On September 21, 2009, the US Internal Revenue Service (IRS) published Announcement 2009-69. The announcement makes a number of changes to Revenue Procedure 2007-65, the safe harbor for wind energy partnerships using the partnership flip structure.
First, the announcement drops the threat that the IRS will "closely scrutinize" a taxpayer that does not satisfy all the requirements of the safe harbor. Instead, the announcement states, "Returns claiming wind energy production tax credits under § 45 are subject to examination by the Service."
Second, the announcement reverses the limitation regarding fixed price purchase options. The announcement now permits a fixed price purchase option if the option is negotiated for valid non-tax business reasons at arm's length by parties with material adverse interests. The exercise price under the option must be either at fair market value as determined at the time of exercise or at a reasonable estimate of fair market value at the time of exercise as determined when the option is issued. The announcement retains the restriction on the developer's ability to have an option that may be exercised within five years of the placed-in-service date. The fixed price purchase option limitation was subject to a lot of criticism because it established a higher standard than is required in other contexts (e.g., the common law rules applicable to leasing transactions), and a number of developers had been lobbying for this reversal since the revenue procedure was originally published.
Third, the announcement clarifies how the § 469 passive loss rules apply to § 45 tax credits. In the case of individuals, S corporations, and closely held C corporations, credits may be used to the extent of tax liability from passive activities, rather than the tax liability from only passive wind investments. This is welcome news for private equity funds with individual investors.
Fourth, the announcement modifies Example 2 of the revenue procedure primarily to clarify that the revenue procedure only provides safe harbor requirements.