This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: energy boost, part 1.
When the Inflation Reduction Act was signed into law in August of 2022, it brought changes to taxes and credits across the board. Now, we've taken a close look at some of those changes, like the corporate AMT (alternative minimum tax), IRS funding, and the excise tax on stock buybacks, which we'll link to in the show notes.
Today we're continuing our perusal of the IRA, this time taking an in-depth look at the energy credits. This episode is part one of a two-part series in which we'll cover what the new credits are, their major pieces of guidance, and what's still to come.
Here to talk more about this is Tax Notes contributing editor Marie Sapirie. Marie, welcome back to the podcast.
Marie Sapirie: Thanks. It's good to be back.
David D. Stewart: I understand you recently talked to someone about this. Could you tell us about your guest?
Marie Sapirie: I spoke with Tim Jacobs, a partner at Hunton Andrews Kurth. Tim practices federal income tax law with emphasis on tax controversies and renewable energy.
David D. Stewart: And what issues did he get into?
Marie Sapirie: We talked about the energy tax credits in the Inflation Reduction Act. The first part of our interview goes over the IRA basics. Where it came from, what it changed, and what's happened so far on the implementation front.
David D. Stewart: All right, let's go to that interview.
Marie Sapirie: Thank you, Tim, for joining me today to discuss the Inflation Reduction Act's energy tax credits and the large volume of guidance, including proposed regulations that the IRS and Treasury have issued over the past 14 months to implement the new law.
Timothy L. Jacobs: Marie, great to be here and happy for the invite. Great to speak on a subject that I know you've been working on and I've been working on now for almost a year and, I think, three months.
Marie Sapirie: The IRA has dramatically changed the energy tax credit landscape. To start, would you tell us about how the IRA began, namely how the legislative process went for this bill and also the results of that process. What were the major changes that the new law made?
Timothy L. Jacobs: I would say that the election of President Biden and also the Democratic Congress, I think, was probably the initial start of the IRA.
It had quite a history, in some parts tortured, and some parts it took a long time to get to where it got in the end last August. But it really started out, I believe, [as] some initial bills. I think the Green Act at the early part of 2021 — there were some other various bills that were introduced.
And what we see is a confluence of various technologies, which I think is what makes this enactment unique. You have new technologies; you have old technologies; you've got extensions. But basically from 2021, you saw these various bills coming in from various senators, congressmen, Senator [Ron] Wyden [D-Ore.], and then you see the Build Back Better legislation.
I can remember very distinctly I was with my parents at the time that the original House, I believe, reconciliation bill dropped, and I think it was October, two years from pretty much this day.
And so the House reconciliation bill moved throughout the latter part of 2021. Everybody was excited. And then they didn't have the votes. Senator [Joe] Manchin [III, D-W.Va.] was holding out. Senator [Kyrsten] Sinema [I-Ariz.], I believe, was holding out at that time. They did not have the votes to pass Build Back Better. And one of the things we're going to talk about here, I believe, will be what we call direct pay, but it's called elective payment. Treasury calls it elective payment, but essentially the entirety of the Build Back Better legislation. The IRA is supercharged, but the Build Back Better was even bigger.
But it was all driven by a direct-payment mechanism, which was very close to essentially grants, indifferent to tax liabilities and such and so forth. Build Back Better essentially died towards the end of 2021. End of 2022, there was some noise here and there. We all got excited maybe one day, and the next day, we were not so excited.
And then I think pretty much everybody in the renewable space, we fell silent through the first part of 2022, the first half. Worried that there would not be any legislation on the green side and renewable side. And then all of a sudden on July 27, there's this announcement that comes out. Senator Manchin and Senator [Charles E.] Schumer [D-N.Y.] had come to a deal on the Inflation Reduction Act.
And one of the major switches that we saw was we see the direct-payment centralization and central focus of the Build Back Better legislation going over to transferability. And somebody that has been in the tax world and also on the controversy side, there was always this expression that "you cannot sell tax credits, you cannot sell tax credits." And in fact, I've been involved in litigation in the circuit courts and in the Tax Court and elsewhere on that very issue. But what IRA did, the switch was going from direct pay to transferability, to where now the central focus is actually on selling tax credits, which is very interesting.
On August 16, 2022, after about almost record time of moving legislation from July 27 through to August 16, it only took a couple of weeks and we end up with the Inflation Reduction Act. And what we see in this enactment is many, many new credits, many, many new technologies, and the extension of formerly wind, solar, the traditional section 45, section 48.
And now you see technology-neutral credits coming into effect beginning in 2025. Pretty much across the board. You can look at the numbers: I think we're up to AA; we're in the doubles now. There was 48A, 48B, and now you're double digits. The number of credits that are in this IRA, I think, are extraordinary, and we've probably only seen this level of devotion to clean energy and renewable energy, I think, three times in my lifetime.
One was the Energy Policy Act of 2005, then you had the American Recovery and Reinvestment Act of 2009, which was grants, the [section] 1603 grants. And then you have the IRA. The IRA makes those programs look very small.
Marie Sapirie: Once the IRA was enacted, the guidance process began, starting with a string of notices with requests for comment in fall 2022 and then the release of other notices and proposed regulations and other guidance. What are the major pieces of guidance so far?
Timothy L. Jacobs: I think the major pieces of guidance so far — and I actually remember it was in or about October 3, there was a 30-day comment period. There was an initial release of IRS notices requested comments to be filed by November 4, 2022.
And those included manufacturing credits, which were 45X and 48C. There were the bonus credits, which were prevailing wage domestic content. There was also the tech-neutral credits, the 48E, and 45Y, as well as the old 45 production tax credit or 48 investment tax credit. And then you had also the direct pay and transferability.
Those were the first set of comments that were due on November 4, and then I believe on November 3, the day before we got a surprise, while we were working on our comments, there was a request for comments on hydrogen, which is a new tax credit under 45B, and then also the former carbon sequestration credit under 45Q. There was also a comments project there.
What have we seen so far? Well, we have initial guidance on domestic content in Notice 2023-38 on the bonus credit. A lot of the comments that were filed in November of last year were related to domestic content bonus credit, and a lot of the stakeholders input with Treasury and DOE, Department of Energy, and the White House have been directed towards domestic content. That is a big one. It is a notice of intent form at this point, a notice of intent to issue proposed regulations. Proposed regulations have not been issued or domestic content at this point.
Prevailing wage and apprenticeship: This is a new concept in the tax world. There was an original issuance of notice, IRS notice, in November of last year, which is [Notice] 2022-61. And then very recently on August 30, we see the actual proposed regulations for prevailing wage and apprenticeship.
Prevailing wage and apprenticeship, of course, it's sprinkled throughout all — many of the provisions we see in the Inflation Reduction Act actually have the labor provisions in there, which we call them PWA (prevailing wage and apprenticeship). The energy community's bonus credit, that has been issued in the form of an IRS notice at this point, or a notice of intent to issue proposed regulations.
There have been actually three notices issued with respect to the energy community bonus credit. There is the low-income community bonus credit, which came out in the form of an IRS notice, but then also moved to proposed regulations, I believe, in June of this year.
The two big ones that we were looking for in terms of tax credit monetization, those were the [section] 6417 elective payment proposed regulations and also the transferability, the elective transfer proposed regulations, which came out this summer. And the comment period through the August time frame. Those moved directly to proposed regulations unlike some of the other provisions which were in notice form.
Where we stand right now is, I think those are some of the major items. And then you also had the initiation of the section 48C, qualifying advanced energy project credit program being launched earlier this year. I believe it was Notice 2023-18 and then it was updated in [Notice 2023]-44.
That program kicked off in the initial round one concept papers — they were due at the end of July; there was an extension, I believe to August 3. Right now, most folks are waiting for letters of encouragement or discouragement from the review by the Department of Energy in that round one program.
The comments that I understand from the assistant secretary indicated that they have $4 billion to allocate, $1.6 billion of which are for designated 48C energy communities with closed coal plants or mines. They received $42 billion in terms of concept papers seeking $42 billion and $11 billion for those designated energy communities. So that's a 10-to-1 ratio in terms of what folks are seeking in terms of credits and what can be allocated in this first round.
The allocation process would then move towards an application process towards the end of this year. And then the Notice 2023-44 says that the IRS will issue its certification, or not issue its certification, or an allocation for taxpayers by March 31, 2024.
I believe those are what I would say are the principle pieces of guidance that have been issued. There's also electronic vehicle guidance that was due to be issued on December 31 of last year. Treasury started out with what I believe has been called a white paper and then moved to proposed regulations in March this year. And I believe at this point, we're waiting on to see final regulations on the section 30D clean vehicle credit.
Marie Sapirie: And what guidance are taxpayers still waiting on?
Timothy L. Jacobs: I think that the major items right now that we will see before the end of the year, and I think we're on the cusp of seeing this guidance, which is the advanced manufacturing production credit under section 45X.
Treasury has indicated that that guidance will be issued before the end of the year, and we fully expect it will be issued in the next short period. There is also hydrogen credit under section 45B; under the statutory provisions of the IRA, Congress had directed Treasury to issue guidance by the one-year anniversary, which was August 16. Treasury did not do that.
Secretary [Janet] Yellen indicated that the guidance was not completed, and it would be issued at some later point in time after the one-year anniversary. We would expect to see the hydrogen guidance issued sometime before the end of this year and maybe towards, actually in December of this year.
There is also, we understand, an ongoing project under section 48 with the investment tax credit that is actually, it's a regulatory project that was started even before the Inflation Reduction Act.
And anybody that has been involved in section 48 knows that the regulations for the investment tax credit, some versions go back into this as early as the late '60s. And those regulations have not been updated in many, many years, although they have been reused and cited to in terms of the investment tax credit [reg. sections 1.148-1] and 148-9, which lays out some principles for solar energy property, etc.
But there was an ongoing regulatory project for the investment tax credit. Inflation Reduction Act passes, and section 48 now includes not only some new energy property definitions, but importantly includes energy storage technology. So energy storage technology, for example, would include battery energy storage systems. It would include pump storage, hydropower; it includes hydrogen storage property.
That is also guidance that we would expect to be issued before the end of the year. I believe that it's going to be in the form of proposed regulations. So I think those are the three principle pieces of guidance that in the near future will be issued: 45X manufacturing, 45B hydrogen, and 48 investment tax credit.
Marie Sapirie: Let's switch now from implementation to enforcement. The IRS isn't necessarily starting from scratch in developing its approach in this area. Would you give us an introduction to the section 1603 program and how that history could be relevant to the IRA credits?
Timothy L. Jacobs: Yes. Let me just back up a second and give you a little bit of my experience. I've spent probably the last 18 years in the renewable energy space, and that's not only in the technical space, but I also am involved in the controversy space. I have litigated a number of cases in the Court of Federal Claims and, as I mentioned earlier, in the Tax Court, related to tax credits and renewable tax credits specifically.
One of the areas that I was heavily focused on in the Court of Federal Claims was the section 1603 grant program and the litigation that came out of that. Section 1603 was enacted in 2009. It followed in the wake of the so-called Great Recession, or the financial crisis that occurred in 2007 and 2008.
What had occurred was, at that point in time in 2008 and early 2009, is President Obama is elected, there is a green energy agenda at the top of the list, but we have a financial crisis ongoing that is centered heavily on financial institutions, which financial institutions are what we call tax equity.
They are the investors in the traditional partnership structures involving renewable energy tax credits, solar, wind, what have you. And so at that point in time, in early 2009, you see pretty much every financial institution under enormous stress or no longer in existence. And so the mechanism to fix that was section 1603, or in part was section 1603. It was to provide a direct grant in lieu of the tax credit. This is a grant that was paid by the Treasury Department, and I say Treasury Department proper.
The Internal Revenue Service was actually not involved in the 1603 program directly. This was a program that was actually administered by the office of the Assistant of Fiscal Affairs within the Treasury Department, and participants with clean energy, wind, solar, residential solar, were some of the largest energy credits that were involved.
They would actually make applications to the Treasury Department, and it was an application for grants. The original price tag on that, by the way, was $6 billion. That was what the original estimates were, what became the American Recovery and Reinvestment Act in the 1603 program. And what actually happened was it became oversubscribed; it actually ended up being about $30 billion.
1603 was a big deal for clean energy and development of solar and wind projects in the 2009 through 2014 period. Essentially there was grants being paid to parties such as developers directly who did not have tax liabilities and were not traditional investors themselves in projects.
What happened and why it's relevant and why 1603 is relevant here is the application process for the direct payment, elective payment under 6417 and the transfer election under 6418, the pre-registration process that's being followed or that was laid out in the proposed regs for those two code sections and then also in the temporary regs that were issued earlier this year during the summer, resemble in many ways the application process for section 1603, and it involved a scenario where you provided a listing of information that the Treasury Department had described, such as the location of the project.
You would provide basis information; you would provide certain specified contracts. Even though it was administered at the Treasury level and not by the IRS, the tax rules applied. The traditional tax rules were supposed to be applied. And indeed, I think the legislative history indicated that the rules would mimic the tax rules. In the process of this application process, it was by statute supposed to be 60 days from application to payment.
And during the early days of the 1603 program, what we saw was a need, given the state of the economy and also green energy goals of the administration was to get dollars in the hands of successful projects, projects that had been built, as soon as possible.
And so that 60-day period was put in place for that purpose. And by the way, we're in that same posture today: Although we're not in necessarily a financial crisis, there is an impetus right now to get money into the hands of the proper parties in order to allow not only projects to be built, but also additionality, which is to allow investments to be turned over into new investments in green energy and put those dollars to work.
Originally, the 1603 program did start out that way, and then actually [the Treasury Inspector General for Tax Administration] would come in after the fact, I can remember very distinctly. They would do the audits of projects after they paid the grants out. That changed. Why it changed was the oversubscription that I mentioned earlier, which was $6 billion versus $30 billion.
The dollars started to move up in terms of the number of projects, and the number of applications, and the number of dollars or dollar figures that were involved. And then there were also, I would say sparingly, but enough, there were fraudulent applications that were filed that triggered a reaction. And there were not that many, but the reaction was enough to create a political reaction together with something that was actually not involved, or did not involve [a] 1603 grant, but did involve the DOE loan guarantee, which was the Solyndra issues.
Solyndra received the DOE loan guarantee and then failed, both, I believe Solyndra and then also some evidence of fraud here and there, and then also the increasing dollars triggered a sensitivity in the Treasury Department to take a very close look pretty much across the board at applications coming in.
And what we saw was instead of getting paid in 60 days, the larger projects, the more intensive projects, were getting paid not in 60 days, but if they got paid, it took years in some cases to be paid. And the way the Treasury Department looked at that was, until you actually answered all the questions that Treasury had, that 60-day clock did not start on payment, that 60-day statutory clock did not start.
The major areas that ultimately went to litigation involved qualifying property. What is qualifying property? Pretty much everything under 1603, including the traditional production tax credits under 45 and the investment tax credits under 48.
The rules were all turned on cost basis, the traditional section 1012, 1016, cost basis rules and the old investment tax credit basis rules. When you look at those basis rules, one issue was valuation. That was becoming an increasingly focal point of Treasury that ultimately ended up in litigation. And that litigation, which I was involved in, actually continued and actually continues to this very day.
There are still cases that are live in the Court of Federal Claims that involve what were described as valuation issues or intangible asset issues. And on the other side, as I mentioned, there were qualified energy property. What is the property that is eligible to receive an ITC, an investment tax credit, but grant their following, which would be, for example, drainage facilities at a large solar farm. [The] question was whether drainage facilities were land, [and] therefore non-depreciable or not integral to the solar farm or otherwise eligible and therefore receiving a grant?
But then you get into the valuation issues and intangibles. One question or one focal point — many, many cases that were brought forward in the Court of Federal Claims involved whether a power purchase agreement transferred by a developer to ultimately a taxpayer vehicle, whether it's partnership or otherwise; whether that power purchase agreement and certain other contracts such as an interconnection agreement, whether those constitute an intangible asset and [are] therefore ineligible for both the ITC and hence the grant.
Whether the valuations or basis numbers should have been allocated or reallocated, contrary to how the parties had negotiated the purchase price and what have you. Ultimately, those cases ended up in the federal circuit and a case called Alta Wind, which is actually still ongoing, was decided and introduced section 1060 into the equation, which is allocation of purchase price in the context of a sale of trade or business.
Again, those cases, they were still alive. As of several years ago, there were multiple cases. Now I think it's down to just a few, but those cases are still ongoing in the Court of Federal Claims.
And some recent decisions of note, such as the Alta Wind case, there was an order issued — I think it came out in June of this year — that actually addressed whether the incremental consideration paid on account of the grant itself, whether that was an intangible asset and whether indemnities were an intangible asset. Those are issues that the industry is looking at right now and could also spill over into the IRA area because of the relationship with the investment tax credit issues.
David D. Stewart: That's it for part one of this interview. Next week, in part two, you'll hear more about the domestic content rules and prevailing wage and apprenticeship requirements.
And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?
Paige Jones: Thanks, Dave. In Tax Notes Federal, Phyllis Horn Epstein examines case law involving the reasonable-cause and good-faith defense against penalties. Brian Deese and David Kamin identify core principles for evaluating proposals to address the tax cuts expiring at the end of 2025.
In Tax Notes State, four Bass, Berry & Sims practitioners examine a recent Tennessee Court of Appeals decision, which could help taxpayers determine if they fall under the manufacturing sales tax exemption. Four Montgomery Purdue practitioners analyze the Estate of Purdue case and similar pro-taxpayer family partnership cases.
In Tax Notes International, three Cyril Amarchand Mangaldas practitioners explain changes to the Indian Angel Tax. Fadi Shaheen floats the proposition that from a U.S. tax perspective, the [undertaxed payments rule] is the equivalent of a 100 percent withholding tax on a deemed distribution by the UTPR entity.
In featured analysis, Marty Sullivan wonders if a proposed Trump corporate rate cut could raise revenue.
And finally on the opinions page, Ryan Finley explains why the appeal in the Medtronic tax case matters.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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