner Lessor C, and Alta Wind I Owner Lessor D, et al. v. United States, (October 31, 2016) that a power purchase agreement was inseparable from the physical assets of a project and not a separate intangible asset. Since only amounts paid for tangible property qualify as eligible basis, the Court's decision not to allocate any amount to the power purchase agreement as a separate intangible asset increased Alta Wind's overall grant award. The Alta Wind case, however, is not without controversy (including the fact that a Treasury expert witness's testimony regarding valuation was struck from the record) and is currently under appeal. Although these cases will not resolve that controversy, they may at least provide some guidance as to when a development fee will be respected and excluded from the costs that are potentially subject to allocation to intangible assets such as power purchase agreements.

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