United States: FERC And IRS Diverge On Approaches To Tax Equity Investors

Meredith Hiller is an Associate in the Boston office

The Internal Revenue Service (IRS) and the Federal Energy Regulatory Commission (FERC) have recently taken different approaches to issues raised by tax equity investors that have invested specifically in renewable energy projects or in companies engaged in electric energy generation from renewable resources.

FERC said on Wednesday that tax equity investors in public utilities needn't seek authorization from FERC under Section 203 of the Federal Power Act (FPA) to make their investments, something many investors had sought out of an abundance of caution. A group of renewable energy investors had filed a petition in December, 2016, seeking a declaratory order that their tax equity interests did not constitute voting securities under the FPA, and therefore they did not need advance FERC authorization, and that a holding company has blanket authorization under FERC regulations to acquire such interests.

FERC relied on the fact that the petitioners' equity investments are passive investments that do not assert day-to-day control of the utility, and on its 2009 order in AES Creative Resources LP et al., where it found tax equity investments in utilities do not assert day-to-day control over the utilities for purposes of Section 205 of the FPA, governing electricity rate-making and sales. Although that finding was under Section 205 of the FPA, FERC focused on the fact that both Sections 203 and 205 address whether the interests give the holders control over the company's activities, or whether they are passive, and saw no reason not to apply the findings under Section 205 to the similar factual situation that arose under Section 203.

However, FERC was careful to limit the tax equity investors' activities to the general definition of a "passive investor" as set out in earlier FERC orders – the investors can only have rights that do not hand them day-to-day control of the company. Clarity on the issue of Section 203 approval from FERC should help tax equity investors, who are generally very cautious, continue to invest in renewable energy projects, and benefit from the federal investment tax credit and production tax credit. Since Section 203 approval could take a few months, it delayed project development, and should allow projects to move ahead at a faster pace.

In contrast to the FERC order, which should stimulate renewable energy project growth, the IRS issued a Technical Advice Memorandum in late July denying claims of two tax equity investors for energy tax credits, suggesting that the IRS is reviewing renewable energy investments with a higher level of scrutiny than before. This may have the opposite effect of chilling renewable energy investment, if the IRS memorandum sufficiently unnerves tax equity investors.

The tax equity investors had claimed credits under Section 45(e)(8) of the Internal Revenue Code on the basis of their interests in a joint venture that owned two production facilities making refined coal. The credits are usually available to valid partners for U.S. federal tax purposes, provided the arrangement furthers the purpose for which the credit was enacted, in this case the production of refined coal.

In this case, an operator designed and constructed two refined coal facilities, and then contributed them to a wholly-owned limited liability company that the investors bought interests in, and which then constituted a partnership for U.S. federal tax purposes. The LLC operating agreement allocated partnership tax items among the owners (the operator and the investors) on a pro rata basis, and the joint venture made royalty payments to the operator under a sub-license agreement based on the value of the tax credits produced by the facilities. The joint venture also entered into a supply agreement to purchase feedstock coal from an electric company at cost, and the electric company agreed to purchase the refined coal at a price discounted from the feedstock coal price.

The facilities were less than successful, however, sometimes not producing for months at a time, and ending production permanently in the fifth year of operation. Despite this performance, the investors received tax benefits well in excess of their capital contributions, including tax losses, depreciation and credits.

The IRS found that the parties facilitated the improper sale of Section 45 tax credits – a finding usually based on an IRS decision that a taxpayer is not a partner. However, the IRS specifically denied finding the investors were not partners, the entity was not a partnership, or that pre-tax profit potential was required, even though it reviewed the transaction based on factors that would usually align with such findings.

Strangely, the IRS began its analysis with the assumption that taxpayers may not sell federal tax benefits, citing Historic Boardwalk Hall LLC v. Commissioner, but the prohibition on such a sale is not the basis of the holding in Historic Boardwalk.  In that case, the Third Circuit ruled an investor was not a bona fide partner for U.S. federal tax purposes because the agreements governing the transaction ensured the investor would receive Internal Revenue Code Section 47 rehabilitation tax credits and a preferred return without any meaningful downside risk or upside potential with respect to the underlying economic venture.

The IRS did compare the refined coal arrangements to the transaction in Historic Boardwalk, finding that the parties created a similar situation – one where the investors faced gain, but very little risk of loss. The agreements with the electric company appear to be key to the IRS finding, however, since they allowed joint venture to incur small, limited losses from the discounted sales of the refined coal, but no benefit if the market for coal changed.

The approach to reviewing this renewable energy transaction raises the specter of increased IRS scrutiny of transactions with a renewable tax credit component, possibly leading tax equity investors to be more cautious when structuring such arrangements, even while some tax equity investors now have comfort that FERC need not approve their investments under Section 203 of the FPA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions