On July 27, 2018, the U.S. Court of Appeals for the Federal Circuit issued an opinion reversing the decision of the Court of Federal Claims in Alta Wind I Owner-Lessor C, et al. v. U.S. The Federal Circuit held that goodwill and going concern value could attach to the assets of wind facilities that had not yet been placed in service and therefore that the Code Section 1060 residual method of allocating purchase price applied to the acquisition of the wind facilities. The Federal Circuit's holding that goodwill and going concern value can attach to a wind facility, and the fact that it vacated the decision of the Court of Federal Claims (which included other holdings favorable to industry participants) could have significant implications for renewable projects.
At issue in Alta Wind was the appropriate amount of cash grants pursuant to Section 1603 of the American Recovery and Reimbursement Act of 2009 for several wind facilities. The Alta Wind plaintiffs purchased wind farms from a developer, placed them in service, and then applied to the Treasury Department for $703 million in Section 1603 grants. The Treasury Department awarded Section 1603 grants of approximately $495 million based on a determination that a portion of the purchase price for the wind facilities should be allocated to intangibles, potentially including going concern value and goodwill, using the residual method under Section 1060 of the Code.
As explained in our prior analysis, the Court of Federal Claims had focused on whether the wind farm acquisitions qualified as "applicable asset acquisitions" under Code section 1060 because of the presence of goodwill or going concern value. The court found as a matter of fact that neither goodwill nor going concern value could exist for a non-operational plant and therefore held that Section 1060 of the Code did not apply. With respect to goodwill, the court ruled that prior to beginning operations, no "expectation of continued patronage" could possibly exist under the terms of the PPAs, which is the sine qua non of a finding of the existence of goodwill. Regarding going concern value, the court cited United States v. Cornish, 348 F.2d 175 (9th Cir. 1965) for the proposition that going concern value, as distinguished from goodwill, is the "special value inherent in a functioning plant continuing to do business and to earn money with its staff and personnel." Since the wind farms at issue were not functional at the time of acquisition, the court found that no separate intangible going concern value had yet been created. The Court of Federal Claims also held that location value, turnkey value, and any value attributable to above-market PPAs were inherent in the tangible property rather than separate intangibles.
The Federal Circuit disagreed with the Court of Federal Claims after applying a strict reading of the regulations under Section 1060 of the Code, which state that a group of assets constitute a trade or business requiring the use of the residual method if the "character" of the group of assets transferred is such that goodwill or going concern value could attach under any circumstances. Reg. 1.1060-1(b)(2)(i)(B) (emphasis supplied). According to the Federal Circuit, "[t]here is no need to show that a transaction had actual, accrued goodwill or going concern value at the time of the transaction" for the residual method to apply.
The Federal Circuit's decision appears to leave open the debate as to whether a plant specific, non-transferable power purchase agreement is an intangible asset separate and distinct from its underlying renewable energy facility. In 2012 the IRS issued PLR 201214007, in which it ruled that a facility-specific PPA was not separate from the underlying facility, citing a similar rule under Code section 168(c) for commercial real estate. The IRS subsequently revoked that ruling in PLR 201249013. The Federal Circuit addressed this issue in its analysis concerning one of the factors that could indicate the presence of goodwill and going concern value—viz., the presence of intangibles associated with the tangible property. Without much analysis, the court concludes that "the PPAs, or at least some portion thereof, may be characterized as customer-based intangibles" under Section 197 of the Code and accordingly appears to conclude that PPAs, or portions of the PPAs, could be separate intangibles. However, the court completely failed to address the substantive legal arguments for and against a holding that a facility-specific PPA is a separate and distinct asset from the underlying facility. If the Federal Circuit's opinion can be confined to the initial determination of whether the residual method applies to a non-operational plant with a PPA, then the substantive issue of whether, as a matter of law, any value should be associated with an in-the-money PPA, or whether that value is inextricably intertwined with the value of the facility's tangible asset, arguably remains to be decided another day.
The Federal Circuit opinion is a significant setback for industry participants in their attempts to assert that virtually all the basis in wind and solar projects is attributable to the tangible property, just as the trial court opinion was a significant setback for the government. However, it remains possible that the Court of Federal Claims on remand could conclude that there is in fact no goodwill or going concern value associated with the wind facilities, and we expect industry participants to take a similar position in the meantime.
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