Victory For The Alternative Energy Industry
Yesterday, the IRS issued a positive ruling for the wind energy industry that reverses a prior harsh position on alternative energy partnerships.
Section 45 of the Tax Code provides wind energy production tax credits and is the primary way Congress augments market incentives to promote American energy independence.
In many instances, the wind energy tax credits cannot help wind energy developers directly. Because developers have to make large initial investments to build wind farms, they are not able to utilize the tax credits. Instead, in order for section 45 to achieve the result intended by Congress, developers must partner with financial investors. The combination of the two industries ensures the viability of the wind energy industry.
In Revenue Procedure 2007-65, published in November, 2007, Treasury advised wind energy partnerships of the circumstances under which they could share tax credits. The wind energy Revenue Procedure takes a very anti-taxpayer stance, announcing several times that "if any other provision of this safe harbor is not followed for any wind energy partnerships, the Service will closely scrutinize the validity of such partnerships."
The wind energy Revenue Procedure dictates precisely what the economic relationships between the parties must be in order to ensure that the IRS will respect the partnerships. For example, it requires that if there is a buy out option for one of the parties, the price cannot be lower than the fair market value "determined at the time the option is exercised." In reality, participants need to be able to determine the buyout option price at the fair market value determined by independent appraisal when the partnership is formed, based on expected cash flows.
As a direct result of the publication of the Revenue Procedure, it become difficult to create effective wind energy partnerships to utilize the credits legislated by Congress. Moreover, because of the conservative nature of the banks entering into partnerships, the rest of the alternative energy industry had difficulties finding financial partners as well.
On September 20, 2009, the IRS published Announcement 2009-69, reversing the negative elements of the original Revenue Procedure. All the "close scrutiny" language has been removed. And most significantly, a buy-out option is acceptable as long as it is "negotiated for valid non-tax business reasons at arm's length by parties with material adverse interests. The purchase price for the Property must either be a price that is not less than the fair market value of the Property determined at the time of exercise or, if the purchase price is determined prior to exercise, a price that the parties reasonably believe, based on all facts and circumstances at the time the price is determined, will not be less than the fair market value of the Property at the time the right may be exercised."
The ruling is truly a victory for the industry. It makes it significantly more attractive for banks and others to partner with alternative energy companies to develop new projects.
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