Treasury Issues Guidance on Applications for Grants in Lieu of the ITC and the PTC

Overview of the Grants

The American Recovery and Reinvestment Act of 2009 (ARRA), which was enacted in February, permits an applicant to receive a grant from Treasury in lieu of claiming investment tax credits (ITCs) or production tax credits (PTCs). To qualify, the property must be placed in service in 2009 or 2010 or, if construction begins in 2009 or 2010, must be placed in service by the end of 2012 (for wind), 2013 (for biomass, geothermal and other resources) or 2016 (for solar).

The grant functions similarly to a refundable tax credit. The amount of a grant generally is equal to the amount of the ITC for which the owner of the project otherwise would have been eligible (i.e., generally 30% of the qualified cost of the project). Receipt of the grant is not includible in the gross income of the recipient. The tax basis of the property for depreciation purposes generally is reduced by one-half of the amount of the grant (i.e., the tax basis for depreciation generally would equal 85% of the qualifying costs of the property).

Application Procedures

An application generally must be submitted after the property has been placed in service and before October 1, 2011. ARRA directs Treasury to make payment to a qualified applicant within 60 days of receiving a completed application.

For property not placed in service in 2009 or 2010 but for which construction begins in 2009 or 2010, an application must be submitted after construction commences but before October 1, 2011. An applicant who applies before the project is placed in service must submit, within 90 days after the property is placed in service, supplemental information sufficient for Treasury to make a final determination of eligibility.

Eligible Applicants

An applicant must own or lease the property and must have originally placed the property in service. Federal, state, and local governments, tax-exempt entities, cooperative electric companies, and certain partnerships and other pass-through entities with such persons as direct or indirect partners or owners are not eligible for the grants.

NOTE: The guidance specifically endorses the use of "blocker"corporations. Therefore, a person who would otherwise not be eligible to receive the grant may set up a U.S. corporation to hold its interest and thereby qualify to receive the grant.

Eligible Property

Eligible Basis

An applicant must submit with the application a detailed breakdown of all costs included in the basis of the qualifying property. For property with a cost basis in excess of $500,000, an applicant must submit an independent accountant's certification attesting to the accuracy of all costs claimed as part of the basis. All costs that must be capitalized into the basis of property under general tax principles will be included.

Leased Property

The owner of a project that is eligible for a grant may make an irrevocable election to have the lessee of the property receive the grant. The election is made by a written agreement with the lessee and generally will follow rules already applicable to the ITC.

Recapture

The grant must be repaid to Treasury if the applicant sells the property to a disqualified person or the property ceases to qualify as specified energy property within five years from the date the property is placed in service. The amount subject to repayment is 100 percent if the disqualifying event occurs in the first year and decreases by 20 percent each year thereafter. For this purpose, "disqualified person" generally includes a person who would not be eligible for the grant if that person had placed the property in service originally.

Selling the property to an entity other than a disqualified person does not result in recapture if the property continues to qualify as a specified energy property and the purchaser of the property agrees to be jointly liable with the applicant for any recapture. An applicant will remain jointly liable to the Treasury for the recapture amount even if the applicant no longer has control over the property.

If a lessor elects to have the lessee apply for the grant and subsequently sells the property to a disqualified person, the lessee will be liable to Treasury for the recapture amount even if the lessee maintains control over the property. If the lease is terminated and possession of the property is transferred by the lessee to the lessor or any other person, the lessee will be liable to Treasury for the recapture amount if the use of the property changes during the recapture period so that it no longer qualifies as specified energy property.

An applicant is not required to post a bond as a condition of receiving payment under the grant program, and receipt of payment does not create a lien on the property in favor of the United States. However, funds that must be repaid to Treasury under these rules are considered debts owed to the United States. These debts are not considered tax liabilities.

NOTE: Treasury has limited the situations in which recapture will be triggered. In addition, Treasury will not take a security interest in the project or in the project company. This will permit developers and their lenders to avoid complex inter-creditor agreements as well as the need to provide additional security to indemnify lenders against the possibility of recapture. 

If you have questions about today's Treasury Department guidance and grants in lieu of ITCs or PTCs, contact:

Chris Heuer at (503) 294-3206 or ckheuer@stoel.com
Greg Jenner at (612) 373-8857 or gfjenner@stoel.com
Carl Lewis at (206) 386-7688 or cslewis@stoel.com
Kevin Pearson at (503) 294-9622 or ktpearson@stoel.com
Adam Kobos at (503) 294-9246 or ackobos@stoel.com

IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.