Tax Issues for Wind Forrest Milder © 2007

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 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 – (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 )

Law on Profit Motive Sacks case is very favorable (69 F3d 982, 9 th Cir. 1995) – Add cash to credits But don’t take it for granted – see Frank Bizjak, TC Memo and Drobny v. U.S., 77 AFTR 2d (86 F3d 1174), IRS Rulings -- PLR , 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.”