Tax equity lawsuits: DC Solar
Eight tax equity investors in the DC Solar deals filed suit in December against the law firms that wrote opinions as well as the accounting firms, appraisers and brokers involved in them.
DC Solar was a high-flying manufacturer of mobile solar platforms that can be used to light outdoor sporting events, construction sites and similar venues. The company claimed to have leased as many as 17,000 units to end users. It raised hundreds of millions of dollars of tax equity. The FBI raided the company in December 2018 after concluding, based on information from a former employee, that only a fraction of the units were real.
Jeff and Paulette Carpoff, the founders of the company, pled guilty in late January to operating a massive Ponzi scheme. Four other employees had already pled guilty.
The Carpoffs led a lavish lifestyle, owning 149 cars, a minor league baseball team and as many as 20 properties, including in Lake Tahoe, Las Vegas and the Caribbean. The rapper Pitbull entertained at the company Christmas party in 2018.
The IRS disallowed the tax benefits claimed in some of the tax equity transactions. In one suit filed in the US Tax Court about a tax equity deal structured as a partnership flip transaction, the court papers said the parties claimed tax bases of $150,000 per mobile platform that the IRS asserted cost $17,000 each to build. (For more details, see “Solar Transactions Land in Court” in the October 2018 NewsWire.)
The eight tax equity investors who filed suit said they invested at least $862 million in the deals. At least one other tax equity investor who did not join the suit is reported to have invested another $340 million.
The suit charges the consultants and brokers “either knew of or were willfully blind to red flags and indicators of fraud” and that they “concealed and failed to disclose . . . material information about DC Solar that would have caused [the tax equity investors] not to invest . . . .”
There are lessons for both consultants and investors. One lesson is someone should visit the site to make sure a project is real. Do basic diligence about the sponsor. Be attuned to warning signs. Law and accounting firms should think carefully about writing opinions on aggressive deal structures or facts. Investors should recognize that they are taking risks if they are earning premium returns and all they can get is a more-likely-than-not opinion about key aspects of the transaction.
Separately, lawsuits continue to be filed in connection with failed landfill gas partnerships in which a Chicago law firm acted for 34 clients, including 20 National Football League players.
The latest is a suit in federal district court in south Florida filed by former Miami Dolphin star Zach Thomas in an effort to get the US government to refund $18,600 in penalties that Thomas and his wife had to pay after the government disallowed tax credits they claimed in 2007.
The US used to offer tax credits as an inducement to produce “nonconventional” fuels like gas from landfills and coal seams, synthetic fuel from coal and oil from shale or tar sands. The credits could be claimed on the fuels sold to third parties during the first 10 years after the well or other equipment used to produce the fuel was first put into service. The production equipment had to be in service by June 1998 to qualify.
At least four class-action suits have been filed against the law firm, Chuhak & Tecson PC, that advised the investors in the landfill gas deals. The partner who handled the deals was charged in 2014 with helping clients claim at least $5 million in illegal tax credits during the period 2006 through 2010. He pled guilty to helping to prepare false tax returns and was sentenced to 18 months in prison in September 2017. He has been disbarred and is no longer with the firm.
Other NFL stars who invested include Ray Lewis, a standout former linebacker for the Baltimore Ravens, Terrell Owens, a former Philadelphia Eagles and San Francisco 49er wide receiver, and Kyle Orton, a former quarterback for several teams including the Denver Broncos. Orton sued the law firm in 2011 alleging that he and others lost millions. The suit was put on hold while the lawyer faced criminal charges. Other suits were filed in 2015 through 2018, including one by former Baltimore Ravens cornerback Duane Starks on behalf of himself and other investors.
A US appeals court upheld the disallowance of tax credits on gas produced from 19 landfills on grounds that the gas was flared rather than put to use as fuel. The court said the operators lacked reliable records to prove how much gas was produced and, in some cases, their legal rights to the gas had expired. (For earlier coverage, see “Landfill Gas Tax Credits Disallowed” in the October 2018 NewsWire.)