A long-awaited court decision released Wednesday that had the potential to affect how tax bases are determined for calculating investment tax credits is unlikely to have much effect in practice.
The case is Alta Wind I Owner Lessor C v. United States.
It has been 13 years in the courts.
The main effect may be to cause companies buying the development rights to projects that have not been built yet to spend more time on cost segregation reports allocating the purchase price among the various development-stage assets. Many companies do not bother today with such reports. Lack of an easy-to-follow roadmap cost the Alta Wind taxpayers as much as $47.1 million.
The decision did not put to rest a debate about whether a purchaser that pays more for a project that qualifies for an investment tax credit than one that does not must treat the incremental purchase price as payment for an intangible asset. Investment tax credits cannot be claimed on intangible assets. The government sometimes argues that allowing the premium to add to tax basis in the hard assets lets an additional tax credit be claimed on the base investment credit.
The court said it is persuaded by this circularity argument when the purchaser pays more for a project that will entitle the purchaser to a government cash payment, but it suggested tax benefits are different.
The court said a developer profit can be added to the tax basis when using the "replacement cost method" to value a project. The replacement cost method looks at what a purchaser would have to spend to build the same project itself. The court allowed developer profits of 15% to 20% on the six Alta Wind projects based on the appraisals obtained when the projects were placed in service, but said the amount depends on the facts of each project. Most appraisers already include such an amount in appraisals when valuing projects using the replacement cost method. DAI, the Alta Wind appraiser, said it was seeing developer profits as high as 30% at the time on wind projects in California.
The case involved Treasury cash grants paid on six wind farms in the Tehachapi region of California that went into service between 2010 and 2012.
Five of the wind farms were financed in sale-leasebacks. One was sold to EverPower. All of the projects had long-term power contracts to sell their electricity to Southern California Edison.
At the time, the US Treasury was paying owners of new renewable energy projects 30% of their tax bases in the generating equipment under a so-called section 1603 program that was part of a group of economic stimulus measures that Congress passed in early 2009 to pull the economy out of a tailspin. The Treasury payments were a substitute for investment tax credits that could otherwise have been claimed on the projects. The tax equity market had frozen in late 2008.
The lessors in the five sale-leasebacks and EverPower as the owner of the sixth project applied for more than $703 million in cash grants based on what they paid for the projects rather than what the developer, Terra-Gen, spent to build them. The owners assigned 93.1% to 96.9% of what they paid for the projects to the generating equipment and the rest to other assets.
The Treasury paid cash grants of $495 million. It did not challenge the overall prices, but said roughly 29% of what was paid should have been treated as purchase price for unspecified intangibles. Its focus at the time was on the price per watt allocated to the hard assets compared to what it saw claimed by other cash grant recipients.
The Treasury argued later in court that the owners should have added up the value of the equipment first and then treated any remaining purchase price as basis in intangibles like power contracts, customer goodwill and going concern value.
This is the approach that section 1060 of the US tax code requires when buying a business as opposed to a piece of equipment. IRS regulations require separating the assets that come with the business into seven asset classes from easiest to hardest to value. Purchase price is allocated fully to each asset class before moving to the next one until it is used up. Classes I through IV are, in order, cash, things like commodities that are actively traded so that quotes are readily available, accounts receivable and inventory held out for sale. All other tangible assets go into class V. Investment tax credits can be claimed on class V assets. Class VI is intangible assets like power contracts, site leases and licenses. Any remaining purchase price goes into class VII and is considered a payment for customer goodwill or going concern value.
The Alta Wind owners sued for the shortfall of $206.8 million in 2013. The Treasury filed a counterclaim in 2015 asking the owners to repay $58.9 million on grounds that the Treasury paid the owners more than they were owed.
The owners won after an initial trial in 2016. (For prior coverage, see here.) However, the government persuaded a US appeals court in 2018 to set aside the judgment and order a new trial. The appeals court directed the trial court to assign the case to a new judge and to use the section 1060 method to allocate the purchase price between the part of each project that qualifies for a Treasury cash grant and the part that does not. (For more details, see here.) Most appraisers have switched since the appeals court decision to the section 1060 method when valuing projects.
The retrial finally took place in July 2025. It took the US Court of Federal Claims almost a year to issue a new decision.
The court set two main tasks for itself. One was to decide whether the Alta Wind owners or the government was right about how best to value the class V hard assets on which Treasury cash grants (and by extension investment tax credits) could be claimed.
The Alta Wind owners proposed using the "income method." They discounted the after-tax benefits stream they expected to receive as project owners by a discount rate to reduce it to a net present value. They backed out value attributable to land. The benefits stream was projected revenue from electricity sales and tax benefits. They included the expected Treasury cash grant as part of the benefits stream.
The expert witness that the owners had do this calculation said he used a discount rate that was appropriate to value development-stage assets as a way to focus solely on hard assets and remove intangibles from the calculation.
The court was not persuaded that the choice of discount rate had the effect of removing the intangibles.
The government argued instead for the replacement cost method that looked at what the owners would have had to spend to build the same projects themselves. It started with Terra-Gen's actual costs to build the projects as shown in a cost segregation report prepared by KPMG that the owners used to apply for the cash grants and made certain adjustments.
The court said use of the replacement cost method was more appropriate in this case because it isolated the hard assets and no company would pay more for a project than it could spend to replicate the project on its own.
Virtually all appraisers today use both methods. The more conservative appraisers take the lower of the values under the two approaches on the theory that while a company will not pay more than it could spend to replicate the projects, it would also not spend more than the net present value of what it would earn from owning the project using its hurdle rate as the discount rate.
Other appraisers weight the values under the two methods.
Appraisers then allocate the project value to the assets using the section 1060 method to determine how much of the value is in class V assets as opposed to the power contract, going concern value and other intangibles.
The court said the value of the ITC assets is a generic value rather than what a particular buyer would pay. One of the expert witnesses argued that a hotel by the water would fetch a higher price than one inland. However, the court said the cost to build the actual hotel is no different in the two locations. Any additional value is due to intangibles.
The court suggested selling a project to a tax equity partnership or other buyer does not change the ITC basis. The "cost of building a windfarm is the same regardless of whether there is an intermediate transaction transferring the windfarm from party A to B."
The other main task the court set for itself was to determine how much "turn-key value" to add to the construction cost.
The original trial court said a power plant can be worth more at the end of construction than it cost to build because it is ready for use. It called this "turn-key value." Any turn-key value goes into asset class V and is considered basis in the hard assets. After the retrial, the court provided a clearer definition of turn-key value. It said the turn-key value is "the incremental value a buyer would pay for [the] assurance the plant and equipment would all work together without the need [for] costly and time-consuming adjustments and coordination." A turn-key plant is worth more than the cost of the disassembled parts.
A US claims court decision in a 1974 case called Miami Valley said the turn-key value in a purchase of a medium-sized television company was 23.8%. The claims court said the turn-key value was 5% in a 1979 case called Forward Communications Corp. involving the purchase of a small newspaper.
The Alta retrial court agreed with the government that no turn-key value should be added to the Alta Wind projects because Terra-Gen had hired construction contractors and turbine suppliers that charged extra to deliver turn-key projects that they guaranteed would work, so any turn-key value was already built into the numbers in the KPMG cost segregation report that the government used as a starting point for its calculations.
The government added a developer profit of 9.03% to the actual construction costs but excluded three other costs that KPMG treated as basis in hard assets in its cost segregation report.
The court said the government's 9.03% was a weighted average cost of capital calculation rather than a developer profit. It said the appraiser that the owners used provided evidence to support a higher developer profit. The court allowed 15% to be added to actual cost for Alta I and 20% for the other five Alta projects. The developer profit is distinct from turn-key value and reflects what a developer would expect to earn for its efforts.
Terra-Gen paid $157 million to Allco, one of two original developers, for Allco's 50% interest in the development rights to the projects. The court declined to add it to the construction cost because it said the category descriptions that KPMG used in the cost segregation report to allocate the $157 million among the various development assets were too vague. There were also valuation discrepancies. A draft cost segregation report prepared by Duff & Phelps when the development rights were purchased allocated $93 million to the power contracts while only a minor amount was allocated to them in the report KPMG prepared later when the projects were sold.
The court let $48.1 million in interest paid on debt during construction be added to the construction cost.
It let another $100.5 million be added that Terra-Gen paid as a "developer fee" to buy out the other 50% original developer. The other developer was entitled to 2.5% of projected revenues from the projects discounted at 10% had it remained a part owner. The developer fee was compensation for forgoing such payments.
The additions were then allocated to ITC basis versus non-ITC basis in the same ratio as KPMG allocated the base construction costs. The eligibility percentages accepted by the court varied slightly by project with a range from 95.8% to 97.12%.
The final Treasury cash grant still remains to be calculated.
Terra-Gen said it spent $2.3 billion on the projects. The Treasury allowed a tax basis of $1.64 billion for calculating the cash grants.
The court instructed the parties to recalculate the Treasury cash grant basis using its instructions and to report back before July 31 on the final calculation. Either party could still appeal.