Firm Seeks Related-Party Guidance to Promote Renewable Energy

May 28, 2021

The Honorable Mark J. Mazur
Acting Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

The Honorable William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

Dear Messrs. Mazur and Paul:

On behalf of our clients Alliant Energy Corporation, DTE Energy Company, and NiSource Inc., we request that the 2021-2022 Priority Guidance Plan include guidance that sales of electricity from renewable facilities between related parties and any losses recognized on such sales not be limited pursuant to sections 707 and 267. Notice 2008-60 provides that the requirement of a sale to an unrelated person under section 45 will be treated as satisfied if the producer sells the electricity to a related person for resale by the related person to a person that is not related to the producer. We believe that the sale of electricity generated by a wind or solar project and any resulting tax losses should be treated consistently where the purchaser resells the electricity to an unrelated third party. This extension of the rationale in Notice 2008-60 would recognize the realities of the electric market where sales are required to be made to related electric providers in order to comply with state requirements and then the electricity is immediately sold and transferred to the consumer (an unrelated third party).

Utility Owners in Renewable Energy Partnerships

Congress, through the tax Code, has provided for two specific federal income tax incentives to promote investment in renewable energy: accelerated depreciation and tax credits (the production tax under section 45 and the investment tax credit under section 48). In many instances, the tax benefits of these incentives may be so substantial in the early years of a project, while the property is generating tax depreciation (resulting in losses) and credits, that the owner cannot fully utilize the tax incentives in the year earned.

In order for the tax incentives associated with renewable energy projects to be utilized more efficiently, many taxpayers have utilized tax equity partnership arrangements. These are partnerships between a project sponsor (the utility) and a tax equity investor, under which a substantial portion of the tax depreciation and tax credits are allocated to a tax equity investor in exchange for capital contributions. Tax equity financing allows the tax benefits to be more efficiently utilized by the tax equity investor as they are generated, resulting in a lower cost for the facility to the sponsor and hence lower electricity pricing.

A renewable energy project owned by a tax equity partnership qualifies for five-year MACRS depreciation under section 168, and, under present law, additional bonus depreciation under section 168(k). Under the Service's characterization of electricity as an inventoriable good, and the application of section 263A to MACRS depreciation, the partnership typically incurs a loss for income tax purposes on the sale of the electricity to the utility in the first few years of a project's life. Under a typical utility — tax equity ownership structure, the utility off-taker is related to the partnership under section 707(b) or 267(b)(10) due to the utility (or an affiliate thereof) holding a greater than 50 percent interest in the partnership's capital. If section 707 or 267 were to apply to the interim sale, the loss is permanently disallowed with no opportunity for recoupment. This is in contrast to a loss sale between corporations in an affiliated group, in which case the loss is temporarily deferred until the loss property leaves the group, which, in the case of electricity occurs immediately upon its resale to the ultimate consumer.¹

Needed Guidance

As discussed below, the related party loss disallowance rules in sections 707 and 267 of the Code are limiting investment (and in some cases prohibiting investment) in renewable energy projects without favorable guidance from the Internal Revenue Service (the “Service”) on the matter.

The Service has already addressed a similar issue in the context of the section 45 energy tax credit and the section 45J credit for advanced nuclear power. Notice 2008-60 provides that the requirement of a sale to an unrelated person under section 45 will be treated as satisfied if the producer sells the electricity to a related person for resale by the related person to a person that is not related to the producer. A similar rule is provided in Notice 2006-40 for section 45J. The statutory requirements for whether a person is related to a partnership are the same under sections 45 and 45J and sections 707(b) and 267(b)(10) In the case of the section 45 energy credit, a taxpayer is entitled to the credit on the same property that is eligible for the MACRS depreciation. To allow the credit but to disallow the MACRS depreciation based on the exact same definition of related party is illogical and hinders investment (and in some cases prevents investment) in renewable projects. Accordingly, the Service should apply the same principles under sections 267(b)(10) and 707(b) for testing relatedness by looking to the ultimate consumer for sales of electricity in recognition of the substance of the transactions.

Similar to Notice 2008-60, the Service should provide guidance regarding the sale of electricity from a partnership to a related party where the related party sells such electricity to an unrelated third party. The sale of electricity in a transaction in which a related party has only flash title is not the type of transaction that Congress intended to fall within the scope of section 267(b)(10) or 707(b) and therefore any losses generated should not be disallowed under those provisions.

We propose that any related party guidance issued by the Service adopting a consumer test be limited to the sale of electricity. This is due to the unique nature of electricity which for federal income tax purposes is a tangible good that is produced, sold, resold, and consumed in an instant. We are not aware of any other good with this unique life cycle and therefore believe it is appropriate to limit guidance to the sale of electricity under these circumstances. We believe that this guidance will have broad application on a significant issue to many taxpayers in the electric industry, will reduce controversy and lessen the burden on taxpayers and the Service, promote the consistency of sound tax administration, and can be drafted in a manner that will be easily understood by taxpayers.

Additionally, this guidance would be consistent with the public policy of promoting renewable energy and the desire to promote additional investment in infrastructure that reduces the nation's carbon footprint.

Thank you for considering this request. If you have any questions or need further clarifications, please contact Philip Tingle at (305) 347-6536 or Martha Pugh at (202) 756-8368.

Sincerely,

Philip D. Tingle

Martha Groves Pough

McDermott Will & Emery
Washington, DC 

Cc:
Treasury
Krishna Vallabhaneni, Tax Legislative Counsel
Bryan Rimmke, Attorney-Advisor
Wendy Friese, Tax Policy Advisor
Tim Powell, Tax Policy Advisor

Chief Counsel
Holly Porter, Associate Chief Counsel, Passthroughs & Special Industries
John Moriarty, Associate Chief Counsel, Income Tax & Accounting
Christopher Kelley, Special Counsel, Passthroughs & Special Industries