Tax and Renewable Energy Law Alert: IRS Revises Safe Harbor for Wind Project Structure
9/22/2009
Yesterday the IRS issued Announcement 2009-69, which revises the requirements to qualify for the safe harbor created in Revenue Procedure 2007-65 for partnership flip transactions involving wind projects with respect to which the Production Tax Credit under IRC § 45 ("PTC") is claimed. For a description of the safe harbor and Revenue Procedure 2007-65, see http://www.stoel.com/showalert.aspx?Show=2747.
Announcement 2009-69 addresses the prototypical partnership flip transaction. In such a transaction, a developer (the Developer) forms a partnership (typically in the form of a limited liability company) with one or more tax-motivated investors (the Investors) to own a wind farm. During the period the project qualifies for the production tax credits and accelerated depreciation deductions, the Developer is allocated a relatively small percentage and the Investors are allocated a large percentage of partnership income, loss, deduction and credit. Once the tax benefits expire or are fully utilized, the interests of the Developer and the Investors "flip," such that the Developer is allocated a larger percentage and the Investors are allocated a smaller percentage of future income, loss, deduction and credit. At or near the time the flip occurs, the Developer typically has an option to purchase the Investor's then-reduced percentage interest in the partnership. To qualify for the safe harbor, such an option cannot be exercisable earlier than five years after the project is originally placed in service. Although the safe harbor on its face applies only to transactions involving wind projects with respect to which the PTC is claimed, it is informative with respect to flip transactions involving other types of renewable projects and incentives as well.
Perhaps the most significant revision in Announcement 2009-69 relates to purchase option pricing. Revenue Procedure 2007-65 provided that "[n]either the Developer, the Investors nor any related parties may have a contractual right to purchase, at any time, the [w]ind [f]arm, any property included in the [w]ind [f]arm or an interest in the [partnership] at a price less than its fair market value determined at the time of exercise of the contractual right to purchase * * *." This meant that parties effectively were precluded from fixing a purchase price for the Developer's purchase option. Rather, that price had to be left open and determined (typically by an appraisal) at the time the option became exercisable. It was not practically possible to qualify for the safe harbor if the purchase option price were fixed at the beginning.
Announcement 2009-69 changes this requirement to allow fixed price purchase options, as long as the fixed price reflects a reasonable expectation of what fair market value will be at the time the option becomes exercisable. Announcement 2009-69 revises Revenue Procedure 2007-65 to provide that "[t]he purchase price * * * must either be a price that is not less than the fair market value of the [p]roperty determined at the time of exercise or, if the purchase price is determined prior to exercise, a price that the parties reasonably believe, based on all facts and circumstances at the time the price is determined, will not be less than the fair market value of the [p]roperty at the time the right may be exercised."
Allowing fixed price purchase options represents a significant change to the requirements of the safe harbor. Based on the revised language of the safe harbor, however, parties wishing to use a fixed-price purchase option must be very careful to select a price that is not less than what they reasonably believe will be the fair market value at the time the option becomes exercisable. In some cases, it may be advisable to obtain an appraisal or other expert advice regarding reasonably expected fair market value. At the very least, it will be advisable to create and retain documentation supporting the fixed price, in case the IRS challenges the purchase option later.
Announcement 2009-69 also revises the language of Revenue Procedure 2007-65 relating to the effect of qualifying for the safe harbor and the language relating to the application of passive activity loss limitations to wind projects. If you have any question regarding Revenue Procedure 2007-65 or Announcement 2009-69, please contact one of the attorneys listed below.
If you have any questions about the issues in this alert, please contact:
Minneapolis, MN
Greg Jenner at (612) 373-8857 or gfjenner@stoel.com
Portland, OR
Chris Heuer at (503) 294-9206 or ckheuer@stoel.com
Kevin Pearson at (503) 294-9622 or ktpearson@stoel.com
Robert Manicke at (503) 294-9664 or rtmanicke@stoel.com
Adam Kobos at (503) 294-9246 or ackobos@stoel.com
Eric Kodesch at (503) 294-9684 or ejkodesch@stoel.com
Elisabeth Shellan at (503) 294-9887 or esshellan@stoel.com
Seattle, WA
Carl Lewis at (206) 386-7688 or cslewis@stoel.com
IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.