Purchase Price Allocations

Purchase Price Allocations

June 23, 2023 | By Keith Martin in Washington, DC, David Burton in New York, and Hilary Lefko in Washington, DC

Buyers of projects that qualify for government payments that will be received after the projects are placed in service must allocate part of the purchase price to the future payments, the US Court of Federal Claims suggested in mid-June.

The court reserved for trial whether part of the purchase price must also be allocated to any indemnity from the seller to protect the buyer against a reduction in the future payments.

The court said the part of the purchase price allocated to such payments must be treated as basis in an intangible asset. No investment tax credit or accelerated depreciation can be claimed on it.

The decision could affect tax equity and M&A transactions involving renewable energy facilities where investors expect future tax credits, but the government does not appear to intend it to be read that broadly.

The claims court decision is in a case called Alta Wind I Owner Lessor C v. United States. The court released it on June 20. The decision could be reversed on appeal.

The case is part of the long-running saga of Alta Wind challenging a Treasury cash grant it received under the section 1603 program in 2012. Terra-Gen finished developing and built six wind projects and sold and leased back five of them to special-purpose entities owned by various institutional buyers. At the time, the government was paying owners of new renewable energy projects the cash equivalent of a 30% investment tax credit on their projects. The owners then would forego the tax credits.

The project owners received $495 million in section 1603 payments on the projects. They believed they should have received another $206 million.

The claims court sided with Alta Wind in 2016 and ordered the government to pay the shortfall. The government appealed. The appeals court set aside the decision and sent the case back to the claims court for another trial before a new judge. (For more detail on the earlier rounds in the case, see "Tax Basis Issues: Alta Wind" in the August 2018 NewsWire.)

The latest decision was in response to a motion by Alta Wind for "summary judgment" on two questions that the government is raising in the new trial about the projects that were sold at fair market value to lessors at the end of construction and leased back.

One is whether part of the purchase price paid by the lessors should have been allocated to the incremental value the projects had because they qualified for Treasury cash grants.

The other is whether purchase price should also have been allocated partly to the indemnity the lessors received from Terra-Gen to compensate them to the extent the Treasury cash grants were less than expected.

The court said the expected future cash grants were intangible assets. The appeals court that reviewed the earlier Alta Wind decision said that the purchase price should have been allocated among all the assets in the project using a "section 1060 method," meaning the project assets should be divided into seven asset classes, from easiest to value like cash and cash reserve accounts to the hardest to value like going-concern value and goodwill.

The purchase price is allocated to assets in these seven asset classes by assigning value to assets in each class up to the full fair market value of the assets in that class before moving up to the next class. The power plant is in class V. Class VI includes power purchase agreements and other contracts. Class VII is going-concern value and goodwill.

If the full purchase price is used up before reaching classes VI and VII, then there is nothing to allocate to them.

The claims court said the following: "The portion of the purchase price pertaining to consideration for the anticipated Section 1603 cash grants is grant-ineligible intangible property under Class VI (contract rights) or Class VII (goodwill or going concern value)."

The court said, "the Court cannot consider a premium associated with the anticipated value of a grant" to be purchase price paid for the power plant.

The same logic, by extension, could apply to tax credits that will be claimed in the future.

However, the court did not go that far. The Alta Wind lessors cited two claims court decisions in 1976 and 1979 where the court acknowledged that investment tax credits could be calculated on the full amount spent on ships, even though the amounts were drawn from capital reserve funds on which the ship owners had not paid taxes (because they deducted the deposits into the reserve accounts).

The government argued -- and the court accepted -- that these decisions did not apply to Treasury cash grants to be paid in the future because tax credits could be claimed on the full amounts spent on the ships regardless of the source of the funds. "The government alleges [the ship cases do] not apply . . . because [the ITC statute] does not allow plaintiffs to include a yet-to-be-received Section 1603 grant — unlike the tax credit . . ." the court said.

The court said there were too many factual issues to sort out to be able to rule now on whether separate value had to be assigned to the indemnity and reserved that issue for the retrial.

The parties have been doing new discovery and filing motions as they approach retrial.