Latest Alta Wind Decision Addresses Recursive Section 1603 Grant Calculations, Grant Premiums

• Jurisdiction: United States,Federal
• Law Firm: Linklaters
• Subject Matter: Tax, Energy and Natural Resources, Energy Law, Oil, Gas & Electricity, Income Tax, Renewables, Property Taxes
• Author: Judy Kwok and Gabriel Grossman
• Published date: 07 August 2023

On June 20, 2023, the Court of Federal Claims denied summary judgment to the taxpayer in Alta Wind I Owner-Lessor C, et al. v. United States ("Alta Wind (2023)"),¹ the latest episode in an ongoing multifaceted dispute over the calculation of the Section 1603 grant. While the Section 1603 grant expired over a decade ago, the jurisprudence around this program'most notably the Alta Wind cases'can nonetheless have implications for the taxpayers taking the investment tax credit ("ITC").

The Section 1603 grant arose not from the Internal Revenue Code, but from a separate Treasury-administered federal program that was created under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009. Under this program, the Treasury made payments in lieu of ITCs to eligible applicants for specified energy property. Similar to the ITC, the Section 1603 grant in most cases was calculated as 30% of the basis of the relevant property; in the case of wind farms, for example, only property that was an integral part of the wind facility was taken into account for purposes of determining the Section 1603 grant.

Background

The Alta Wind saga began in 2010-2012, when various taxpayers acquired six wind farms from Terra-Gen, five of them pursuant to sale-leaseback transactions. Each of the Alta wind farms was the seller of electricity in a 24-year power purchase agreement ("PPA"), along with other intangibles such as transmission rights. In calculating the Section 1603 grant, the IRS allocated a certain amount of the project basis to the value of such intangibles under the residual method of Section 1060, i.e., according to a "waterfall" of asset classes, including tangible property (Class V), Section 197 intangibles (Class VII) and goodwill and going concern value (Class VII); the taxpayer argued, inter alia, that no goodwill or going concern value could have existed at the time of transfer because the facilities were not yet operational and the residual method, under the Section 1060 regulations, applied only to an active trade or business or to an asset group to which "goodwill or going concern value could under any circumstances attach." The taxpayer also asserted that the PPAs, rather than being customer-based Section 197 intangibles, related only to their specific wind farms, were not transferable or assignable, and accordingly could not be viewed as separate assets from their wind farms.

The Court of Federal Claims sided with the taxpayer in a 2016 decision ("Alta...