United States: US Treasury Department Issues Section 1603 Program Guidance on Evaluating Cost Basis for Solar PV Properties

Originally published June 30, 2011

Keywords: US Treasury Department, Section 1603, program guidance, solar PV properties, Grant program

On June 30, 2011, the US Treasury Department (Treasury) posted guidance (Guidance) to assist applicants in determining their cost basis for certain solar photovoltaic (PV) properties for purposes of the Section 1603 grant (Grant).

Under the Grant program, Treasury will make a payment equal to 30 percent of the basis of certain solar property (i) that is placed in service during 2009, 2010 or 2011 or (ii) for which construction began in 2009, 2010 or 2011 if the property is placed in service by the end of 2016. The Guidance provides that applications will be evaluated to determine whether the basis of solar PV property includes only eligible items and whether the basis represents the applicant's actual costs or, in the case of a pass-through lease, the fair market value of the eligible property. The principles underlying the Guidance are consistent with the determination of basis for federal tax purposes. Thus, even though the Guidance addresses only solar PV property, it is instructive in determining the cost basis of other types of property eligible for a Grant.

Basis

Basis is generally the cost of the property, although it may include the capitalized portion of other costs related to buying or producing the property. However, if the stated cost does not reflect the applicant's "true economic cost" of the property, it may be ignored in determining the basis—for example, where a transaction is not conducted at arm's-length by economically self-interested parties, or where the circumstances of a transaction influence the applicant to pay an inflated cost.

Treasury will exercise increased scrutiny of the claimed basis in cases involving related parties, related transactions or other unusual circumstances. The Guidance emphasizes that Treasury has the authority to decide that an applicant has miscalculated or misrepresented the basis of its property.

Benchmarking

As a first step in evaluating an applicant's basis, Treasury will compare the claimed basis to certain benchmarks that are derived from data assembled by Treasury and predicated upon open market, arm's-length transactions between unrelated parties. If the applicant's basis is consistent with the benchmarks, Treasury will then review the line items provided in the detailed cost breakdown to ensure that only eligible items are included. Treasury recognizes that each system is different, and that cost may be affected by technology choice, regional market differences, and a system's size. The applicant may submit a detailed and credible third-party appraisal to support its claimed basis. If the claimed basis reflects only items appropriately attributed to the property, and there is adequate documentation to support the costs, the basis is accepted.

If the basis is materially higher than the benchmarks, Treasury will exercise closer scrutiny, including a consideration of any unusual circumstances, and determine whether the claimed basis is consistent with the property's fair market value. Based upon its determination, Treasury may adjust the basis to a level it believes reflects the actual cost.

As of the first quarter 2011, the benchmarks for the solar PV market are as follows:

Fair Market Value

Fair Market Value is the "price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts." The Guidance describes three broad methods of valuation: (i) the cost approach, which is based on the actual cost to build the property, (ii) the market approach, which is based on comparable sales, and (iii) the income approach, which is based on the discounted value of future cash flows. Treasury believes the cost approach is the most concrete and favored method, and the income approach is the least reliable method due to its reliance on a number of variables and assumptions.

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