The ABA Tax Section’s may meeting hosted a panel discussion on Friday concerning the IRS’ start of construction guidance (Notice 2013-29) relating to production tax credits for wind, geothermal, biomass, marine and hydro projects.
Those projects need to start construction by the end of the year to qualify for the credits. The panel tried to clarify some open points in the guidance.
The guidance permits a project owner to show it started construction by meeting one of two tests: by starting physical work or incurring at least 5% of the eligible project costs by the deadline. Both tests require some measure of continuous work after 2013 until completion.
For the 5% test, the project owner must show continuous efforts to advance toward completion. Some project developers have questioned how they can get comfortable that their efforts will be continuous. The market was unable to find much comfort under the Treasury’s cash grant program that physical work would be continuous.
Chris Kelley, attorney-advisor, tax legislative counsel in Treasury’s tax policy division, said the "continuous efforts" rule was intended to put a deadline on the PTC. He said it was not intended to be difficult to get over.
He wants to see reasonable steps to move toward completion. This doesn’t mean any particular schedule, like a normal development plan.
He said he thinks pointing to something that is outside of a developer’s control (like no interconnection) as the bar to moving gangbusters on construction generally is fine. He said, "you know it when you see it." He does not want abuse and he does not want taxpayers claiming these credits on projects they place in service in 10 years.
With that said, however, he has no more plans to issue additional guidance, solely on the start of construction rules.
An audience member asked whether one should assume that the Treasury’s transfer rules under its cash grant FAQs carry over to the tax credit world. Mr. Kelley said no. The IRS wants to be less restrictive.
He gave a common fact pattern as an example. A taxpayer owns a single-member LLC and, prior to placing a project in service, it sells an interest in that LLC. For tax purposes, that is a sale of project assets owned by the LLC. The FAQs would have suggested that this transaction is not permitted because for tax purposes it is a sale of assets. Mr. Kelley does not want to suggest that transactions Congress expected [read, the formation of tax-equity partnership transactions] when it changed to start of construction standard would be be off limits. So, selling an LLC interest to a tax-equity partner should be permitted.
There may be some extreme examples where a sale of a partnership interest would not be OK, but Mr. Kelley said to take those on a case-by-case basis.
With respect to the physical work test, one of the examples says that if one pours the foundations for 10 turbines at a 50 turbine wind farm, he can say he’s started physical work. The example in the Treasury’s cash grant materials only referenced one turbine foundation. Mr. Kelley confirmed that there was no intention to insert a 20% threshold on the physical work test. "Don’t read anything into it," he said.
Brian Americus, the attorney in the IRS Office of Associate Chief Counsel who wrote the IRS guidance, noted that the IRS will not issue private letter rulings on whether companies have started construction. That means it could be difficult to get into the IRS to talk about particular issues or fact patterns with any formal resolution.
Further, Mr. Americus noted that the people who will administer the program, at the end of the day, will be the IRS field agents. They may talk the issues over with his branch, but they may not.
Separately, Ellen Neubauer, the Treasury’s cash grant program director (who was on the panel as well), said that Treasury has paid $18.5 billion in grants to renewable energy projects. Surprisingly, only $4.3 billion of the total was for solar. She thinks there will be another $12 billion total.
She also confirmed that an applicant can file a claim for a grant for contingent costs not yet spent. An example is where a contractor and the applicant dispute a cost. The applicant has to agree to give back any excess it receives.
Many have been asking whether an across the board cut of all future Treasury grants called Sequestration opens the door to claiming an investment credit on the portion of the grant not paid. Brian Americus confirmed that the IRS current thinking is there is no investment credit on sequestered amounts. He does not see the statutory authority to claim any credit on a project that received a cash grant.