Construction-Start Questions

Construction-Start Questions

July 09, 2015 | By Keith Martin in Washington, DC

CONSTRUCTION-START QUESTIONS continue to receive attention.

Wind, biomass, geothermal, landfill gas, incremental hydroelectric and ocean energy projects had to be under construction by December 31, 2014 to qualify for 10 years of production tax credits on the electricity output or for a 30% investment tax credit on the project cost.

There must also be continuous work on the project after 2014. The Internal Revenue Service will not make anyone whose project is completed by December 2016 prove continuous work. However, projects completed after that will have to provide proof.

Jennifer Bernardini, a lawyer in the branch in the IRS national office that handles construction-start issues, said at an American Bar Association tax section meeting in May that the informal view in the national office is that continuous work must be shown only after 2014, even for projects on which construction started in 2013.

She was also asked at the meeting whether a single wind farm not all of whose turbines make it into service by December 2016 can be broken up so that only the turbines that got into service in time qualify for tax credits. The answer was no if any of the remaining turbines is installed.

Lawyers in the IRS national office continue to answer other questions by phone.

There are two ways to have started construction in time. One is to have incurred at least 5% of the total project cost by December 2014. Some developers took delivery of wind turbines, blades, towers or other equipment at the factory in 2014, but without knowing at which project the equipment will be used. The IRS national office view is that a developer with such equipment who then, after 2014, assembles a site, interconnection agreement, permits and similar intangibles, for a project at which stockpiled equipment amounting to at least 5% of the project cost will be used, can treat the project as eligible for tax credits, and anyone later acquiring the development rights, together with the stockpiled equipment, would be able to do so, as well. However, ideally the developer selling the equipment and project rights should have had one or more potential projects in mind when it originally bought the equipment, even though it decides to use the equipment ultimately at another project.

Another way to have started construction in time was to have started significant physical work at the project site or at a factory on equipment for the project. In that case, the developer must be able to show there was “continuous construction” after 2014 if the project slips into 2017 or later. However, the IRS excuses breaks in construction that are outside the control of the developer, including “financing delays of less than six months.” IRS lawyers in Washington believe that lack of funding can excuse a failure truly to get construction underway and that this excuse is not solely for situations where funding falls away after substantial site work has already started.

In a related development, the CEO of Plug Power, a fuel cell manufacturer, sent the assis-tant Treasury secretary for tax policy, Mark Mazur, a letter in early May in advance of a meeting with Mazur to complain about denial of three Treasury cash grant applications on fuel cell projects. The Treasury paid a cash grant to one Plug Power customer in 2012, but then began questioning in February 2013 whether other customers could count toward the 5% test the cost of components that Plug Power had set aside in stock in 2011 to make fuel cells for these customers. The customers’ projects had to be under construction by December 2011 to qualify for grants.

The issue was Plug Power ordered compo-nents for fuel cells when it felt close to concluding a purchase order with a customer, but before it had the binding purchase order in hand. The Treasury cash grant guidance says “[i]n the case of property manufactured . . . for the applicant by another person under a binding written contract that is entered into prior to the manufacture . . . of the property,” the customer can count toward the 5% test costs incurred by the manufacturer to fill the customer’s order. The CEO sent another letter June 1 thanking Mazur for the meeting and complaining about the “veritably Talmudic interpretation of various texts from guidance documents and Q&As put out by the [Treasury] Department.”

Meanwhile, an ad hoc group of companies involved in “every aspect” of renewable energy development asked the US Treasury and IRS in a letter on May 1 for more guidance about what it will take to prove continuous work on projects that slip past 2016. The group wants “one or more mechanical or objective tests.” It suggested two such tests. One is to say work was continuous if the taxpayer can show a certain percentage of project cost was incurred by a deadline, such as the end of 2016, and then the project is put in service soon after, such as by some date in 2017. Another potential objective test is to treat work as continuous if the developer met “certain delineated tests necessary and common to the construction process by milestone dates and the facility was placed in service soon thereafter (e.g., by some date in 2017).”

A lobbyist for a developer working on a waste-to-energy project asked the IRS in a separate letter on May 1 to give power plants that use municipal solid waste or other waste fuels to generate electricity four years to finish construction without having to prove continuous work.

Christopher Kelley, a senior IRS lawyer, said at a conference in New York in May that he “wouldn’t be too optimistic” that the government will issue more guidance on construction-start issues. The IRS has already issued four notices.

Keith Martin in Washington