Eyes on Energy Tax Update is a regular publication of the Holland & Knight Energy Tax Team that provides highlights of important energy tax developments. The Energy Tax Team also publishes more in-depth publications of certain developments. To receive these publications, please subscribe online and, once registered, check the "Energy" and "Renewable/Clean Tech" categories.
The fourth quarter of 2022 brought a flurry of energy tax developments as a result of the enactment of the Inflation Reduction Act of 2022 (IRA), court activity and announcements from federal agencies. Below, this report summarizes the energy tax updates you need to know.
IRS Rulings and Guidance
Following enactment of the IRA, a plethora of related guidance was released by the U.S. Department of the Treasury and IRS. The IRS has compiled guidance related to the IRA on a special page.
- To aid the development of guidance under the IRA, Treasury Department and IRS released several requests for comments in the form of the following notices:
- Notice 2022-48 requests comments on incentive provisions for improving the energy efficiency of residential and commercial buildings.
- Notice 2022-50 requests comments on elective payment of applicable credits and transfer of certain credits.
- Notice 2022-51 requests comments on prevailing wage, apprenticeship, domestic content and energy communities requirements.
- Notice 2022-56 requests comments related to the qualified commercial clean vehicles provisions and the alternative fuel vehicle refueling property.
- Notice 2022-58 requests comments related to the credit for the production of clean hydrogen and the clean fuel production credit.
Holland & Knight Insight: Although the deadline for submitting comments in response to these notices has passed, the Treasury Department and the IRS are continuing to accept comments as long as the consideration of such comments will not delay the issuance of guidance. In addition, taxpayers are engaging with members of Congress, the Treasury Department, IRS and other government officials regarding IRA guidance.
- In Notice 2022-61, the Treasury Department and IRS provide prevailing wage and apprenticeship guidance, which officially started the 60-day clock to begin construction on a qualified facility in order to be exempt from prevailing wage and apprenticeship requirements for facilities with a maximum net output of greater than 1 megawatt (MW). The prevailing wage and apprenticeship requirements must be satisfied in order for the taxpayer to receive the five times adder under Sections 30C, 45, 45Q, 45V, 45Y, 48, 48C and 48E, as well as an increased deduction under Section 179D (For further information on the Notice, see Holland & Knight's previous alert, "60-Day Clock Is Ticking on Prevailing Wage, Apprenticeship Requirements," Dec. 21, 2022.).
- The Treasury Department and IRS have released several pieces of guidance aimed at clarifying credits intended to incentivize the purchase of electric vehicles:
- The IRS released a set of frequently asked questions regarding the credits under Section 30D (clean vehicle credit) for individuals and businesses, Section 25E (previously-owned clean vehicle credit) for individuals, and the Section 45W (qualified commercial clean vehicle credit). Notably, the FAQs provide that proposed guidance with respect to the critical mineral and battery component requirements under Section 30D is expected to be issued in March 2023.
- Notice 2023-01 details forthcoming guidance to be issued regarding Section 30D will include rules regarding final assembly, manufacturer's suggested retail price (MSRP), vehicle classifications, placed-in service requirements, and critical mineral and battery components requirements.
- Notice 2023-09 provides a safe harbor under Section 45W regarding the incremental cost of qualified commercial clean vehicles placed in service after 2022.
- Revenue Procedure 2022-42 sets forth procedures under Section 30D(d)(3) for qualified manufacturers to enter into a written agreement with the Secretary of the Treasury under which a manufacturer agrees to make reports providing information related to each vehicle manufactured that is eligible for a clean vehicle credit under Sections 30D or 25E.
- The IRA retroactively extended long-existing tax credits and enacted new tax credits for certain clean fuels. The Treasury Department and IRS released guidance related these fuel credits:
- In Notice 2022-39, the IRS announces the rules that claimants must follow to make a one-time claim for the credit and payment allowable under Sections 6426(d) and 6427(e) for alternative fuels sold or used during the first, second and third calendar quarters of 2022. The Notice also provides rules regarding how a taxpayer's excise tax liability under Section 4081 may be reduced by claiming the alternative fuel mixture credit allowable under Section 6426(e) for the first and second calendar quarters of 2022.
- In Notice 2023-06, the IRS provides guidance regarding the new sustainable aviation fuel (SAF) credit under Section 40B. Among other items, the guidance provides lifecycle greenhouse gas emissions for certain fuels, provides a safe harbor for the use of life cycle greenhouse gas emissions percentages and details registration requirements.
- The IRS released a set of frequently asked questions about the energy efficient home improvements and residential clean energy property credits under Sections 25C and 25D. The FAQs address eligibility, timing of claiming the credits and examples of the credits' applications.
- Announcement 2023-01 provides the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Section 179D as revised under the IRA.
The IRS released guidance under Section 45, as in effect before the enactment of the IRA.
- Announcement 2022-23 provides the Section 45 production tax credit (PTC) amounts for 2022 in the case of any qualified facility placed in service after Dec. 31, 2021. In the case of any qualified facility placed in service before Jan. 1, 2022, the Section 45 PTC amounts published in Notice 2022-20 remain unchanged.
Holland & Knight Insight: Note that because of the change in the rounding rule for PTCs, the tax credit amount provided in Announcement 2022-23 differs from the amount provided in Notice 2022-20.
The IRS also released a pair of private letter rulings related to the application of the normalization rules under Section 168(i).
- In PLR 202239002 (released Sept. 30, 2022) and PLR 202247006 (released Nov. 25, 2022), the IRS ruled that taxpayers were not subject to normalization for depreciation or investment tax credit (ITC) purposes because each utility taxpayer's rates were not determined on a cost-of-service or rate-of-return basis and, therefore, the taxpayers' properties were not considered public utility property subject to normalization under Section 168(i)(10).
- In Cross Refined Coal v. Commissioner, No. 20-1015 (D.C. Cir. 2022), aff'g 19502-17 (T.C. 2019) (bench op.), the U.S. Court of Appeals for the District of Columbia Circuit upheld the validity of an investment partnership, using concepts often found in the context of economic substance analyses and finding that the value of excise tax credits can be taken into account when determining profitability.
- In Exxon Mobil Corp. v. United States, No. 21-10373 (5th Cir. 2022), the U.S. Court of Appeals for the Fifth Circuit rejected ExxonMobil's request for en banc rehearing of its earlier holdings related to lease characterization of offshore ventures, as well as its agreement with the U.S. Court of Appeals for the Federal Circuit's decision in Sunoco that the cost of goods sold deduction may include the net excise tax liability after taking into account the value of credits claimed under Section 6426. The Fifth Circuit affirmed the district court's holding that ExxonMobil was not liable for the Section 6676 erroneous refund claim penalty.
- In Chemoil Corp. v. United States, 1:19-cv-6314 (S.D.N.Y.), the government seeks to deny claims for alcohol fuel mixture credits. Cross-motions for summary judgment have been fully briefed on certain issues, including economic substance.
- In Olsen v. Commissioner, No. 21-9005 (10th Cir. 2022), the U.S. Court of Appeals for the Tenth Circuit affirmed the U.S. Tax Court's denial of depreciation and solar energy credits. In the case, the taxpayer purchased solar lenses for use in generating electricity, but the generation system was never completed. The court's Tax Court determined that during the trial, the taxpayer failed to prove that there was a profit motive, and the Court of Appeals found no clear error in the determination after reviewing a number of factors.
- In Vitol Inc. v. United States (5th Cir. 2022), the Fifth Circuit rejected Vitol's request for en banc rehearing of its earlier holding relating to whether the term "liquefied petroleum gas" includes butane for purposes of the alternative fuel mixture credit under Section 6426.
Other Energy Updates
- The White House released a guidebook summarizing each energy tax credit and energy funding opportunity enacted as a part of the IRA. The guidebook summaries detail each credit's eligibility, monetization options and stackability with other credits.
- The Joint Committee on Taxation announced that the general explanation of tax legislation enacted during the 117th Congress (the Bluebook) will include the IRA and that a separate Bluebook will not be issued for the IRA in January. The Bluebook provides key legislative insight, as the Joint Committee on Taxation is heavily involved in assisting in the drafting of statutory language.
- The Treasury Department and IRS on Nov. 23, 2022, released the 2022-2023 Priority Guidance Plan, which lists the 205 guidance projects that are priorities for issuance. Many energy tax provisions included in the IRA were listed as priorities.