Earlier
this year, the Internal Revenue Service (the “IRS”) published Notice
2013-29, providing guidance on what it means to “begin construction”
for purposes of the recent extension of the 2.3
cent-per-kilowatt-hour production tax credit (the “PTC”) and the 30%
investment tax credit (the “ITC”) for qualifying wind and certain
other renewable energy facilities (excluding solar) the construction
of which begins before January 1, 2014.
Under
Notice 2013-29, there are two alternative methods by which a
taxpayer can demonstrate that construction has begun before January
1, 2014: (1) by beginning physical work of a significant nature
before January 1, 2014 (the “physical work test”) or (2) by paying
or incurring at least 5% of the total cost of the facility before
January 1, 2014 (the “5% safe harbor”). Among other
requirements, the physical work test requires that the taxpayer
maintain a continuous program of construction and the 5% safe harbor
requires that the taxpayer maintain continuous efforts to advance
towards completion of the project. Only limited guidance was
provided regarding these continuity requirements.
Notice
2013-29 was also ambiguous regarding how the new rules would apply
to transferees (i.e., whether or under what circumstances a
transferee could “piggyback” on the transferor’s satisfaction of the
Notice 2013-29 requirements. Further, although Notice 2013-29
provided that, for purposes of the physical work test, work
performed by a vendor/manufacturer prior to January 1, 2014 under a
master contract can be taken into account by an affiliate of the
original purchaser who receives an assignment after December 31,
2013 of the rights to receive any of the components under the master
contract, no such statement was made with respect to the 5% safe
harbor.
On
September 20, 2013 the IRS published Notice 2013-60 (the “Notice”)
clarifying certain aspects of the guidance provided in Notice
2013-29. Specifically, the Notice addresses: (1) the
“continuous efforts” and “continuous construction” requirements; (2)
the master contract described in Notice 2013-29 and (3) the transfer
of a facility after construction has begun under the
Act.
CONTINUOUS
EFFORTS AND CONTINUOUS CONSTRUCTION
Under
the Notice, a taxpayer is deemed to satisfy the relevant continuity
requirement if the project is placed in service before January 1,
2016. A facts and circumstances analysis will be applied to
projects placed in service after this deadline and no further
clarifying guidance beyond what was provided in Notice 2013-29 was
provided.
MASTER
CONTRACT
Pursuant
to the Notice, the master contract provision, as described in Notice
2013-29, applies to the 5% safe harbor as well as the physical work
test.
TRANSFER
OF FACILITY
In
the Notice, the IRS noted that the statutory language requires only
that construction of a facility begin before January 1, 2014; it
does not require the construction to be begun by the taxpayer
claiming the PTC or ITC. The Notice provides an example in
which a disregarded entity begins construction of a wind energy
facility prior to January 1, 2014 and 95% of the equity interests in
the disregarded entity subsequently are transferred by the
“developer” in a transaction treated as a transfer of a 95%
undivided interest in the assets under Revenue Ruling 99-5.13 In the
Notice the IRS concludes that the entity, now an entity taxable as a
partnership owned 5% by the developer, will continue to be treated
as having satisfied the begun construction
requirement.
Although
the example in the Notice addresses only the transfer of 95% of the
equity interests in a disregarded entity that is developing a
project, the rationale expressed in the Notice should apply equally
to transfers of all of a project entity’s assets and to transfers of
100% of the equity interests in a project entity to a third party.
What
remains unclear is what constitutes a facility, e.g., to what extent
can a developer who acquires turbines in 2013 under a master turbine
supply agreement transfer some of those turbines to an affiliate (so
that the affiliate then satisfies the begun construction requirement
under the rules in the Notice and Notice 2013-29 applicable to
master contracts) and then sell all or a portion of the interests in
that affiliate to a third party when the project is completed prior
to 2016. If you have any questions regarding this
notice, please contact:
Gregg
Riddle Partner [email protected] 415.773.5533
Wolf
Pohl Managing Associate [email protected] 415.773.4252 |