In the inaugural column of ‘‘Power and Taxes,’’ we discussed the tensions surrounding the requirement that an investor be an owner when a project is placed in service in order to qualify for the investment tax credit under section 48, and we suggested that investors take a cautionary approach when deciding the dates on which they invest. In this column, we discuss a companion issue that invariably arises when an equity investor, observing that advice, invests before a renewable energy facility is up and running. If the unexpected occurs and the facility does not become operational at a defined point (for example, the facility fails to satisfy a completion deadline imposed by an off-take power purchase agreement), both parties will usually want out of the deal. The investor would want to divest itself of the nonperforming asset, and the sponsor would likely just as soon cut its losses and liquidate its interest (or, just as probable, a construction lender would require that it do so).

This potential circumstance leads the parties to contemplate a wide range of alternatives — from subtle construction completion backstops to outright unwinds. Although these types of arrangements make commercial sense, they have serious tax implications and exacerbate the placed-in service issue.

Originally published in TAX NOTES, September 12, 2016.

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