Last week the U.S. Court of Federal Claims issued its opinion in Alta Wind I Owner Lessor C et. al. v. United States (“Alta Wind”) (available here). The court awarded the plaintiffs over $200 million in damages relating to underpaid Section 1603 grants for six different wind projects, five sold in sale-leaseback transactions and one sold in an outright sale to an unrelated party. As described below, the opinion addresses a number of fundamental issues relating to the determination of qualifying basis for Section 1603, ITC, and depreciation purposes.
In Alta Wind the government challenged the basis determinations under two distinct theories, both of which the Treasury Department has commonly used to justify reductions in Section 1603 grants. Under the first theory (the cost segregation theory) the government argued that more of the applicants’ basis (in particular, the excess of the purchase price over the seller’s cost) should have been allocated to intangible property, which is ineligible for Section 1603 grants, the ITC, and 5-year MACRS depreciation. Under the second theory (the “peculiar circumstances” theory), the government argued that there were peculiar circumstances in the deals (including other related party transactions) that required concluding the basis was less than the nominal purchase price. The court rejected both theories.
In Alta Wind the court reached the following conclusions:
- Goodwill and Going Concern Value. No goodwill or going concern value could attach to the Alta facilities because, among other things, the facilities had not begun selling power under the PPAs. The opinion seems to leave open the argument that the holding should still apply even immediately after the facilities had begun selling power under the PPAs.
- Location Value. Although the location of the facilities added to their value, the added value was part of the basis of the tangible assets rather than a separate intangible asset. The opinion cites TAM 9317001, which concludes that no part of a satellite transponder’s purchase price related to an intangible asset.
- Turnkey Value. The Alta facilities had turnkey value, which the court described as “value a facility has when it is ready for immediate use after purchase.” The turnkey value was part of the basis of the tangible assets rather than a separate intangible asset. The court cited TAM 200907024 for the proposition that “case law supports a conclusion that it is appropriate to value interrelated assets in the aggregate and that the synergistic value of a collection of assets is attributable to those assets rather than a conceptually distinguishable goodwill or going concern value element.”
- PPA Value. Because each PPA related to a specific wind facility and was not transferable or assignable, any value in the PPAs was part of the basis of the tangible assets rather than a separate intangible asset. The court appears to have adopted the reasoning of Private Letter Ruling 201214007 (available here), which was later revoked by Private Letter Ruling 201249013 (available here).
- Pro Rata Allocations Were Reasonable. The plaintiffs’ purchase price allocation method was reasonable. The plaintiffs had allocated costs using a variation of a method used in virtually all cost segregation studies, according to which indirect costs are allocated among the assets pro rata in accordance with the direct costs of various categories of eligible and ineligible property.
- Purchase Price is Basis. There were no “peculiar circumstances” that required ignoring the purchase price as the cost of the assets in the hands of the purchasers for basis purposes. The government had argued that the sale leaseback transactions, which included prepayments of rent by the lessee, created peculiar circumstances. However, the court noted that the government presented no evidence that the parties had adjusted any of the sale leaseback pricing in order to inflate the purchase price. The court concluded that “there is simply no evidence that [the prepayments of rent] inflated the purchase price in any way.” The court also concluded that the Section 1603 grant indemnities, pursuant to which the seller agreed to indemnify the buyer for any shortfalls in the Section 1603 grant, did not create “peculiar circumstances” that required using something other than the purchase price as basis.
Alta Wind represents a significant setback for the government in its attempts to challenge determinations of basis for purposes of the Section 1603 grant, ITC, and depreciation. The Alta Wind conclusions on the cost segregation theory (concerning goodwill and going concern value, location value, turnkey value, and PPA value) would appear to be widely applicable. In particular, Alta Wind would appear to foreclose many of the obvious government challenges to a taxpayer who has acquired a project from an unrelated party in an arm’s-length transaction, even when the purchase price represents a significant premium over the cost to construct the project. In addition, the court seems to put a high burden on the government’s assertion of the “peculiar circumstances” theory by requiring that the court should disregard the purchase price as the basis only if “peculiar circumstances have highly inflated the purchase price.” (Emphasis in original.)