Treasury Cash Grant Litigation

Treasury Cash Grant Litigation

June 11, 2014

Treasury cash grant litigation is moving closer to resolution.

There are 20 pending lawsuits against the US Treasury Department by companies that put new renewable energy facilities in service after 2008 and chose to be paid 30% of the “basis” the companies had in the facilities in cash rather than claim tax credits. All of the companies received smaller cash payments than they applied for. The Treasury was authorized to make the payments under section 1603 of the American Recovery and Reinvestment Tax Act. Many renewable energy projects are financed in a way that lets the owner use the fair market value as his basis for calculating tax benefits (and, by extension, section 1603 payments in lieu of tax credits) rather than the cost to build the project. This has led to many disputes with Treasury about how to determine the value.

The government filed motions for summary judgment in eight of the pending cases in late May. A summary judgment motion is a request for the court to decide the cases based on legal briefs from both parties. The procedure is used in cases where the facts are not in dispute.

It should lead to decisions in at least some of the cases this year.

The oldest case has been pending since July 2012. All of the cases have been filed in the US Court of Federal Claims. One case filed earlier than July 2012 was withdrawn by the solar company that filed it after the government accused the company of fraud.

The remaining cases raise five significant issues.

Many of the suits challenge the Treasury’s cost-up approach to determining value. The Treasury has appeared to base some grant payments on what a project cost to build and then adding a profit margin that it considers reasonable.

At least two suits challenge whether part of what was paid for a utility-scale power project must be allocated to the power purchase agreement with a utility. Any amount allocated to the power contract would not qualify for a grant. The IRS ruled privately in 2012 that a power purchase agreement that can only be performed by supplying electricity from a specific project has no value separate from the project on the theory that the contract is like a tenant lease of a building. No one buying a building would allocate part of the purchase price to the tenant lease. The entire purchase price is treated as basis in the building. The IRS quickly thought better of applying the analogy to power contracts and withdrew the ruling.

The issue in at least one suit is whether the Treasury is required by law to accept what outside appraisers say is the fair market value of a project.

Other suits involving projects that were sold to bank leasing companies and leased back raise the issue whether part of what the bank leasing companies paid must be treated as purchase price for an intangible asset like going concern value rather than the power plant. Grants are not paid on intangible assets.

Finally, the latest suit, filed in mid-May, involved a 17.6-megawatt wind farm near the Anchorage, Alaska airport whose developer, Fire Island Wind, LLC, spent $5.3 million to dismantle an old navigational system and buy the air traffic controllers a new Doppler radar so that the developer could get clearance from the Federal Aviation Administration to put up its wind turbines. The developer treated the $5.3 million as a cost of the wind turbines. The Treasury would not let the amount be included in basis for calculating the cash grant on the project.

The statute of limitations to file suit against the Treasury is six years from when a company is notified its grant has been approved for payment. If the government starts losing some of the cases, other suits can be expected.

In a separate development, the IRS said in early June that companies may not claim an investment tax credit to make up for haircuts in grant amounts due to sequestration. Grants approved for payment through September this year are subject to a 7.2% haircut as part of a Congressional budget deal in 2012 to keep the federal government open. Sequestration will continue past September, but potentially at a different percentage. Some developers must have tried to claim tax credits for the shortfall. The IRS said this is not allowed. The tax basis the project owner uses to depreciate the project must be reduced by one half the grant. The IRS said the basis reduction is for half the actual grant paid — after sequestration. The IRS announcement is in Notice 2014-39.

by Keith Martin