On June 20, 2019, the Court of Federal Claims released its opinions in the consolidated cases of California Ridge Energy, LLC v. U.S., C/A 1:14-cv-00250-RHH, and Bishop Hill Energy, LLC v. U.S., C/A 1:14-cv-00251-RHH. The taxpayers in those cases included developer fees paid to a related person in their cost basis in claiming cash grants under the Department of the Treasury’s (Treasury) Section 1603 grant program. In holding for the government, the Court determined that the taxpayers were not entitled to a 1603 cash grant with respect to the developer fees.
| Eversheds Sutherland Observation: Although these cases involve the 1603 cash grant, they likely will have implications for taxpayers claiming an investment tax credit (ITC) under section 48 of the Internal Revenue Code. |
The 1603 cash grant program provided a grant equal to 30% of the cost basis of a qualifying renewable energy project to owners of wind, solar and certain other renewable energy facilities. The 1603 cash grant was available in lieu of the production tax credit (PTC) under section 45 or the ITC.
California Ridge Energy, LLC and Bishop Hill Energy, LLC (Plaintiffs), both wholly owned by Invenergy Wind, LLC, applied for 1603 cash grants with respect to wind energy facilities. In their applications to the Treasury to receive 1603 grant payments, California Ridge Energy and Bishop Hill Energy included in their cost basis a developer fee in the amounts of $50 million and $60 million, respectively, paid to a related person. With respect to those developer fees, Treasury allowed a cash grant for just a portion of the amounts claimed. The Plaintiffs sued for a cash grant for the remainder of the developer fees, and the government countersued for the amounts that had previously been paid with respect to the developer fees. The court held for the government, disallowing any amount of 1603 cash grant with respect to the developer fees.
In reaching its decision, the court looked to the sham transaction and economic substance doctrines. The court focused on the facts that although the developer fee was “paid,” it was returned to its original bank account on the same day through wire transfers; the chief development officer of the entity to which the developer fee was paid was not even aware of the existence of the development agreements; and the developer agreements were short in length (three pages) and sparse in certain provisions. The court also dismissed the Plaintiff’s reliance on Deloitte’s allegedly independent certification of development fees because Deloitte relied solely on Plaintiffs’ representations and did not independently determine whether all of the eligible costs, including developer fees, were valid, accurate and complete.
| Eversheds Sutherland Observation: The issue of the amount of developer fees properly includible in cost basis has been the subject of much discussion both with respect to section 1603 cash grants and the ITC. As illustrated by these cases, especially when developer fees are paid to related parties, it is important to document the specific services that will be performed by the developer, to ascertain the fair value for such services, to ensure that those services are not provided under another pre-existing developer agreement, to avoid circular cash flows, and to document that the specified services were actually performed. |
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