Solar Finance: Considerations for TaxExempt Entities and Government
Organizations
James F. Duffy, Esquire
Nixon Peabody LLP
100 Summer Street
Boston, MA 02110-2131
(617) 345-1129
jduffy@nixonpeabody.com
FINANCING SOLAR ENERGY
IPED, INC.
Alexandria, Virginia
May 21-22, 2009
Investment Tax Credits
• The principal federal incentive for the
development of solar facilities remains the
investment tax credit (energy tax credits under
Section 48 of the Internal Revenue Code), known
as “ITCs”
• But tax-exempt entities and governmental
organizations generally do not pay federal
income taxes
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Treasury Grants
• Section 1603(g) of the American Recovery and
Reinvestment Act of 2009 (“ARRA”) specifically
provides that the Treasury grants which are
available in lieu of ITCs cannot be made to taxexempt entities, to governments or subdivisions,
agencies or instrumentalities thereof, or to any
partnership or other pass-through entity any
partner or equity holder of which is such an entity
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Section 168 Elections
• So, without being able to utilize ITCs or claim
Treasury grants, how does a tax-exempt entity or
governmental organization finance a solar
facility?
• One mechanism is to set up a subsidiary and
elect under Section 168(h)(6)(F)(ii) of the Internal
Revenue Code to have the subsidiary treated as
a for-profit entity
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Section 168 Elections
• Check to see if having a for-profit subsidiary is
allowed under local law for governmental
organizations or under the organizational
documents of a tax-exempt entity
• Any ultimate collapse of the for-profit subsidiary
into the tax-exempt entity will be a taxable event
(deemed sale at fair market value with basis of
zero by then), so careful tax planning is required
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CREBs
• Clean Renewable Energy Bonds (“CREBs”) may
be an option
• Under Section 54 of the Internal Revenue Code,
CREBs were designed to provide an incentive for
governmental bodies (including Indian tribes) and
cooperative electric companies to produce
renewable energy
• CREBs were addressed in detail on a previous
panel on Thursday morning
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Tax-Exempt Use Property
• Any leasing of the solar facility to a tax-exempt
entity will cause the facility to be deemed “taxexempt use property” under Section 168(h)(1) of
the Code
• Tax-exempt use property will not be eligible for
the ITC
• This does not mean that you cannot lease a
rooftop from and sell solar electricity to a taxexempt entity
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Section 7701
• Section 7701(e)of the Code deals with the
classification of a contract as either a service
contract or a lease
• In the case of a solar company leasing space
from a tax-exempt entity and selling solar
electricity to that entity, the preferred treatment is
as a service contract, not as a lease of the facility
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Section 7701
• Section 7701(e)(1) provides a facts and
circumstances test as to whether a contract
which purports to be a service contract is to be
treated as a lease of property, taking into
account all relevant factors, including those
listed in that Section of the Code
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Section 7701
• The facts and circumstances listed in Section
7701(e)(1) include whether or not: the service
recipient has physical possession of the property or
controls the property, the service recipient has a
significant economic interest in the property or bears
the economic risk of diminished receipts or increased
expenditures if there is nonperformance under the
contract, the service provider uses the property only
to provide services to the service recipient, and the
total contract price does not substantially exceed the
rental value of the property for the contract period
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Section 7701
• In contrast to the facts and circumstances test of
Section 7701(e)(1), Sections 7701(e)(3) and (4)
provides a safe harbor for certain contracts,
including those with respect to the sale to the
service recipient of electricity produced a solar
facility
• As long as none of the circumstances listed in
Section 7704(e)(4) is present, the contract will be
deemed to be a service contract
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Section 7701
• In order to qualify under Section 7701(e)(4), the service
recipient (or a related entity) cannot:
– Operate the facility,
– Bear any significant financial burden if there is
nonperformance under the contract (other than for reasons
beyond the control of the service provider),
– Receive any significant financial benefit if the operating
costs of the facility are less than the standards of
performance or operation under the contract, and
– Have an option to purchase, or be required to purchase, all
or a part of the facility at a fixed and determinable price other
than for fair market value
•
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