tax issues for wind forrest milder 617-345-1055 [email protected] © 2007
TRANSCRIPT
Refresher (1)
Wind credits are 10-year production tax credits, 2 cents per kwh (in 2007).
Placement in service starts the credits, NOT admission of an investor.
Requires sales of electricity to unrelated persons
Refresher (2)
New property placed in service by 12-31-08
Generally, depreciation over 5 years. No basis reduction due to PTC when computing depreciation.
Grants and Bonds (“subsidized energy financing”) can be a problem. Up to 50% reduction
Technical Rules Alternative Minimum Tax – Credits
generally can’t reduce it, but PTC has 4-year exception
Almost all investors are corporations because of “At Risk” and “Passive Loss” Rules
Can’t use credits to totally eliminate tax (must pay at least $25K plus 25% of excess)
We Must have an Owner PTCs aren’t sold. The Partnership or
LLC gets credits and allocates them to an investor.
Lengthy Partnership or LLC document details the relationship.
We must assure that the LLC owns the turbines and that the investors own their interests
The LLC Agreement (1)
“Substantial economic effect”
or
“Partners’ Interest in the Partnership”
The LLC Agreement (2)
Allocating credits – they follow sales E.g., suppose 10m kwh generates $1m in
sales proceeds and $200,000 of credits. Allocate the sales proceeds and the credits
to the investor and allocate depreciation, too
Keep track of capital accounts so that cash can go differently from the gross sales
Exit Strategies
Getting the Investor Out of the Deal
Flip – reduce the investor’s
percentage
Put – The investor wants to get out
Call – The developer buys out the
investor
Use a Flip –
E.g., 99% interest in operations, reduced to a 10% interest after IRR has been achieved.
“Transitory Allocation” rule of the Regulations
TAM 8931001 – (but there were no profits) Pending Rules?
Use a “Put” or a “Call”
Does a put insulate the investor against loss? Then is it a “partner”?
Can a call be at less than fair market value? When is FMV determined?
Profit Motive
Section 183 (the “hobby loss rules”) don’t apply to widely held corporations, which is the typical investor
BUT: IRS has applied these rules to partnerships at the entity level. (Rev. Rul. 77-320)
Law on Profit Motive
Sacks case is very favorable (69 F3d 982, 9th Cir. 1995) – Add cash to credits
But don’t take it for granted – see Frank Bizjak, TC Memo 1994-297 and Drobny v. U.S., 77 AFTR 2d 96-1667 (86 F3d 1174),
IRS Rulings -- PLR 200620004, etc.
The Sacks decision“If the government treats tax-advantaged transactions as shams unless they make economic sense on a pre-tax basis, then it takes away with the executive hand what it gives with the legislative. A tax advantage such as Congress awarded for alternative energy investments is intended to induce investments which otherwise would not have been made. Congress sought, in the 1977 energy package, of which the solar tax credits were a part, to increase the use of solar energy in U.S. homes and businesses … If the Commissioner were permitted to deny tax benefits when the investments would not have been made but for the tax advantages, then only those investments would be made which would have been made without the Congressional decision to favor them.”