September 21, 2017
by Steven Miller, former IRS Acting Commissioner and alliantgroup National Director of Tax
Renewable Energy World
Nearly a year ago, the United States Court of Federal Claims handed the renewable energy sector a victory in Alta Wind V Owner Lessor v. United States. The court found the government’s reduction in 1603 grant awards was incorrect, holding that the plaintiffs were entitled to recover their full 1603 grant awards as they had originally requested.
In Alta, the fundamental issue as to whether treasury’s reduction of Alta’s 1603 grant was proper hinged on the proper definition of basis. The plaintiffs argued that basis meant the purchase price of the wind farm facilities, minus small allocations for ineligible property (let’s call this the “top down” definition), whereas the government argued that basis needed to be calculated by adding up the cost of each project’s grant-eligible constituent parts and their development and construction costs (not surprisingly, we will call this the “bottom up approach”). In the end, the court sided with the plaintiffs, holding that the government’s approach improperly excludes value from the basis of the facilities in a manner that is not supported by the 1603 program. The court held that for 1603 purposes, basis must be calculated top down, minus reasonable allocations for land and other grant-ineligible property.
In July of this year, armed with a win from the original Alta case, Alta Wind I Owner Lessor filed suit for additional projects. In light of this new suit, those who have come to us for advice, and the chatter we have heard, it is clear that additional companies may be gearing up for litigation. Our advice has been that Alta is a great win, and that the time to assess your claim is right now, but that such an assessment needs to consider key facts that may distinguish your case from that of Alta.
One of the key aspects of the Alta case was the fact that the court was easily able to establish that the sale—the foundation for the top down approach—was at arm’s length. The court spent almost no time analyzing how the sale was at arm’s length and for fair market value. But inherent in the facts of Alta is the fact that the Alta Wind projects had independent appraisals and involved third-party sales that were subject to multiple rounds of bidding and substantiated arguments over pricing. While we agree with the plaintiffs in the new Alta complaint that “basis derived from purchase price should itself be dispositive,” we’re not certain that absent such compelling facts, a court would be so quick to dismiss the government’s argument here. We believe it is necessary when comparing your facts to Alta, that you spend time in comparing how you can establish fair market value versus how Alta was able to do so. Key questions include, do you have appraisals? When were the appraisals done? Do you have an arms-length sale? What are the interests of third-parties? All this said, even without formal appraisals, it may well be possible to divine fair market value from other contemporaneous or later materials.
It would be insincere to discuss fair market value of the sale without considering the totality of the transaction — which in Alta had taken the form of a sale-leaseback. As with determining fair market value, the court did not dive deep into establishing why a sale-leaseback is not a peculiar circumstance, other than by stating that it is a common type of structure in these transactions. What the court did not opine on was the validity of other common structures. While the court may not take issue with different structures, it is important to at least consider the differences as you consider whether to proceed.
Lastly, and possibly most fundamentally, we think it is important to first establish the entity that maintains the rights to collect any withheld grant payment upon victory in court. Without an actual claim to damages, it would be pointless to even begin the process of engaging in potentially lengthy and costly litigation without a primary claim to the award. Care should be taken to consider whether tax investors or others are entitled to the winnings.
With that said, Alta presents a great opportunity. As with all litigation, there are a number of other issues to consider. The court will look at the specific facts of each case. Issues in your case may arise that were not present in Alta. As a result, we think it is vital to take a step back before diving into litigation and consider the strengths and weaknesses of your case in relation to Alta. While Alta was a great win for the industry, we think it is important to rely on Alta not as a winning lottery ticket, but instead as a guidepost to measure the facts of your potential case. But given the timing of the six-year limitation to make this claim, the time to look is now and it is vital to utilize counsel with experience in these transactions as you consider next steps.
Steven T. Miller served as former IRS Acting Commissioner in 2012, but prior to that he served for several years as the Deputy Commissioner for Services and Enforcement, leading all IRS enforcement and service activity. Steven also served as the Commissioner of the Large and Mid-Size Business Division, overseeing IRS audits of large taxpayers and the IRS programs relating to offshore tax compliance and international tax law enforcement. As the Commissioner of the Tax Exempt and Government Entities Division, he supervised the IRS oversight of governments, tax exempt entities and retirement programs.
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