The United States Court of Appeals for the Federal Circuit yesterday issued its decision in California Ridge Wind Energy LLC, Invenergy Wind LLC, and Bishop Hill Energy LLC v. United States, the consolidated appeal of two cases involving development fees under the now-expired Section 1603 cash grant program.
Although the decision does not break new legal ground on whether development fees can be included in a project owner’s tax basis for Section 1603 cash grant or investment tax credit purposes, it serves as a reminder of the need to substantiate development fees and the underlying development services.
Yesterday’s decision resolves appeals by California Ridge Wind Energy LLC, Invenergy Wind LLC, and Bishop Hill Energy LLC, of two United States Court of Federal Claims decisions, California Ridge Wind Energy, LLC v. United States, 143 Fed. Cl. 757, 763 (2019); Bishop Hill Energy, LLC v. United States, 143 Fed. Cl. 540, 545 (2019). The two cases involved essentially identical facts and were consolidated for purposes of the appeal. Following is a brief summary of the trial court’s opinion in these cases. Our prior coverage of these cases is available here.
California Ridge Wind Energy LLC and Bishop Hill Energy LLC each owned a wind farm that was placed in service in 2012. Each company applied for a cash grant under Section 1603 of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 306, which permitted the owner of a qualified renewable energy facility to receive a cash payment equal 30 percent of the eligible tax basis of the facility. In each case, a portion of the claimed tax basis in the facility, and the cash grant amount applied for, was attributable to development fees paid by the project company to an affiliate of the sponsor.
The United States Department of Treasury denied a portion of the grant claimed by each company, based on the disallowance of a portion of the development fees paid to the sponsor’s affiliate. Each project company then filed a complaint in the United States Court of Federal Claims for the difference between the amount requested and the amount awarded. In each case, the government filed counterclaims seeking a full return of cash grants attributable to the development fees. The trial court agreed with the government, concluding that the project companies did not substantiate the development fees and that the development fee arrangements were “sham transactions.”
Federal Circuit Decision
The sole issue on appeal was whether the project companies proved at trial that their proposed development fees were properly included in the tax basis of the projects for purposes of the Section 1603 grant. As a procedural matter, this meant that the appellate court reviewed only whether the factual findings of the trial court were “clearly erroneous”—a very difficult standard for any appellant to satisfy.
Unsurprisingly, the appellate court concluded that the trial court’s decisions were not clearly erroneous. The appellate court held that the evidence presented at trial—including that the development fees made a round trip from and back into the same bank account on the same day, the development fee agreements were entered into after much of the development work had been completed, and the development fees were not adequately shown to relate to the development services provided—supported the trial court’s finding that the development fees should not be included in the owner’s tax basis. Accordingly, the appellate court affirmed the decisions of the trial court.
Yesterday’s decision does not significantly change the legal landscape regarding development fees. Rather, it reaffirms the importance of substantiating that development fees must be commensurate with arm’s-length fees for services actually rendered. While it is possible that the court’s decision will embolden the Internal Revenue Service to more closely scrutinize development fee arrangements, because the tax equity marketplace generally has moved away from transaction structures involving development fees in favor of structures involving sales of projects for fair market value (among other financing structures), the decision may not have a significant immediate impact on tax equity planning and financing.