Solar transactions land in court

Solar transactions land in court

October 23, 2018 | By Keith Martin in Washington, DC

Three solar transactions landed in court.

One is headed to trial next February 4 in the US Tax Court.

Solarmore Investments Inc. and a tax equity investor formed a partnership that bought 192 mobile solar platforms from DC Solar Solutions MFG. Inc. for $28.8 million, or $150,000 each.

The partnership was a standard partnership flip transaction, but with a fixed date for the flip five years after the mobile solar platforms were purchased.

The partnership paid the seller only 25% of the purchase price and gave a 20-year note for the balance that requires fixed payments of $134,331.40 a month.

The tax equity investor agreed to contribute 84.18¢ per dollar of investment tax credit to help cover the purchase price for the mobile platforms. The investor contributed the 25% of the purchase price paid in cash. It made only 2.8% of its investment before the equipment was put in service.

The sponsor, Solarmore, agreed to make capital contributions to refund the tax equity investor its money to the extent the tax credits are less than expected. If the tax credits are more than expected, then the tax equity investor must invest more. Solarmore also had to buy insurance for the value of the tax credits.

The partnership claimed a 30% investment tax credit on $28.8 million and also claimed a 100% depreciation bonus.

The sponsor, Solarmore, and the seller of the mobile solar platforms are related companies: they have 79% overlapping ownership.

The partnership leased the equipment for five years to another Solarmore affiliate for fixed rents of $140,000 a month plus 5% of the annual revenue from the affiliate’s use of the solar platforms above $1.9 million. The IRS says the revenue from renting the mobile platforms to customers was insignificant.

The government asserts that no real partnership was formed. The IRS disallowed the tax benefits the tax equity investor claimed on audit. It said the investor was not a real partner because it was protected from downside risk since it will get its money back to the extent the tax credits are less than expected, and it has no upside potential since the lease rents are fixed.

What happens after the flip is important to any such analysis. In this case, Solarmore can repurchase what will then be a 5% partnership interest from the investor for the fair market value of the interest at the time. If this call option is not exercised, then the investor can “put” the interest to the partnership for the fair market value or the investor’s capital account, whichever is less, with the repurchase price to be paid by the partnership over time out of 90% of distributable cash until paid in full.

The government is also disputing the tax basis the partnership used to calculate tax benefits. Solarmore produced appraisals from two appraisers confirming a market value of $150,000 per solar platform. The IRS says the platforms cost only $7,000 a piece to build and that adding royalty payments to the owner of Solarmore for use of a patent would push up the cost to only $13,000 per platform.

The IRS position is that the market value can be used as the tax basis for calculating tax benefits only in a sale between unrelated parties or in an inverted lease. It said otherwise the taxpayer is limited to the cost to build the platforms.

Finally, the government suggests that 75% of the purchase price should be ignored because it is circled cash among the Solarmore principals.

The case is Solar Eclipse Investment Fund III v. Commissioner.

Separately, a federal district court in Colorado ordered two companies in late August to repay the US Treasury three times the cash grants — also known as section 1603 payments — that the companies received on 41 solar rooftop projects, plus pay an additional penalty of $225,000. The companies received $1.6 million in grants. They have been ordered to repay the government $4.8 million for submitting false claims to the US Treasury.

Infinergy Solar and Wind, Inc. partnered with dealers who installed solar panels for residential and commercial customers and then invoiced Infinergy for them, but without expecting full payment. The dealers said the invoiced amounts did not match their real costs, and Infinergy would sometimes tell them the invoices were too low and should be increased.

Infinergy would then purport to sell the systems to an affiliated company, New World, at a markup. New World did not actually pay Infinergy, but reported the sales prices as its tax basis when applying for cash grants.

Ellen Neubauer, the Treasury cash grant program manager, sent an email at one point to Murray Hambrick, the owner of both companies, warning him that claimed costs must actually be incurred.

New World purported to lease the systems or sell power from them to customers, but it failed to collect payments in many cases, and Hambrick “admitted that he was not concerned with the payments.”

Hambrick did not fight the claims against the companies, and the court issued a default judgment. However, he is fighting claims against himself. His counsel told the government that he plans to file for bankruptcy in the hope of avoiding personal liability.

In the third case to land recently in court, a federal district court in Utah ordered two men and their Utah companies RaPower-3 LLC and International Automated Systems, Inc. in early October to repay a little over $50 million and refrain from further activity after what the court said was a “massive fraud” involving sales of solar lenses that the promoters said entitled the owners to claim investment tax credits and depreciation that far exceeded their investments. The fraud affected at least 90 customers in a number of western states.

The lenses were never put in service. They were supposed to hang from towers and concentrate sunlight on a heat-exchange fluid that would then transfer heat to a boiler to produce steam to turn steam turbines.

No electricity was ever produced. Most of the lenses sold were never made or installed. Customers paid $3,500 in theory for each lens, but paid a maximum of $1,050 down with the rest to be paid over 30 years after a five-year lag. The promoters told customers they could calculate tax credits and depreciation on $30,000, and that the lenses would be put out for lease that would earn them $150 a year in rental payments. A government witness said that the lenses had a market value of about $100 each.

The IRS started investigating six years into the marketing efforts in 2012 and, by 2013, was disallowing tax benefits and contacting accountants in an effort to head off more claims.

The trial last 12 days. The government called 25 witnesses. The defendants called none. The case is United States v. RaPower-3, LLC.