There are two distinct ways to begin construction pursuant to the Treasury Guidance: (1) actual physical activity; or (2) the expenditure of money. These tests are entirely separate, and what counts toward meeting one test generally will not affect qualification for the other. 

1. Physical Activity Test

   Actual physical activity is the first test for beginning construction. The Treasury Guidance states that "[c]onstruction begins when physical work of a significant nature begins." FAQ 4 provides that even a small amount of physical activity will meet this requirement. However, FAQ 5 states that Treasury will scrutinize projects where the physical activity, once begun, does not involve a continuous program of construction. In other words, Treasury will evaluate whether work begun in 2009 or 2010 is carried on continuously and may disallow the section 1603 grant if it is not.

   The Treasury Guidance and FAQs provide that both physical work done by the applicant itself and physical work done by others pursuant to a binding written contract may be taken into account. In addition, work done both on site and off site may count in meeting the physical activity test.

   Importantly, there are specific requirements that must be met for a contract to be considered binding for purposes of section 1603, and only work done after the binding contract is entered into will count for purposes of this test.

   On-site work may include excavation for foundations, pouring of concrete pads, building of certain roads, and assembly of machinery. Off-site work may include the manufacture of component parts, such as boilers or solar arrays, to be assembled or used on site. Preliminary work, such as planning and design, securing financing, researching, and site clearing, does not qualify. Physical work of a significant nature may begin even if a specific site for the facility has not been identified.
   
    

2. Expenditure Test – The 5 Percent Safe Harbor

   As an alternative to the physical activity test, the Treasury Guidance provides that construction begins if a safe harbor is satisfied. To qualify for the safe harbor, an applicant must have "paid or incurred" more than 5 percent of the total cost of the property on or before December 31, 2010. As with the physical activity test, these costs must be paid or incurred pursuant to a binding written contract. This is strictly an expenditure test; physical work is neither required nor relevant. There has been considerable confusion about this test.

   The term "paid or incurred" has a specific meaning for tax purposes, based on whether the taxpayer is an accrual method or cash method taxpayer. For accrual method taxpayers, mere payment of an expense (e.g., making a nonrefundable deposit) generally is not sufficient for the expense to have been "incurred."

   For purposes of the safe harbor, the general rule is that amounts are not treated as paid or incurred by an accrual method applicant until the property or services have actually been provided to the applicant by the contractor (or until the payment date, if the property or services are reasonably expected to be provided within three-and-a-half months of the payment date).

   In addition, the Treasury Guidance provides that, if there is a binding written contract but the property or services have not yet been provided to the applicant, costs may be treated has having been paid or incurred by the applicant when costs have been paid or incurred by the contractor.
   
    

3. Pros and Cons of the Two Tests

   The 5 percent safe harbor is useful if physical work, either on site or off site, will not begin before 2011. Conversely, where it is possible for physical work of a significant nature to begin before the end of 2010, the 5 percent safe harbor has limited application. However, one advantage of meeting the 5 percent safe harbor, rather than the physical activity test, is that there is no requirement for the safe harbor that construction be continuous (see FAQ 22).

Planning and Drafting for Meeting the "Beginning Construction" Requirement

It is important that various agreements, such as EPC and BOP contracts and turbine and other equipment supply agreements, address how the "beginning construction requirement" is intended to be met. Where necessary, these agreements should be drafted to ensure they meet the requirements for "binding written contracts." It may also be appropriate for them to set specific performance and payment deadlines, and to obligate particular parties to provide reports, allocate costs, etc. in order that the application for the section 1603 grant can be completed. Finally, the agreements should address the question of allocation of risks if the various requirements for "beginning construction" are not met.

Conclusion

Developing and implementing a strategy for satisfying the "beginning of construction" requirement requires a thorough analysis of the particular transactions being considered. In addition, great care must be exercised in drafting the various agreements to ensure that they address the various requirements.

We would be pleased to assist you in accomplishing these goals. Please contact one of the Stoel Rives attorneys listed below.

Energy David Benson at (206) 386-7584 or Email John Eustermann at (208) 387-4218 or Email Bill Holmes at (503) 294-9207 or Email Morten Lund at (858) 794-4103 or Email Alan Merkle at (206) 386-7636 or Email Julia Pettit at (801) 578-6958 or Email David Quinby at (612) 373-4104 or Email Howard Susman at (858) 794-4111 or Email

Tax Chris Heuer at (503) 294-9206 or Email Greg Jenner at (612) 373-8857 or Email Adam Kobos at (503) 294-9246 or Email Carl Lewis at (206) 386-7688 or Email Kevin Pearson at (503) 294-9622 or Email

See the rest of our alert here ... http://www.stoel.com/showalert.aspx?Show=6645.

The section 1603 grant currently applies to renewable energy projects, such as wind, solar, geothermal and biomass, that are placed in service before 2011 or for which construction begins in 2009 or 2010 (and that are placed in service by certain dates). In its current form, if a project qualifies for the grant, the Treasury Department is required to pay the grant.

Expressing concern that a significant portion of the grants paid so far have gone to non-U.S. companies,  Senator Charles Schumer (NY) and three other Democratic senators have sponsored a bill that would make payment of the grant subject to the discretion of the Treasury Department. It also would make the grant subject to the Buy American requirements of the stimulus bill, and would require that Treasury conduct an analysis of the "domestic job preservation and creation provided by" a project for which a grant application is submitted.

Various trade associations involved in renewable energy (such as AWEA, GEA and SEIA) are taking immediate action to register their opposition. Their focus will be on the incorrect assumptions underlying the proposal (for example, that it does not create U.S. jobs) and that, if enacted, it likely would destroy the effectiveness of the program.

We encourage our readers to register their strong opposition with their members of Congress and with the trade associations with which they are associated. The more opposition that is registered, and the longer the proposal drags out, the less likely it is to be enacted. 

Read the March 4, 2010 Stoel Rives Law Alert on this proposed legislation.

Some of you readers may be aware that I spent 23 years in DC, both in and out of government.  The mysterious ways of DC are less mysterious to me, which makes me somewhat dangerous!  But I digress ...

It's fair to say that the 1603 grant program has been one of the most successful of any enacted in the stimulus bill. As of today (and since August 1), Treasury has paid out over $2.34 billion.  More than that, Treasury has moved quickly to set up the program and provide guidance which, while not perfect, has generally been helpful to taxpayers.  The program has some glitches, particularly resulting from Congress moving too quickly and not thinking through the ramifications of some of its decisions.  On the whole, however, most people agree that the program has worked well.

I note this initially because Congress is considering a complete restructuring of the program.  A combination of forces is pushing them to consider this (here's the inside baseball part).  Supporters want to eliminate the requirement that construction begin before 2011, something we would all support.  The "begin construction" requirement has caused a lot of wrinkled brows since 1603 was enacted (BTW - Treasury is about to issue new guidance that will simplify the requirement).  However, to eliminate the requirement completely requires changes to 1603 itself.  The problem is that 1603 is not within the jurisdiction of the tax-writing committees: House Ways & Means and Senate Finance.  1603 was written as a grant, which means it's an Appropriations Committee problem.  Therefore, in order for the tax writers to amend it, they have to rewrite it to make it a tax provision.  The bill is HR 4599.

As silly as it sounds, what I'm essentially saying is that in order to fix 1603, Congress has to break it.  The way they propose to do that is to make it a refundable tax credit.  Instead of applying directly to the good folks at Treasury, taxpayers would claim the funds on their tax returns.  This creates some very interesting twists and turns.  The good news in all of this is that, according to the sponsors, the rewrite is intended to preserve the favorable positions already taken by Treasury on issues such as recapture, which assets qualify (e.g. roads), etc.  The rewrite would also eliminate the "begin construction" requirement, fix the "disqualified person" problem (proportionate disallowance instead of the death penalty), allow REITs to invest, and eliminate the requirement of independent CPA attestation.  All of these changes would be welcome.

On the downside, the rewrite would first move the program to the IRS and away from Treasury.  To date, the people at Treasury running the 1603 effort have made the program successful.  It is unclear whether IRS would be so favorably disposed.  It is the IRS after all. 

But the most troubling change is how claimants would receive their funds.  The bill treats the amount that would otherwise be paid as a grant as a payment of tax which can be refunded.  It could be claimed as a refund on the claimant's tax return.  However, as written, the refund would not be paid until 45 days after the tax return was due to be filed.  This could mean that, instead of receiving the funds within 60 days as under 1603, the claimant may have to wait as long as 15 months.  There would be no circumstance in which the waiting time would be shorter than 150 days (compared to the current 60). 

In addition, we believe that the refunds could be subject to offset if money is owed to the IRS.  Unlike 1603, the claims could not be made by project companies.  They would have to be made by real taxpayers or entities (like partnerships) with real taxpayers.  If any of these taxpayers owe other debts to the government, offset might be possible.  Finally, recapture liability might actually be imposed up the ownership chain in appropriate circumstances (unlike 1603).

All of these changes could affect how lenders view the program and alter their willingness to lend against the "grants" in bridge financings.  It has taken the lending community a few months to get used to 1603; at a minimum, lenders will need time to adapt to these changes as well.  Certainly, in the case of a longer bridge (15 months potentially), their risk profile will be different.  We (and they) simply don't know at this point.

The fate of this proposal is not certain.  At present, its prospects appear to be good on the House side.  The sponsors are trying to help but likely have not heard from those with concerns.  The Senate is less clear (as always).  Its support for 1603 was grudging in 2009, and whether it will be willing to eliminate the "begin construction" requirement or rewrite 1603 has yet to be tested.  We will keep you apprised.

We hope this "free-form" explanation was helpful.  Should you have any questions, please contact your favorite Stoel Rives attorney.

On Friday, January 8, the Department of Energy awarded to 183 companies $2.3 billion in tax credits for projects designed to expand, re-equip or establish manufacturing facilities for the production of equipment used to produce renewable and other green energy. The $2.3 billion was the full amount authorized by Congress in the stimulus bill as part of new section 48C of the tax code.

Applications for the credit far exceeded the dollar amount of credits available. Stoel Rives is proud to have been directly involved with these companies in preparing the complex applications for the credit. REC Silicon received the largest award of any company -- $154.8 million. SolarWorld received the seventh largest award -- $82.2 million. These credits will provide these companies with a dollar-for-dollar offset against their federal income tax liability.

There is considerable discussion in Congress regarding adding additional funds to the section 48C program, which will permit another round of awards. Please contact your favorite Stoel Rives attorney if you have any questions about these awards or extension of the section 48C credit.

This rumor has some people excited because it is different than what Treasury had been saying and what attorneys had been advising.  Previously, it was believed that Treasury would merely "accept" applications and wait until the project was placed in service to determine if it qualified for the ITC grant.

We have been told definitively by Treasury that the rumor is false.  Treasury will not "pre-approve" projects for the ITC grant subject only to meeting the placed in service deadline.  According to Treasury:

"We will not be issuing 'advance rulings' on projects for which construction begins but are not placed in service. What we outlined on page 3 of the 1603 Guidance document, ' II. Application Procedures' has not changed. We will not issue preliminary approvals because too many things can change by the time a specified property is placed in service. We believe the applicants and lenders should have a good idea if the proposed property meets the requirements of the 1603 program upon reading the application, guidance, terms and conditions, etc.

Stoel Rives has developed an extremely good relationship with individuals at Treasury administering the ITC grant program. We appreciate their candor and willingness to clarify how they intend to run the program.

If you have any questions about this issue, please do not hesitate to contact your favorite Stoel Rives attorney.

The proposed ruling classifies ethanol facilities as assets used in Waste Reduction and Resource Recovery Plants (7 years) and not assets used for manufacture of Chemical and Allied Products (5 years).

The IRS did not state when it will issue a final revenue ruling.  The notice does request comments , which must be submitted by November 23, 2009.

The reasoning underlying the proposed ruling is subject to potential criticism.  This may explain why the ruling was issued in proposed form and comments requested.  

Clients that are interested in learning more about the proposed ruling or submitting comments should speak with their favorite Stoel Rives attorney.

Just informed by Treasury that guidance will "go live" at noon EDT. 

Go towww.treas.gov/recovery/1603.shtml

We have just been informed that the release of the Treasury guidance for the grant in lieu of ITC has been postponed until tomorrow -- Thursday, July 9.  This is being done in order to all ow Treasury to first brief Members of Congress and their staffs on the details of the guidance.

Stay tuned for further updates.

We will publish updates as more information becomes available.

Wind; Biomass (both closed- and open-loop); Geothermal; Landfill gas; Trash facilities; Qualified hydropower; and Marine and hydrokinetic.

Notice 2009-52 appears to provide the exclusive means by which taxpayers may make the election. To qualify, a taxpayer must claim the ITC with respect to qualified property that is an integral part of the facility on a completed Form 3468. Form 3468 must be filed with the taxpayer’s income tax return for the year in which the property is placed in service.

A separate election must be made for each qualifying facility. 

Observation:This requirement may be very important if the Service defines “qualifying facility” very narrowly. For example, if the qualifying facility for a wind farm is each turbine, the election procedure will be extremely onerous. There is no indication in Notice 2009-52 of how the Service will define a facility for this purpose.

The following information must be provided with each election:

1. Name, address, taxpayer ID number, and telephone number of the taxpayer.

2. For each qualified investment credit facility:

(i) A detailed technical description of the facility, including generating capacity.

(ii) A detailed technical description of the energy property placed in service during the taxable year as an integral part of the facility, including a statement that the property is an integral part of such facility.

(iii) The date that the energy property was placed in service.

(iv) An accounting of the taxpayer’s basis in the energy property.

(v) A depreciation schedule reflecting the taxpayer’s remaining basis in the energy property after the energy credit is claimed.

3. A statement that the taxpayer has not and will not claim a grant under Section 1603 of ARRA for property for which the taxpayer is claiming the energy credit. 

4. A declaration, applicable to the statement and any accompanying documents,

signed by the taxpayer, or signed by a person currently authorized to bind the taxpayer

in such matters, in the following form:

Under penalties of perjury, I declare that I have examined this statement, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this statement are true, correct, and complete.

Observation: The Notice does not address what constitutes what property will be considered “integral” to a qualified facility. Presumably, this will be addressed in subsequent guidance.

Finally, the Notice requires that the taxpayer making the election retain adequate books and records, including the information required to be provided by the Notice and all supporting documentation.

Observation: The Notice is focuses on the procedural aspects of the PTC to ITC election. It provides virtually no guidance on grants in lieu of the ITC under Section 1603 of ARRA, and offers little in the way of substantive guidance. Treasury is expected to issue such substantive guidance on these and other issues in the coming months.

Please contact your favorite Stoel Rives attorney with any questions.

Taxpayers who qualify are entitled to a 30 percent tax credit for investment in a “qualifying advanced energy project."  A "QAEP" is defined as one that reequips, expands or establishes a manufacturing facility that produces:

1.  property designed to produce energy from the sun, wind, geothermal, and other renewable resources,

2.  fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles

3.  electric grids to support the transmission of intermittent sources of renewable energy, including storage of such energy,

4.  property designed to capture and sequester carbon dioxide emissions,

5.  property designed to refine or blend renewable fuels or to produce energy conservation technologies, and

6.  new qualified plug-in electric drive motor vehicles (and components),

The program is to be established by IRS, in consultation with Energy Department, on or before August 26, 2009. 

Once the program is established, the Secretary of Treasury is to award certifications for tax credit.  Applications must be submitted within 2 years, and applicants will have one year from the date their application is accepted to provide evidence that requirements for certification have been met.  After certification awarded, an applicant has 3 years to place project in service.

The following are the criteria for certification:

    -- Reasonable expectation of commercial viability

    -- Greatest domestic job creation (both direct and indirect)

    -- Greatest net impact in reducing air pollutants, greenhouse gases, etc. 

    -- Greatest potential for technical innovation and commercial deployment

    -- Lowest levelized cost of energy generated or stored or of measured reduction in energy consumption or greenhouse gas emissions

   -- Shortest project time from certification to completion.

The credit generally applies only to construction, etc. after February 17, 2009. 

The credit is new and unlike anything IRS has ever administered before.  Therefore, it is reasonable to expect that IRS will take some time to get the program fully functional.  Nevertheless, it makes considerable sense to begin assembling materials that explain the company’s project and address the criteria for selection.  In addition, it would be advisable to submit any applications as soon as possible after the program is established.

Stoel Rives would be pleased to assist in planning for and submitting applications for the credit.
   
 

As a reminder, a special bonus depreciation allowance was provided for cellulosic ethanol facilities  IRC sec. 168(l)).  Bonus depreciation allows taxpayers to claim a depreciation deduction for 50% of a plant's cost in the year the plant is placed in service.  However, the way in which the provision was drafted apparently created concern that the provision would only apply in certain narrow ways.  The ruling alleviates that concern, with the IRS concluding that the provision is to be interpreted broadly "in light of the purpose it was intended to serve." 

The grant in lieu of tax credits is in the bill. However, it is now Treasury rather than DOE that will issue the checks. The provision has also been changed to allow the grants to be issued even though the property is not placed in service before 2011, so long as the credit is still in effect and construction began before 2011.

In addition, the bill also includes:

1. the placed in service date for the PTC is extended three years,
2. taxpayers can elect the ITC (30%) in lieu of the PTC, beginning in 2009 through 2013 (2012 in the case of wind),
3. the allocation for CREB bonds is increased by $1.6B,
4. the allocation for qualified energy conservation bonds is increased by $2.4 B,
5. Bonus depreciation and small business expensing extended through 2009,
6. 5-year NOL carryback allowed but only for small businesses,
7. A 30% investment credit for investment in qualified advanced energy projects,
 

Stoel Rives will be issuing an alert describing the provisions in detail in the near future.  If you are not already a subscriber, please click on the "Subscribe" button to sign up.
 

We will post details as they become available and will be sending out an alert.  Congressional leaders are currently meeting with their respective caucuses to obtain their approval.  The Conference Committee is expected to meet in formal session immediately after. 

The Senate adjourned last evening without taking final action on the stimulus bill.  Senate leadership has speculated publicly that they currently do not have sufficient votes to pass the measure in its current form.

A group of 12 Senators -- Democrats and Republicans -- led by Susan Collins (R-ME) and Ben Nelson (D-NE) -- have been working behind the scenes on an alternative proposal to address many concerns expressed by members.  This effort reportedly would strip as much as $100 billion from the bill.  While the group has, apparently, found it difficult to achieve a consensus on the proposal, the leadership decided it was important to give the group more time to work rather than continue floor debate.

Majority Leader Harry Reid has stated that the Senate would reconvene on Saturday morning.  Saturday sessions are fairly unusual and extremely unpopular among members.  As a result, it may be difficult for the Leader to make that happen.