The section 1603 program

The section 1603 program

April 01, 2013 | By Keith Martin in Washington, DC

The section 1603 program remains an area with lots of activity.

A solar company that sued the Treasury for failure to pay grants on its solar systems mounted on the backs of flatbed trucks agreed in March to drop the lawsuit “with prejudice,” meaning the suit cannot be reinstituted. The company had claimed tax bases in its systems for calculating grants as high as $45 a watt. The US government had filed a counterclaim accusing the company of filing false claims. Five other suits are still pending against Treasury.

The US attorney in New York sued a company, The Excelsior Packaging Group, in early April to recover a $129,111 grant that the Treasury paid the company in January 2010. The company failed to file annual reports confirming that it still owned and is using its renewable energy project. The company failed to respond to multiple demand letters and efforts by a private bill collection agency.

The Treasury is taking aim at the tax bases claimed in sale-leasebacks with low rent coverage ratios. It believes that leases that set rent at only 1.0 times the revenue the lessee earns are being used by lessors to justify inflated purchase prices and, therefore, higher cash grants.

It has set new caps of $4 to $6 a watt on basis in emails to solar rooftop companies. The new caps apply to solar equipment put in service on or after October 1. The caps vary by company because the Treasury is using the income method and customer terms vary, but it raises questions about fairness since the effect is to pay grants of varying amounts to companies that may be direct competitors and are using identical equipment.

The Treasury says that rights to cash grants do not carry over where a developer contributes stockpiled 2011 equipment to a project company and then sells the project company during construction, unless the project is well advanced by the time of sale. The project company cannot be mere wrapping paper for the stockpiled 2011 equipment.

Grants are subject to an 8.7% haircut for the remainder of this fiscal year due to sequestration.

The fiscal year ends on September 30.

A new haircut percentage will have to be calculated for grants paid after that, assuming sequestration remains in effect.

Any project that received an award letter from Treasury before March 1 will not be affected. Sequestration does not apply to any grant that was an “obligated balance” before sequestration went into effect on March 1. A grant is an obligated balance when Treasury formally notifies a project that a grant in $X amount has been approved for payment.

The 8.7% haircut will apply to grants for which award letters are received during the period March 1 through September 30 this year.

It is unclear whether a haircut will apply to additional payments on grants that were already paid. The Treasury sometimes makes additional payments where developers complain that they were shortchanged.

The Office of Management and Budget said in a report to Congress shortly before sequestration took effect that it is projecting $3.671 billion in grants to be paid in fiscal 2013 from which sequestration requires $187 million in savings. According to the OMB report, the haircut percentage in 2013 would have been only 5.1% if 2013 had been a full year, but a larger haircut is required from remaining 2013 grants since only seven months remain in the fiscal year to achieve the full savings.

Sequestration originally required $109 billion in spending reductions in each of nine years starting in 2013. It was originally scheduled to take effect on January 2, 2013. However, as part of the fiscal cliff deal on January 1, Congress agreed to $24 billion in specific spending cuts and tax increases to pay for a two-month delay to March 1. That left $85 billion in across-the-board spending cuts for the remainder of 2013.

The required spending cuts will be $109 billion for fiscal 2014, but spread over 12 months.

Congress could still decide to suspend sequestration at some point later this year, but the earliest that realistically could occur is late July or August when the government is expected to have reached the limits of its borrowing authority. Congress will have to act by then to increase the federal debt limit. Congress removed some of the political pressure to lift sequestration by giving agencies like the US Department of Agriculture and the Department of Defense more flexibility on how to apply spending cuts within their departments in late March. There had been fears that sequestration would force layoffs of federal meat inspectors.

Some companies facing haircuts in grants have thought about stretching out the application process to push back approval to late summer, by
when sequestration may have been lifted. Applications must be filed within 90 days after a project is put in service. There is no formal way to stretch out processing, but the reviewers sometimes send questions and answering them can take time.