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Alta Wind: Federal Circuit Reverses Trial Court and Kicks Case Back to Answer Primary Issue

On July 27, 2018, the US Court of Appeals for the Federal Circuit in Alta Wind v. United States, reversed and remanded what had been a resounding victory for renewable energy. The US Court of Federal Claims had ruled that the plaintiff was entitled to claim a Section 1603 cash grant on the total amount paid for wind energy assets, including the value of certain power purchase agreements (PPAs).

We have reported on the Alta Wind case several times in the past two years:

Government Appeal of Alta Wind Supports Decision to File Suit Now

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Act Now To Preserve Your Section 1603 Grant

SOL and the 1603 Cash Grant – File Now or Forever Hold Your Peace

In reversing the trial court, the appellate court failed to answer the substantive question of whether a PPA that is part of the sale of a renewable energy facility is creditable for purposes of the Section 1603 cash grant.

Trial Court Decision

The Court of Federal Claims awarded the plaintiff damages of more than $206 million with respect to the cash grant under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). The court held that the government had underpaid the plaintiff its Section 1603 Grants arising from the development and purchase of large wind facilities when it refused to include the value of certain PPAs in the plaintiffs’ eligible basis for the cash grants. The trial court rejected the government’s argument that the plaintiffs’ basis was limited solely to development and construction costs. Instead, the court agreed with the plaintiffs that the arm’s-length purchase price of the projects prior to their placed-in-service date informed the projects’ creditable value. The court also determined that the PPAs specific to the wind facilities should not be treated as ineligible intangible property for purposes of the Section 1603 Grant. This meant that any value associated with the PPAs would be creditable for purposes of the Section 1603 Grant.

Federal Circuit Reverses and Remands

The government appealed its loss to the Federal Circuit. In its opinion, the Federal Circuit reversed the trial court’s decision, and remanded the case back to the trial court with instructions. The Federal Circuit held that the purchase of the wind facilities should be properly treated as “applicable asset acquisitions” for purposes of Internal Revenue Code (IRC) section 1060, and the purchase prices must be allocated using the so-called “residual method.” The residual method requires a taxpayer to allocate the purchase price among seven categories. The purpose of the allocation is to discern what amount of a purchase price should be ascribed to each category of assets, which may have significance for other parts of the IRC. For example, if the purchase price includes depreciable [...]

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Law School Professors File Amicus Briefs in Support of Commissioner’s Position in Altera

Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.

One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”

Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.

The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use. Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”

A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]

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