Taxpayers are running out of time to file refund claims against the government. If the government reduced or denied your Section 1603 cash grant, you can file suit in the Court of Federal Claims against the government to reclaim your lost grant money. Don’t worry, you will not be alone. There are numerous taxpayers lining up actions against the government and seeking refunds from this mismanaged renewable energy incentive program. Indeed, the government lost in round one of Alta Wind I Owner-Lessor C. v. United States, 128 Fed. Cl. 702 (2016). In that case, the trial court awarded the plaintiffs more than $206 million in damages ruling that the government unreasonably reduced their Section 1603 cash grants.
Philip (Phil) Tingle represents energy companies such as utilities, independent power producers and financial institutions on a wide range of energy tax-related matters. He is the global head of the Firm's Energy Advisory Practice Group. Phil provides advice regarding all aspects of renewable-energy projects, including tax equity structures, refinancings, acquisitions and dispositions, restructurings and workouts. He has extensive experience with the production tax credit and with the application of renewable credits to new technologies. Moreover, he works with the investment tax credit for numerous kinds of solar projects. Read Philip Tingle's full bio.
On September 14, 2017, Cross Refined Coal LLC (Partnership) (and USA Refined Coal LLC as the Tax Matters Partner) filed a Petition in the US Tax Court seeking a redetermination of partnership adjustments determined by the Internal Revenue Service (IRS). According to the Petition, during audit of the 2011 and 2012 tax years, the IRS reduced the Partnership’s and certain partners’ Internal Revenue Code Section 45(e)(8) refined coal production tax credits by several million dollars and disallowed several million dollars more of claimed losses. The Notice of Deficiency, a copy of which is attached to the Petition, provides the following reasons for the adjustments:
- Neither the Partnership nor the partners have established the existence of the partnership as a matter of fact;
- The formation of the Partnership was not, in substance, a partnership for federal income tax purposes because it was not formed to carry on a business or for the sharing of profits and losses from the production or sale of refined coal by its purported members/partners, but rather was created to facilitate the prohibited transaction of monetizing refined coal tax credits;
- The refined coal tax credits are disallowed because the transaction was entered into solely to purchase refined coal tax credits and other tax benefits; and
- Ordinary losses were disallowed because it has not been established that they were ordinary and necessary or credible expenses in connection with a trade or business or other activity engaged in for profit.
As we have previously reported, the IRS has issued negative guidance concerning refined coal transactions and has denied the tax benefits associated with some of those transactions.
We will be watching this case closely and will report back on any developments.
President Trump released his budget proposal for the 2018 FY on May 23, 2017, expanding on the budget blueprint he released in March. The budget proposal and blueprint reiterate the President’s tax reform proposals to lower the business tax rate and to eliminate special interest tax breaks. They also provide for significant changes in energy policy including: restarting the Yucca Mountain nuclear waste repository, reinstating collection of the Nuclear Waste Fund fee and eliminating DOE research and development programs.
New Internal Revenue Service temporary regulations provide guidance on the income inclusion rules that apply when a lessor elects to treat a lessee as having acquired investment credit property under Treas. Reg. § 1.48-4. As expected, the new temporary regulations also provide that a partner of a lessee partnership cannot increase its basis in its partnership interest for this income inclusion.
On May 18, 2016, the Internal Revenue Service (IRS) revised Notice 2016-31 (Notice), its recent guidance on meeting the beginning of construction requirements for wind and other qualified facilities (including biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities). For a discussion of the Notice, click here. The revisions clarify that the Continuity Safe Harbor is satisfied if a taxpayer places a facility into service by the later of (1) the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2016. The revisions also include additional language that the Notice applies to any project for which a taxpayer claims the Section 45 production tax credit (PTC) or the Section 48 investment tax credit (ITC) that is placed in service after January 2, 2013.
The revised Notice also corrects mathematical errors in an example illustrating the application of the begin construction guidance in the Notice to retrofitted facilities. The revised example is as follows:
A taxpayer owns a wind farm composed of 13 turbines, pad and towers that no longer qualify for either the PTC or the ITC. Each facility has a fair market value of $1 million. The taxpayer replaces components worth $900,000 on 11 of the 13 facilities at a cost of $1.4 million for each facility. The fair market value of the remaining original components at each upgraded facility is $100,000. Thus, the total fair market value of each upgraded facility is $1.5 million. The total expenditures to retrofit the 11 facilities are $15.4 million. The taxpayer applies the single project rule. Because the fair market value of the remaining original components of each upgraded facility ($100,000) is not more than 20 percent of each facility’s total value of $1.5 million, each upgraded facility will be considered newly placed in service for purposes of the PTC and the ITC. Accordingly, if the taxpayer pays or incurs at least $770,000 (or 5 percent of $15.4 million) of qualified expenditures in 2016, the single project will be considered to have begun construction in 2016. Provided the taxpayer also meets the Continuous Efforts Test, each upgraded facility will be treated as a qualified facility for purposes of the PTC. However, no additional PTC or ITC will be allowed with respect to the two facilities that were not upgraded.
Taxpayers should consider talking with their advisors to discuss the application of these rules to their projects.
The Internal Revenue Service recently issued Notice 2016-31, which provides much-needed guidance for wind and other qualified facilities on meeting the beginning of construction requirements in light of the 2015 statutory extension and modification of the production tax credit and the investment tax credit. The Notice also revises and adds to the list of excusable disruptions that will not be taken into account when determining whether the continuity requirement has been met, and provides additional examples demonstrating “physical work of a significant nature” for different types of qualified facilities.
On March 17, 2016, the Internal Revenue Service (IRS) issued a Field Attorney Advice Memorandum, 20161101F (Dec. 3, 2015) (the FAA). In the FAA, the IRS concluded that an investment in a partnership designed to deliver a tax credit allocation did not have a potential for profit or risk of loss, was not a meaningful interest in the venture and, as such, was not a bona fide partnership interest. In analyzing whether the arrangement was in substance a prohibited sale of tax benefits, the IRS determined that promotional materials and the partnership agreement indicated the investors were only interested in creating tax credits, not in operating a profitable refined coal business. The IRS relied heavily on Commissioner v. Culbertson, 337 U.S. 733 (1949), and Historic Boardwalk Hall LLC v. Commissioner, 694 F.3d 425 (3rd Cir. 2012), to determine that the investor did not have the requisite risk of loss or profit potential irrespective of creating tax credits, and that the partnership agreement indicated that the purported partner was to be indemnified for disallowed tax credits and deductions. An important fact for the IRS’analysis was that the payments to be made by the investor were nonrecourse, meaning the investor could walk away at any time. The IRS ruled that because “purported capital contributions are largely to be made in the future and only in relation to the amount of refined coal, and by extension tax credits generated, we believe that the payments are in exchange for tax benefits and do not constitute capital contributions in substance.”
Although a FAA is merely the opinion of one attorney at the IRS, it may be indicative of how the IRS evaluates these issues.