The U.S. government has been cleared to conduct full discovery before it defends itself against wind farm developers suing for $226 million in unpaid grant money under the American Recovery and Reinvestment Act of 2009, an otherwise procedural decision that caught the attention of some tax lawyers for the level of detail the judge provided in apparently siding with some of the government’s more substantive claims in the case.
U.S. Court of Federal Claims Judge Thomas Wheeler on July 16 said he was satisfied that lawyers for the U.S. Treasury Department presented enough specific reasons for needing to collect more information from the operator of 20 Alta Wind farms in California. The government already has more than 10,000 pages of documents that were filed in applications for Section 1603 grants, but Treasury needs more information to address the “potential peculiarity” of the projects’ sale-leaseback agreements, Wheeler wrote in an eight-page opinion.
Based on those arrangements, in which an investor buys property and then immediately leases it back to the developer, the government reduced the grant awards because it determined that the cost basis in each of the transactions was overstated. According to SNL Energy data, the Alta Wind farms are operated by Terra-Gen Operating Co., which is not a party named in the suit.
“As the government explained, each agreement comprises multiple related transactions between the parties where the developer is both the seller and lessee,” Wheeler wrote. “This arrangement provides the opportunity to adjust terms to yield a higher purchase price without lowering the buyer’s targeted return on investment. However, during the application evaluations, Treasury did not review the complete set of transaction documents associated with each sale-leaseback agreement. As a result, the government needs discovery to evaluate the evolution of terms and to determine whether the final terms reflect an inflated purchase price above arm’s-length amounts.”
A number of cases involving Section 1603 renewable energy grants are moving through the U.S. Court of Federal Claims, and although Wheeler’s opinion was directed at a procedural discovery motion, it “previewed some of the key issues to be decided and some of the government’s and the court’s concerns,” lawyers at Hunton & Williams LLP wrote in a client alert. “In particular, at the government’s urging, the court bought into the notion that a sale-leaseback transaction may represent ‘peculiar circumstances’ and, therefore, merit special scrutiny.”
The opinion also suggests that plaintiffs in cash grant cases are unlikely to be awarded summary judgments, at least until the government has had full discovery, the firm added.
Wheeler “went too far” and “said too much” in his comments about sale leasebacks and “peculiar circumstances,” said Timothy Jacobs, a partner at Hunton & Williams. Given the amount of money at stake across the renewable energy industry, Jacobs added, a procedural opinion probably was not the appropriate context to weigh the substantive elements of the case.
Lee Peterson, a senior manager in CohnReznick LLP’s renewable energy group, agreed. “I, too, did find the detail in the procedural ruling odd. However, I’m not certain what the precedent of this will be, or whether it will matter as much as some might think for federal tax purposes,” since the case deals with cash grants and is not tax litigation, Peterson wrote in an email.
Under the American Recovery and Reinvestment Act of 2009, renewable energy developers were given the option of taking cash grants equal to 30% of the capital cost of a project in lieu of investment or production tax credits.
The Court of Federal Claims indicated previously that Treasury was not required to accept applications in which an applicant “miscalculated” or “misrepresented” the basis of its property, Hunton & Williams said in a 2011 note. However, Treasury has no discretion to reimburse an applicant for less than, or more than, 30% of the correct basis of the property, the firm added, citing a prior case.
Treasury has denied applications or reduced grant amounts to “a number of solar projects” on the grounds that the project costs were in excess of expected market value, Hunton & Williams said, adding that the department relied on unpublished, internal program policies that resulted in “substantial reductions in the applied-for amounts,” as well as “arbitrary, statistical information to evaluate the ‘cost basis’ of projects.”
Treasury has made up its own rules that “depart materially” from the tax rules otherwise applicable to the federal investment tax credit, Peterson said.
“For some months, we tax lawyers have been medicating our own ulcers in frustration because Treasury has been operating pretty much under its own, made-up definitions of ‘related property’ and ‘special circumstances,’ which absolutely do not follow the federal income tax law,” he said. “My pure guess is that the judge must have felt he needed (or just wanted) more information on the alleged circumstances that Treasury objects to here because he’s maybe considering whether the Treasury is even operating within its legal authority on this discrete point.”