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Renewable Energy Alert

October 6, 2011

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Greg Riddle
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Mark Weitzel
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New IRS Release Examines "Excessive" Treasury Cash Grants for Renewable Energy Projects

        The IRS recently released legal advice addressing the tax treatment of Treasury cash grants that are in excess of the amount that the grant applicant was entitled to receive under Section 1603 of the American Recovery and Reinvestment Act of 2009 ("Section 1603").  AM 2011-004 (Sept. 27, 2011).  Not surprisingly, the IRS advice concludes that excess Section 1603 grants are includible in income when received and deductible when repaid (no income or deduction if received and repaid in the same taxable year), and the excess grants do not affect the applicant's tax basis in the project. 

        More importantly, the release reinforces that cash grants are subject to review and examination by both Treasury, and the IRS itself.  Although technically Treasury's Inspector General has authority to audit Section 1603 grant awards, the IRS advice confirms that the IRS is also reviewing awards based on its authority to examine the grant's income tax treatment.  Grant applicants should therefore be prepared for the IRS to examine the tax treatment of the grant in an audit of the affected income tax returns, and potentially share its findings with Treasury's Inspector General.  Generally a three-year statute of limitations period applies to IRS adjustments to a return but, as the Section 1603 grant affects the tax basis of the grant-eligible project, the IRS could potentially reexamine the grant three years (or more) after the project's final year of depreciation.  The limitations period applicable to any resulting claim by Treasury's Inspector General for repayment of the Section 1603 grant is uncertain, but likely to extend at least six years from receipt of the grant.