In Notice 2019-43 (the Notice), the IRS has modified guidance under the IRC Section 45 renewable electricity production tax credit (PTC) and the IRC Section 48 energy investment tax credit (ITC) to provide that the "Continuity Safe Harbor" for construction of facilities may be tolled and extended in certain limited circumstances involving national security concerns raised by the Department of Defense (DOD).

Background

Section 45 PTC and Section 48 ITC

The IRC Section 45 PTC allows taxpayers to claim a credit for certain renewable electricity produced at a qualified facility. The IRC Section 48 ITC allows taxpayers a credit on the basis of certain energy property placed in service during the tax year. Taxpayers may elect to treat certain qualified facilities under IRC Section 45(d) as energy property and claim the ITC rather than the PTC with respect to the facility.

The Consolidated Appropriations Act of 2016 (the CAA), signed into law on December 18, 2015, extended, among other provisions, the PTC and ITC. Specifically, the CAA extended the PTC for certain facilities whose construction began before January 1, 2017, and further extended the PTC for wind facilities whose construction begins before January 1, 2020. The CAA also modified the PTC for wind facilities so it phases out over four years and extended the election to claim the ITC in lieu of the PTC for certain renewable energy facilities if the facility's construction began before January 1, 2017 (or January 1, 2020, for wind facilities).

The Bipartisan Budget Act of 2018 (2018 BBA), signed into law on February 9, 2018, harmonized the energy credit expiration dates and phase-out schedules for different types of property. The 2018 BBA modified the ITC by replacing the requirement to place energy property in service by a certain date with a requirement to begin construction by a certain later date. See Tax Alert 2018-0302.

IRS guidance and Continuity Safe Harbor

The IRS has provided extensive guidance on the application of the beginning-of-construction requirement for energy property and associated Continuity Safe Harbor.

Notice 2013-29 permits taxpayers to establish that construction has begun by either: (1) starting "physical work of a significant nature" (the Physical Work Test) or (2) meeting a safe harbor by paying or incurring 5% or more of the total cost of the facility (the 5% Safe Harbor). Notice 2013-29 also establishes the Continuous Construction Test, stating that the IRS may determine that the Physical Work Test is not satisfied if the taxpayer fails to maintain a continuous program of construction. The safe harbor provided in Notice 2013-29 also is only available if the taxpayer maintains continuous efforts to advance completion of construction (the Continuous Efforts Test).

Notice 2013-60 provides that a facility placed in service before January 1, 2016, will satisfy the Continuous Construction Test and the Continuous Efforts Test (the Continuity Safe Harbor).

Notice 2014-46 clarifies that no statute requires the taxpayer placing a facility in service to be the taxpayer that began construction, explaining that a partially or fully developed facility generally may be transferred to unrelated taxpayers without losing its qualification under the Physical Work Test or the 5% Safe Harbor.

Notice 2015-25 described a one-year extension of the credit.

Notice 2016-31 put a four-year limit on construction. If a taxpayer places a facility in service during a calendar year that is no more than four calendar years after the calendar year during which the facility's construction began, the facility will satisfy the Continuity Safe Harbor under the Notice.

Notice 2017-04 extended of the Continuity Safe Harbor for facilities placed in service between December 31, 2016, and December 31, 2018.

Notice 2018-59 describes guidance on the ITC to reflect the extension and modification of the credit by the CAA and 2018 BBA, including guidance for determining when construction begins on energy property. As under the prior notices, Notice 2018-59 includes a Continuity Safe Harbor, under which the Continuity Requirement is satisfied for both the Physical Work Test and the 5% Safe Harbor if the energy property is placed in service by the end of the calendar year that is four calendar years after the calendar year in which construction began. Excusable disruptions do not extend the safe harbor. If the safe harbor is not met, satisfaction of the Continuity Requirement depends on the relevant facts and circumstances. See Tax Alert 2018-1324.

Tolling and extension of the Continuity Safe Harbor

In the Notice, the IRS states that, in some cases, a plan to develop or construct a facility or energy property (or related additional equipment necessary to connect the facility or energy property to the energy grid or to customers) may raise national security concerns for the DOD. Efforts to mitigate those concerns may delay the development and construction of the facility or energy property. To address this situation, the Notice specifies certain limited circumstances under which the Continuity Safe Harbor may be tolled and extended for a period to account for delays that result from pursuing a modification to a plan to mitigate significant national security concerns raised by the DOD (Tolling Period).

For the PTC and ITC Continuity Safe Harbor to be tolled and extended under the Notice, the following requirements must be satisfied:

1. Construction must have begun on the facility or energy property that will generate the PTC or ITC.
2. The parties holding an ownership interest the relevant property (or that will hold an ownership interest in property after such property is constructed) must have received one or more government permits or approvals necessary to implement the construction plan.
3. DOD must have provided written notice directly to one or more of the parties described in (2) that one or more aspects of the plan raises significant concerns related to national security and that modification of the plan would be in the best interests of national security objectives.
4. The relevant parties must pursue a modification of their plan that is acceptable to DOD to mitigate these significant national security concerns and to further the national security objectives.
5. The resulting plan modifications must require the parties to obtain new or additional permits or licenses, thereby delaying placing the facility or energy property in service.

If these requirements are met, the Tolling Period results in a day-for-day extension of the Continuity Safe Harbor. The first day of the Tolling Period is the date on which DOD provides the notice described in (3). The last day of the Tolling Period is the date on which the relevant parties (a) obtain all the required new or additional permits or licenses, (b) obtain confirmation that such permits or licenses will not be issued, or (c) notify the relevant authorities that the plan modifications will no longer be pursued. This Tolling Period may not exceed four years. After the last day of the Tolling Period, the Continuity Safe Harbor resumes, with the placed-in-service deadline extended by the number of days in the Tolling Period.

The Notice includes an example illustrating the applicable requirements and the calculation of the Tolling Period. The example demonstrates that the Tolling Period does not begin until the date that the taxpayer receives written notice from the DOD stating that the plan raises significant concerns related to national security and that the proposed alternative route for the transmission line would be in the best interests of national security objectives. This is the case even though, in the example, the DOD raised concerns, and the taxpayer explored alternative routes in response to those concerns, months before the DOD provided such written notice.

The Notice modifies Notices 2013-29, 2013-60, 2014-46, 2015-25, 2016-31, 2017-04 and 2018-59. The Notice specifies that the IRS will not issue private letter rulings or determination letters to a taxpayer regarding the application of the Notice, the prior IRS notices or the beginning-of-construction requirement under the PTC and ITC.

Implications

While the Notice likely only apples to a small fraction of taxpayers, we are aware of projects that have been delayed due to DOD concerns. The Notice is favorable in that it provides direct citable guidance for taxpayers rather than forcing the taxpayer to rely on "facts and circumstances," which are subject to interpretation. Having direct citable guidance will help projects secure debt and tax equity at better terms due to the clarity of tax credit availability.

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