IRS Revokes Favorable PLR Concerning Ability of Tribe to Pass ITCs to Lessee in Master-Tenant Structure

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In recently released Private Letter Ruling 2016-40-010 (the new ruling), the IRS prospectively revoked PLR 2013-10-001 (the original ruling), concluding that a Native American tribe may not elect to pass investment tax credits (ITC) associated with renewable energy assets on reservation lands to a taxable entity under Section 50(d)(5) of the Tax Code.  [Click here for our discussion of PLR 2013-10-001.]

The original ruling describes the Tribe’s plans to place in service renewable energy assets on reservation lands.  The assets will constitute “Section 48 energy property” that qualifies for the ITC.  The renewable energy assets will generate electricity that will be sold to third parties and used by the Tribe in its governmental activities.  The Tribe will maintain ownership of the renewable assets at all times, but will lease the assets to a lessee, during which time the lessee will operate the assets and will be entitled to the net revenues derived from the operation of the assets, including the net revenue derived from the sale of electricity to third party utilities and the Tribe.  At the conclusion of the lease, the Tribe will assume control over the renewable energy assets.  The Tribe and the lessee desired to make the election under Section 50(d)(5) of the Tax Code to allow the ITCs associated with the renewable energy assets to be passed-through the lease to the lessee.  While not stated in the original ruling, it can be assumed that the Tribe and lessee were contemplating a standard “master-tenant” or “lease pass-through” structure, in which the lessor and lessee agree that the lessee will claim the ITC, with the lease terminating shortly after the five-year ITC recapture period.

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IRS Issues Proposed Rules on Income Inclusion under Section 50(d)(5)

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The IRS just published long-awaited temporary regulations under section 1.50-1T governing the section 50(d)(5) income inclusion rules. These rules apply to lessees of investment credit property when the lessor elects to treat the lessee as having acquired the property for its fair market value and pass through the investment tax credit available under section 46 (which includes the section 48 energy credit (“ITC”)). When the lessor makes that election, the lessee must include in gross income 50% of the amount of the ITC ratably over the 5-year MACRS period for energy property in lieu of the basis adjustment that the lessor would have been required to make had it not made the pass-through election. The ITC amount included in gross income is determined regardless of the lessee’s income tax situation, and the ratable income inclusion begins on the date that the property is placed in service.

The temporary regulations provide that when the lessee is a partnership, the income is taken by the “ultimate credit claimant,” which is the partner(s) that claimed the tax credit and cannot be treated as an item of partnership income. Because this income goes to the partners proportionally based on their respective share of the ITC rather than the partnership, partners are not permitted to increase their tax basis in the partnership as a result of the Section 50(d) income inclusion and claim a loss on the disposition of their interest. The temporary regulations also apply to shareholders in S corporations.

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New Hampshire Doubles Solar Net Metering Cap

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New Hampshire has doubled the caps on energy that both residential and commercial customer-generators of rooftop solar can sell back to the grid, raising the cap from 50 MW to 100 MW. The governor signed H.B. 1116, which was introduced this past March, into law on May 2, 2016.

Net metering programs allow homeowners and other solar customers to sell excess power they generate back to the electrical grid in exchange for a credit. Each New Hampshire utility has a cap on the amount of large-scale projects that can receive credits in their area. Eversource Energy, a company which bills itself as New England’s largest energy delivery company, announced in January that it had reached the state regulated limit on the amount of customer generation under New Hampshire’s net metering laws.

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IRS Issues New Notice Extending Beginning of Construction Safe Harbor

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Yesterday, the IRS issued Notice 2016-31 (the “Notice”) which revises previous guidance on satisfying the “beginning of construction” test in order to take advantage of the section 45 renewable electricity production tax credit (PTC) for wind and other renewable energy facilities including geothermal, biomass, landfill gas and certain hydropower and marine hydrokinetic energy projects. The Notice is in response to the recent 5-year extension (with phasedowns) of the PTC for wind projects that begin construction before January 1, 2020, which we discussed in prior blog posts here and here.

In order to establish that construction has begun, the IRS issued a series of notices (2013-29, 2013-60, 2014-46, and 2015-25) which permit a taxpayer to show either that it has: (1) begun physical construction of a significant nature (“Physical Work Test”), or (2) incurred at least 5% of the total cost of the eligible facility (“5% Safe Harbor”). Both tests also require that the taxpayer make continuous progress towards completion once construction has begun or costs have been incurred (the Continuous Construction Test in the case of the Physical Work Test and the Continuous Efforts Test in the case of the 5% Safe Harbor). However, the IRS grants a safe harbor that so long as the taxpayer (1) “begins construction” on the facility prior to January 1, 2015, and (2) places that facility in service prior to January 1, 2017, the facility will be deemed to satisfy the Continuous Construction Test or the Continuous Efforts Test, regardless of the actual amount of physical work performed or costs paid or incurred through December 31, 2016 (“Continuity Safe Harbor”). (For more information on the Physical Work Test, 5% Safe Harbor, and Continuity Safe Harbor see our prior blog posts here, here, here, and here.)

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Developing a Business Case for Renewable Energy at Airports

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The Airport Cooperative Research Program (ACRP) recently released Report 151: Developing a Business Case for Renewable Energy at Airports (the Report). Foley partner David Bannard is a co-author of the Report, assisting lead investigators, Stephen Barrett and Philip DeVita of HMMH. The Report is a companion to ACRP Report 141: Renewable Energy as an Airport Revenue Source, on which Mr. Bannard also served as a co-author with Mr. Barrett.

The Report provides a comprehensive guide to developing a business case for renewable energy projects at airports, and can be applied in other spheres as well. It includes chapters describing a renewable energy business case, the basis of a business case, evaluation criteria and ranking methodology, integrating projects with planning and decision making and engaging internal and external stakeholders. It reviews a model business case, provides examples of business cases, in both airport and non-airport contexts, and concludes with information regarding funding methods for renewable energy projects. The Report also includes several useful appendices, including a sample request for proposals and a sample power purchase agreement.

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