Solar Finance: Considerations for Tax-Exempt Entities and Government Organizations

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Solar Finance Considerations for Tax-Exempt
Entities and Government Organizations

• James F. Duffy, Esquire
• Nixon Peabody LLP
• 100 Summer Street
• Boston, MA 02110-2131
• [phone]
• jduffy_at_nixonpeabody.com

FINANCING SOLAR ENERGY IPED, INC. Alexandria,
Virginia May 21-22, 2009
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Investment Tax Credits

• The principal federal incentive for the
  development of solar facilities remains the
  investment tax credit (energy tax credits under
  Section 48 of the Internal Revenue Code), known
  as ITCs
• But tax-exempt entities and governmental
  organizations generally do not pay federal income
  taxes

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Treasury Grants

• Section 1603(g) of the American Recovery and
  Reinvestment Act of 2009 (ARRA) specifically
  provides that the Treasury grants which are
  available in lieu of ITCs cannot be made to
  tax-exempt entities, to governments or
  subdivisions, agencies or instrumentalities
  thereof, or to any partnership or other
  pass-through entity any partner or equity holder
  of which is such an entity

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Section 168 Elections

• So, without being able to utilize ITCs or claim
  Treasury grants, how does a tax-exempt entity or
  governmental organization finance a solar
  facility?
• One mechanism is to set up a subsidiary and elect
  under Section 168(h)(6)(F)(ii) of the Internal
  Revenue Code to have the subsidiary treated as a
  for-profit entity

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Section 168 Elections

• Check to see if having a for-profit subsidiary is
  allowed under local law for governmental
  organizations or under the organizational
  documents of a tax-exempt entity
• Any ultimate collapse of the for-profit
  subsidiary into the tax-exempt entity will be a
  taxable event (deemed sale at fair market value
  with basis of zero by then), so careful tax
  planning is required

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CREBs

• Clean Renewable Energy Bonds (CREBs) may be an
  option
• Under Section 54 of the Internal Revenue Code,
  CREBs were designed to provide an incentive for
  governmental bodies (including Indian tribes) and
  cooperative electric companies to produce
  renewable energy
• CREBs were addressed in detail on a previous
  panel on Thursday morning

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Tax-Exempt Use Property

• Any leasing of the solar facility to a tax-exempt
  entity will cause the facility to be deemed
  tax-exempt use property under Section 168(h)(1)
  of the Code
• Tax-exempt use property will not be eligible for
  the ITC
• This does not mean that you cannot lease a
  rooftop from and sell solar electricity to a
  tax-exempt entity

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Section 7701

• Section 7701(e)of the Code deals with the
  classification of a contract as either a service
  contract or a lease
• In the case of a solar company leasing space from
  a tax-exempt entity and selling solar electricity
  to that entity, the preferred treatment is as a
  service contract, not as a lease of the facility

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Section 7701

• Section 7701(e)(1) provides a facts and
  circumstances test as to whether a contract which
  purports to be a service contract is to be
  treated as a lease of property, taking into
  account all relevant factors, including those
  listed in that Section of the Code

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Section 7701

• The facts and circumstances listed in Section
  7701(e)(1) include whether or not the service
  recipient has physical possession of the property
  or controls the property, the service recipient
  has a significant economic interest in the
  property or bears the economic risk of diminished
  receipts or increased expenditures if there is
  nonperformance under the contract, the service
  provider uses the property only to provide
  services to the service recipient, and the total
  contract price does not substantially exceed the
  rental value of the property for the contract
  period

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Section 7701

• In contrast to the facts and circumstances test
  of Section 7701(e)(1), Sections 7701(e)(3) and
  (4) provides a safe harbor for certain contracts,
  including those with respect to the sale to the
  service recipient of electricity produced a solar
  facility
• As long as none of the circumstances listed in
  Section 7704(e)(4) is present, the contract will
  be deemed to be a service contract

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Section 7701

• In order to qualify under Section 7701(e)(4), the
  service recipient (or a related entity) cannot
• Operate the facility,
• Bear any significant financial burden if there is
  nonperformance under the contract (other than for
  reasons beyond the control of the service
  provider),
• Receive any significant financial benefit if the
  operating costs of the facility are less than the
  standards of performance or operation under the
  contract, and
• Have an option to purchase, or be required to
  purchase, all or a part of the facility at a
  fixed and determinable price other than for fair
  market value
• 12560510.1

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