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Federal Circuit Vacates Court of Federal Claims Decision That Awarded Taxpayer Additional Cash Grant Receipts7월 30, 2018
On Friday, July 27, the U.S. Court of Appeals for the Federal Circuit (the “Court of Appeals”) vacated and remanded the Court of Federal Claims (the “Claims Court”) holding in Alta Wind et al. (Alta) v. the United States, dated October 24, 2016.1 The Claims Court’s decision had held that the federal government owed Alta $207 million in unpaid cash grants based on their finding that the U.S. Department of the Treasury undervalued the cost basis of cash-grant-eligible energy property for several wind farms.
Under the former “cash grant program” introduced by the American Recovery and Reinvestment Act, taxpayers were permitted to receive a cash grant from the federal government equal to 30% of the basis of certain qualifying renewable energy property. However, only the basis in the actual energy property was eligible for the cash grant (i.e., basis attributable to intangibles, such as goodwill or going-concern value, was not eligible for the cash grant).
At the heart of the dispute between the federal government and Alta was whether a taxpayer must utilize section 1060 of the Internal Revenue Code (the “Code”) in connection with the allocation of the purchase price to such qualifying renewable energy property where the purchase involves the acquisition of all of the assets comprising a wind farm.
Code section 1060 requires taxpayers to use the “residual method” of allocation if an acquisition is “an applicable asset acquisition.” An applicable asset acquisition, in general, is any acquisition of any group of assets (i) the use of which would constitute an “active trade or business” or (ii) to which goodwill or going-concern value could attach under any circumstance. While it appears that the Court of Appeals conceded that the purchase of the Alta wind farms did not constitute the acquisition of “active trades or businesses,” it held that Code section 1060 should have applied in calculating the cash-grant-eligible basis based on the second trigger for the application of the residual method. That is, the acquisition was an acquisition of assets to which goodwill or going-concern value could have attached and, thus, Code section 1060 and the “residual method” of allocation were applicable.
The residual method of allocation requires that the purchase price of a group of assets be allocated based on the fair market value of different groups/classes of assets on a waterfall basis, with any remaining unallocated portion of the purchase price being allocated to goodwill or going-concern value.2
Alta did not apply the residual method in allocating purchase price to grant-eligible property on the grounds that, because operations had not commenced, there could be no goodwill or going-concern value associated with the purchase under either of the prongs described above. The Claims Court agreed, stating that no goodwill or going concern value could have existed at the time of the transfer because the facilities were not yet operational and thus Code section 1060 did not apply. Therefore, the Claims Court concluded that there was no need to calculate grant-eligible basis using the residual method.
While the transactions in the Alta case were cash grant deals involving sale-leaseback structures, neither of these facts present unique issues that would differentiate the application of the holding to other transactions involving wind farms or solar facilities claiming the ITC or PTC that are treated for tax purposes as an acquisition of the facility’s assets. Transactions that do not involve the payment of a premium above actual cost should not be affected by this holding even if the residual method applies because, under the residual method of allocation, there should be no remaining unallocated purchase price after allocating purchase price to the various asset classes mandated by Code section 1060. Moreover, transactions involving the acquisition of interests in entities that are structured as contributions to an entity, as opposed to the acquisition of the facilities’ assets, would also be unaffected by this holding.
1 The July 27, 2018 opinion is available here.
The October 24, 2016 opinion is available here.
2 See sections 1.338-6(b) and 1060-1(a)(1) of the Treasury Regulations.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Junaid Chida, an O'Melveny partner licensed to practice law in California and New York, Arthur Hazlitt, an O'Melveny partner licensed to practice law in New York, and Alexander Roberts, an O'Melveny counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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