Tax and Energy & Utilities Alert
October 2009
Authors:
Charles H. Purcell
charles.purcell@klgates.com
206.370.8369
J. Stephen Barge
steve.barge@klgates.com
412.355.8330
Eric E. Freedman
eric.freedman@klgates.com
206.370.7627
Darcie L. Christopher
IRS Modifies Established Safe Harbor
Requirements for Wind Energy Partnerships
in Announcement 2009-69
On September 21, 2009, the United States Internal Revenue Service (the "IRS")
published Announcement 2009-69 (the "Announcement"), which makes a number of
changes to Revenue Procedure 2007-65. Revenue Procedure 2007-65 sets forth the
safe harbor for wind energy partnerships using a so-called "partnership flip"
structure. These changes should be viewed as providing useful flexibility to investors
and developers, particularly in the greater flexibility that should now be available to
structure repurchase options covering the wind facility. In short, these changes
address in part the concern that wind energy partnerships should not be subject to
more stringent tax requirements than other tax-enhanced investment structures.
darcie.christopher@klgates.com
206.370.8173
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A partnership flip structure generally involves the transfer of property eligible for the
tax credit ("energy property") to a newly formed company (often a limited liability
company that is classified as a partnership for federal tax purposes). In the
partnership flip structure, a partner's distributive share of the partnership's income,
gain, loss, and credits often varies from year to year. In a typical partnership flip
structure, an investor generally earns an agreed internal rate of return on its cash
investment measured on an after-tax basis that is realized through a combination of
cash distributed by the partnership and the tax credits that are allocated by the
partnership to the investor. The developer typically does not share significantly in the
partnership profits until the investor has received its preferred return.
Revenue Procedure 2007-65 generally provides that the IRS will respect the
allocation of the production tax credit by wind energy partnerships if they comply
with the provisions of the safe harbor.
1. Prior to modification by the Announcement, Revenue Procedure 2007-65
included language that the IRS will "closely scrutinize" a taxpayer that does not
satisfy all the requirements of the safe harbor. The Announcement modifies
Revenue Procedure 2007-65 so that it no longer includes such language and
instead provides that "[r]eturns claiming wind energy production tax credits
under [Section 45 of the Internal Revenue Code of 1986, as amended (the
“Code”)] are subject to examination by the [IRS]." The Announcement also
modifies Example 2 in Revenue Procedure 2007-65 to clarify that the Revenue
Procedure only provides safe harbor requirements and, specifically, to remove
language cautioning that the IRS closely scrutinizes projects that do not meet the
safe harbor requirements.
2. In addition, the Announcement eliminated the requirement of Revenue
Procedure 2007-65 that a partnership flip structure not contain a fixed price
purchase option giving a party a contractual right to purchase the wind facility
(or any interest in the company owning a wind facility) for a price less than the
fair market value of the facility at the time the option was exercised. This
requirement was subject to much criticism because it established a higher
standard for wind partnerships than is required in other contexts (e.g., leasing
Tax and Energy & Utilities Alert
transactions). The Announcement modifies
Revenue Procedure 2007-65 so that it allows
participants in a partnership flip structure to
establish a fixed price purchase option where the
strike price is determined at the inception of the
venture; provided that (a) the contractual right is
negotiated for valid non-tax business reasons at
arm’s length by parties having material adverse
interests and (b) the purchase price represents an
amount that the parties reasonably believe,
based on all facts and circumstances at the time
the price is determined, will not be less than the
fair market value of the property at the time the
right may be exercised.
3. Finally, the Announcement clarifies the IRS's
understanding of how the passive activity loss
rules under Section 469 of the Code apply to
tax credits under Section 45 of the Code (e.g.,
the production tax credit). In the case of
individuals, S corporations, and closely held C
corporations, credits may be used to the extent
of tax liability from all passive activities (rather
than the tax liability from only passive wind
investments). The Announcement appears to
better reflect the law than the original text of
Revenue Procedure 2007-65.
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tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used,
for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to
another party any transaction or matter addressed herein.
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October 2009
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