In a memorandum released on June 12th, the IRS confirms that the safe harbor for Section 45 wind energy production tax credit (PTC) transactions set forth in Revenue Procedure 2007-65 does not apply to partners or partnerships with Section 48 energy credits, such as partnership flip transactions involving the solar investment tax credit (ITC).
This IRS memorandum, Chief Counsel Advice (CCA) 201524024, has generated a flurry of interest in the solar community. Overall, the CCA is of interest largely because it is a new statement by the IRS reaffirming what Revenue Procedure 2007-65 has always expressly provided, namely that the Revenue Procedure’s safe harbor only applies to Section 45 PTC transactions.
Since its issuance in 2007, the solar community has been relying on the Revenue Procedure’s wind PTC safe harbor as an indicator of the types of terms that the IRS may find acceptable for solar ITC partnership flip transactions. To that end, solar ITC deal structuring has given deference to the guidelines set forth in the Revenue Procedure. The CCA reaffirms that satisfying the Revenue Procedure’s safe harbor will not ensure that a solar ITC transaction will be respected by the IRS.
The CCA analyzes an aggressively structured solar pay-go transaction, with terms that are beyond the norm of most solar ITC transactions (and that also fail to satisfy many of the wind PTC safe harbor requirements under the Revenue Procedure). As such, the IRS’s factual analysis in the CCA does not provide new insights into how solar ITC transactions should be structured.
Given the lack of direct IRS guidance for solar ITC deals, it is expected that the solar community will continue to view the Revenue Procedure’s wind PTC safe harbor as informative. Indeed, in the CCA itself, the IRS goes on to analyze the solar ITC partnership flip transaction by applying the Revenue Procedure’s safe harbor guidelines. Ultimately, however, the CCA indicates (as has always been the case) that solar ITC transactions must be structured with terms that satisfy fundamental principles of partnership tax law.