On September 20, 2013, the Internal Revenue Service (the "IRS") released Notice 2013-60 (the "September Notice"), supplementing its previous guidance in Notice 2013-29 (the "April Notice") with respect to the requirement in the American Taxpayer Relief Act of 2012 that a qualifying facility must "begin construction" before January 1, 2014 in order to be eligible for a production tax credit ("PTC") or investment tax credit ("ITC"). Notably, the September Notice establishes a new "safe harbor," by treating the taxpayer as having satisfied the "program of continuous construction" and "continuous efforts" requirements in the April Notice, as long as the facility is placed in service prior to January 1, 2016.
The clarification under the September Notice has removed a major uncertainty that had plagued wind power project developers and investors since the April Notice was issued—namely, how to ensure that the highly subjective continuous program/efforts tests would be met.
As previously reported in the Spring 2013 edition of The Climate Report, the April Notice provided two methods for a taxpayer to establish that construction of a qualified facility has commenced in 2013: (i) by starting "physical work of a significant nature" on the facility before January 1, 2014, and thereafter maintaining a "continuous program of construction" until the facility is placed in service; and (ii) by paying or incurring 5 percent or more of the eligible costs of the facility before January 1, 2014, and thereafter making "continuous efforts to advance towards completion" of the facility. The IRS did not express any views in the April Notice as to whether facility construction needed to be completed by a specific date in order for parties to have satisfied either the "continuous program" or "continuous efforts" test. However, the addition of a "continuous efforts" requirement to the 5 percent safe harbor under the April Notice injected a new element of subjectivity, and thus uncertainty, into what had been a relatively straightforward, objective standard, leading to calls for clarification by industry participants.
The September Notice, in effect, adds the certainty of a bright-line test to the tax credit qualification analysis, by stipulating that if construction of a facility has commenced in 2013 in accordance with IRS guidance, the taxpayer will be deemed to have met the "continuous program/efforts" elements of the guidance as long as the facility is placed in service by the end of 2015. In cases where completion occurs after 2015, the IRS will apply a more stringent "facts and circumstances" analysis to determining eligibility for a PTC or an ITC. This revision will help significantly to ease the concerns of sponsors and financing parties about pursuing wind power projects that may not be construction-ready by year-end but are reasonably capable of being completed within two years.
The September Notice included two other important clarifications to the previous IRS guidance. The April Notice had provided that, solely with respect to projects qualifying under the "physical work" test, if a taxpayer enters into a binding written "master contract" in December 2013 for a specified number of components (such as wind turbine generators), and thereafter assigns its rights to certain of such components to an affiliated special purpose vehicle that will own the project, work performed under the master contract in 2013 may be taken into account in determining whether such affiliate "began construction" on the project in 2013. The September Notice makes it clear that the master contract provision in the April Notice also applies to projects that start construction through making a 5 percent safe harbor payment in 2013.
Second, the September Notice clarifies that a subsequent transferee/taxpayer of a facility that had satisfied the beginning of construction requirement in 2013 will also be eligible to claim a PTC or an ITC for such facility. The April Notice was silent as to whether a transfer of a facility during construction would impact the eligibility of the transferee to claim the tax credit. The lack of guidance had led to concerns about the transferability of such tax credits, particularly since the guidance for the Section 1603 cash grant program had limited the circumstances under which tax credit eligibility would be preserved in connection with such transfers. The September Notice effectively recognizes that the PTC/ITC eligibility established by commencing construction in 2013 will follow the facility to subsequent owners/taxpayers, rather than be specific to the taxpayer that owned the facility in 2013.
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