Treasury cash grant update
Treasury cash grant cases continue to advance in the courts.
A large wind developer lost an effort in December to compel the US Treasury to disclose information about the developer fees paid on wind farms.
Twenty-nine lawsuits have been filed against the US Treasury by companies that feel they were paid smaller grants than they are entitled.
The Treasury cash grant program was an economic stimulus measure in 2009 under section 1603 of the American Recovery and Reinvestment Tax Act to encourage construction of new renewable energy projects. Most larger US renewable energy projects are financed in the tax equity market. That market largely shut down in late 2008. Congress directed the Treasury in early 2009 to pay 30% of the cost of new renewable energy projects in cash in lieu of having developers claim tax credits. New wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects qualified for grants if put in service during the period 2009 through 2011 or if they were under construction by December 2011 and put in service before the end of 2012. Solar and fuel cell projects continue to qualify for grants if put in service by the end of this year. However, they had to be under construction by December 2011.
The wind developer says it was shortchanged by $9.2 million on the grant paid on one wind farm and by $12.7 million on another. Both projects are in Illinois. One of the issues in dispute is how much of a $50 million developer fee the project company paid to its parent company in one of the projects, and a $60 million developer fee in the other, can be included in the project cost for calculating grants on the projects.
The developer, Invenergy, asked the US Court of Federal Claims, where the cases are pending, to compel the government to tell it about the grants paid on 108 other wind farms, including the developer fees paid and the extent to which the Treasury allowed them to be included in basis.
The judge ruled on December 21 that “how the [government] may have treated other taxpayers has generally been considered irrelevant in making that determination,” quoting a US Tax Court decision in a tax case. The Treasury argued that the raw numbers are not useful without a lot of other analysis about the particular facts of the cases. Even if the information is of tangential relevance, the judge said, it is too burdensome a request to force the Treasury to spend time gathering it.
Curiously, the judge failed to mention that her court has held in the past that the US tax authorities cannot discriminate against taxpayers who are similarly situated. For example, the Claims Court said in a well-known case in the 1960’s that the Internal Revenue Service could not rule privately that a 10% excise tax on “business machines” did not apply to computers sold by Sperry-Rand while making IBM pay the tax on its computer sales. Remington Rand (which was later acquired by Sperry Corporation) obtained a private ruling that its machines were not subject to the tax. IBM sought a similar ruling for its competing product. The IRS did not respond to IBM’s ruling request for more than two years, after which it wrote to IBM that the equipment was subject to the excise tax on a retroactive basis. The IRS notified Remington Rand about a week later that it intended to revoke its ruling, but only on a prospective basis. IBM had been paying taxes during this entire period.
The Claims Court held that the IRS abused its discretion in ruling that IBM’s computers were taxable retroactively and that Remington Rand’s were taxable only prospectively. It said that IBM was entitled to recover the excise taxes it paid during the period in which Remington Rand was exempted from tax.
The decision has been cited favorably in several other Claims Court opinions.
Of the 29 lawsuits filed against the Treasury, two have been decided. The government won one and lost one. (For earlier coverage, see the February 2015 NewsWire article Treasury Cash Grant and the May 2015 NewsWire article The Treasury.) Both decisions are now before US appeals courts.
Seven other cases have been dismissed, either because the government countersued and the taxpayer thought better of its claim or because a settlement was reached.
A settlement appears to have been reached in potentially the most interesting case that raises the issue whether part of what is paid for an operating wind farm that comes with a power purchase agreement must be allocated to the PPA. The settlement, if there was one, has not been made public.
Three of the 29 lawsuits were filed in federal district courts. At least one involves a whistleblower claim.
Seven were filed by tax equity investors in the various Alta wind farms in California.
Other interesting issues raised by the pending suits are whether part of the purchase price in a sale-leaseback must be allocated to intangibles like going concern value, what are the fair market values of various wind farms and rooftop solar systems financed in the tax equity market, to what extent the government can impose percentage limits on markups from construction cost in arriving at market value, whether part of the cost of a power plant that makes steam as an intermediate step to generating electricity, and then gets double duty from the steam by diverting part of it to an industrial use before sending to back to a condenser and then to the boiler as water to restart the cycle, can be denied a grant on a part of the project cost that the Treasury says represents the steam usage, and whether equipment that cleans gas before it is used in a fuel cell qualifies as part of the fuel cell on which the grant is paid.
The oldest case has been pending since February 2012.
The most recent lawsuit is one filed in December 2015 by Nippon Paper Industries USA Co., Ltd. The company says that Treasury reduced a grant it was paid on a 20-megawatt power plant that it completed at a paper mill in Port Angeles, Washington in 2013. The Treasury allowed a grant on only 82.8% of the project cost after allocating part of the cost to steam put to industrial use. The lawsuit says that the company is aware of seven other biomass power plants that received full grants on similar facts: Seneca Sustainable Energy, LLC in Oregon, Roseburg Forest Products Co. in California, Simpson Tacoma Kraft Co., LLC in Washington, WE Partners I, LLC in North Carolina, Cosmo Specialty Fibers in Washington, Verso Bucksport, LLC in Maine and Shasta Renewable Resources, LLC in California.
The next case set for trial is LCM Energy Solutions. Arguments will be heard on April 26.
LCM filed suit in May 2012 asking the Treasury for the difference between the $482,504 it was paid and the $889,638 for which it originally applied on 18 solar rooftop systems. Treasury valued the 18 systems at $5.70 a watt for purposes of paying grants. The company wanted roughly $10.50 a watt.
The government later filed a counterclaim against LCM accusing the company of fraud and asking not only for denial of the company’s claim for more money, but also for civil penalties of up to $220,000 plus treble damages of three times the amount the company was already paid, or $1.4 million. The government found the legal arrangements around the 18 systems were a mess when digging more carefully into the facts after the company filed suit. (For more details, see the April 2014 NewsWire article Treasury Cash Grant.)
The next scheduled trial after LCM will start June 21 in a case involving GUSC Energy, Inc.
That case involves another biomass power plant on which the Treasury reduced the grant after allocating part of the project cost to steam usage. The Treasury also excluded from the grant calculation costs related to site cleanup, landscaping, ornamental iron work and paving. (For more details, see the February 2015 NewsWire article Treasury Cash Grant.)