A US Court of Federal Claims decision on June 20 that suggested the purchase price paid for a power project should be allocated partly to any tax credits or other government subsidies for which it qualifies should be read narrowly, according to a source formerly with the government.

The decision should be interpreted as requiring such an allocation only where a government payment will be made in lieu of tax credits after the buyer buys a project.

In such cases, the right to a future payment is not part of the value in the power plant but rather a separate intangible right.

Investment tax credits and accelerated depreciation may not be claimed on intangible assets.

A US appeals court held in 2018 as part of the long-running Alta Wind saga that the purchase price paid for a wind farm must be allocated among the various assets that the buyer will receive 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 latest claims court decision says 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 key word is "anticipated."

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.