WIND DEVELOPERS will not be able to get private letter rulings from the Internal Revenue Service about tax issues in transactions that are structured as “partnership flips.”

WIND DEVELOPERS will not be able to get private letter rulings from the Internal Revenue Service about tax issues in transactions that are structured as “partnership flips.”

September 01, 2006

WIND DEVELOPERS will not be able to get private letter rulings from the Internal Revenue Service about tax issues in transactions that are structured as “partnership flips.” The IRS has placed a hold on any further rulings in such transactions.

Wind farms in the United States qualify potentially for large tax subsidies. Most wind developers are not in a position to use the subsidies and, therefore, arrange with an institutional investor who can use them to come into the project as a part owner. The project is owned by a partnership or limited liability company. The developer and the investor are partners. Tax benefits, taxable income/and cash are allocated largely to the investor until a “flip date,” after which the interest of the investor flips down to single digits and the developer has an option to buy out the investor. The “flip date” is usually the later of when the tax benefits have run or the investor reaches a target return.

The IRS issued two identical private letter rulings in November in a transaction involving a partnership flip structure. The rulings were favorable. (The rulings were made public in late February.)

However, in early May, the agency placed a hold on any further rulings. It appears that what prompted the hold were two new ruling requests — one where the investor was being guaranteed a minimum return and the other where the amount the investor planned to pay to buy into the deal was contingent on tax benefits. The IRS is assessing whether the investor in such situations is in substance merely a lender or bare purchaser of tax benefits. It is also considering whether to issue guidelines about what it will require before ruling in wind deals involving partnership flips in the future.

It is too early to assess the market reaction. Wind deals have been done traditionally in the US on the basis of tax opinions from outside counsel rather than rulings. Therefore, the reaction at most will probably be to turn slightly more conservative.Tax counsel will pay closer attention to the “ownership sticks” that the investor has so that he or she is well armed if the transaction is ever examined by the IRS on audit.


Keith Martin