As we previously noted on April 15, the Internal Revenue Service (IRS) issued Notice 2013-29 providing guidelines and a safe harbor for determining what it means to “begin construction” for purposes of the production tax credit (PTC) under section 45 of the Internal Revenue Code (the “Code”) and the investment tax credit (ITC) under section 48 of the Code. We also noted on April 30,that the IRS updated Notice 2013-29 following questions from practitioners regarding the definition of “binding written contract.” The IRS recently issued Notice 2013- 60, expanding and clarifying Notice 2013-29. Both the new Notice and the updated Notice 2013-29 are attached for your reference.
As background, Notice 2013-29 provides two methods that a taxpayer may use to satisfy the “begun construction” requirement of Code section 45 and Code section 48. The taxpayer may establish the beginning of construction by starting “physical work of a significant nature” (the “Physical Work Test”) or by meeting the 5% safe harbor provided in Notice 2013-29 (the “5% Safe Harbor”).
Further, notwithstanding that the relevant statutory provision addresses only whether in fact construction has begun by December 31, 2013, Notice 2013-29 added under both methods that the taxpayer make continuous progress after it has begun construction toward completion until placed in service (the “Continuous Construction” and “Continuous Efforts” tests). The unavoidable facts and circumstances nature of the Continuous Construction and Continuous Efforts tests lead to a great deal of concern as to whether project developers would be able to finance projects with surrounding uncertainty of whether a project complied with such tests, leading to great difficulty in planning the building of projects after 2013.
Fortunately and helpfully, Notice 2013-60 provides guidance as to how taxpayers can satisfy the Continuous Construction and Continuous Efforts tests. It states that if a facility for which construction has begun under either the Physical Work Test or the 5% Safe Harbor by January 1, 2014, is ultimately placed in service before January 1, 2016, the facility will be deemed to satisfy the Continuous Construction Test (for purposes of satisfying the Physical Work Test) or the Continuous Efforts Test (for purposes of satisfying the 5% Safe Harbor).
For a facility for which construction has begun under either the Physical Work Test or the 5% Safe Harbor by January 1, 2014, but which is not placed in service before January 1, 2016, the Continuous Construction Test or the Continuous Efforts Test would continue to be determined by the relevant facts and circumstances as described in Notice 2013-29.
Notice 2013-60 also clarified that the “master contract” provision of Notice 2013-29, pursuant to which facility components that are to be manufactured, constructed, or produced for the taxpayer by another person under a binding written contract (a “master contract”) are assigned by the taxpayer to an affiliated special purpose vehicle, which will own the facility for which such property is to be used, then such facility components may be taken into account under the 5% Safe Harbor, as well as the Physical Work Test.
Finally, Notice 2013-60 clarified that the grandfathering status of construction begun before January 1, 2014 follows the relevant project and not the taxpayer who owned it when construction began. Accordingly, a transfer of a facility after construction has begun will not prevent a facility from qualifying for the PTC or ITC.