Earlier this year, the Internal Revenue Service (the “IRS”) published Notice 2013-29, providing guidance on what it means to “begin construction” for purposes of the recent extension of the 2.3 cent-per-kilowatt-hour production tax credit (the “PTC”) and the 30% investment tax credit (the “ITC”) for qualifying wind and certain other renewable energy facilities (excluding solar) the construction of which begins before January 1, 2014.
Under Notice 2013-29, there are two alternative methods by which a taxpayer can demonstrate that construction has begun before January 1, 2014: (1) by beginning physical work of a significant nature before January 1, 2014 (the “physical work test”) or (2) by paying or incurring at least 5% of the total cost of the facility before January 1, 2014 (the “5% safe harbor”). Among other requirements, the physical work test requires that the taxpayer maintain a continuous program of construction and the 5% safe harbor requires that the taxpayer maintain continuous efforts to advance towards completion of the project. Only limited guidance was provided regarding these continuity requirements.
Notice 2013-29 was also ambiguous regarding how the new rules would apply to transferees (i.e., whether or under what circumstances a transferee could “piggyback” on the transferor’s satisfaction of the Notice 2013-29 requirements. Further, although Notice 2013-29 provided that, for purposes of the physical work test, work performed by a vendor/manufacturer prior to January 1, 2014 under a master contract can be taken into account by an affiliate of the original purchaser who receives an assignment after December 31, 2013 of the rights to receive any of the components under the master contract, no such statement was made with respect to the 5% safe harbor.
On September 20, 2013 the IRS published Notice 2013-60 (the “Notice”) clarifying certain aspects of the guidance provided in Notice 2013-29. Specifically, the Notice addresses: (1) the “continuous efforts” and “continuous construction” requirements; (2) the master contract described in Notice 2013-29 and (3) the transfer of a facility after construction has begun under the Act.
CONTINUOUS EFFORTS AND CONTINUOUS CONSTRUCTION
Under the Notice, a taxpayer is deemed to satisfy the relevant continuity requirement if the project is placed in service before January 1, 2016. A facts and circumstances analysis will be applied to projects placed in service after this deadline and no further clarifying guidance beyond what was provided in Notice 2013-29 was provided.
Pursuant to the Notice, the master contract provision, as described in Notice 2013-29, applies to the 5% safe harbor as well as the physical work test.
TRANSFER OF FACILITY
In the Notice, the IRS noted that the statutory language requires only that construction of a facility begin before January 1, 2014; it does not require the construction to be begun by the taxpayer claiming the PTC or ITC. The Notice provides an example in which a disregarded entity begins construction of a wind energy facility prior to January 1, 2014 and 95% of the equity interests in the disregarded entity subsequently are transferred by the “developer” in a transaction treated as a transfer of a 95% undivided interest in the assets under Revenue Ruling 99-5.13 In the Notice the IRS concludes that the entity, now an entity taxable as a partnership owned 5% by the developer, will continue to be treated as having satisfied the begun construction requirement.
Although the example in the Notice addresses only the transfer of 95% of the equity interests in a disregarded entity that is developing a project, the rationale expressed in the Notice should apply equally to transfers of all of a project entity’s assets and to transfers of 100% of the equity interests in a project entity to a third party.
What remains unclear is what constitutes a facility, e.g., to what extent can a developer who acquires turbines in 2013 under a master turbine supply agreement transfer some of those turbines to an affiliate (so that the affiliate then satisfies the begun construction requirement under the rules in the Notice and Notice 2013-29 applicable to master contracts) and then sell all or a portion of the interests in that affiliate to a third party when the project is completed prior to 2016.