Revenue Procedure Establishes Bright-Line Guidance for Developers and Investors
The Internal Revenue Service has issued Revenue Procedure 2007-65, establishing a safe harbor provision under which the IRS will respect the allocation of IRS Code Section 45 wind energy production tax credits by partnerships. The safe harbor applies to partnerships between a project developer and one or more investors in which the partnership owns and operates the qualified energy facilities and is effective for transactions entered into on or after November 5, 2007.
The revenue procedure is intended to provide guidance in lieu of the IRS issuing individual rulings under Subchapter K (as indicated in Notice 2006-88, I.R.B. 2006-42) to taxpayers establishing or participating in wind energy partnerships. As long as the partnership meets each of the safe harbor requirements of Revenue Procedure 2007-65, the IRS will not further scrutinize the allocation of claimed credits.
Failure to meet any of the safe harbor requirements does not automatically preclude partnerships from successfully claiming and allocating wind energy credits; however, the IRS will examine the partnership and determine on an individual basis whether the allocation of credits under Section 45 will be respected. Therefore, compliance with the safe harbor will greatly enhance investor certainty about the allocation of wind tax credits.
Revenue Procedure 2007-65 applies only to partners or partnerships with Section 45 production tax credits from wind and does not apply to any other tax credits.
Safe Harbor Requirements
To qualify for the safe harbor, all of the following key requirements must be met:
- Source of investment return. The partners’ investment return is reasonably anticipated to be derived from both Code Section 45 credits and participation in operating cash flow.
- Minimum partnership interest. The developer must have a minimum one percent interest in each material item of partnership income, gain, loss, deduction and credit at all times during the existence of the partnership. During the period of ownership, each partner must have a minimum interest equal to 5 percent of his investment in partnership income and gain for the taxable year for which the investor's percentage share of income and gain will be the largest, as adjusted for sales, redemptions or dilution of its interest.
- Commencement of ownership. A partner must make a minimum unconditional investment in the partnership on or before the later of (a) the date the facility is placed in service, or (b) the date an interest in the partnership is acquired.
- Unconditional capital contributions. At least 75 percent of the sum of the fixed capital contributions, plus reasonably anticipated contingent capital contributions, to be invested in the partnership must be fixed and determinable obligations that are not contingent in amount or certainty of payment.
- Fair market purchases. No one connected with the partnership, including related parties, may have a contractual right to purchase the facility, any property included in the facility, or an interest in the partnership at a price less than its fair market value determined at the time of exercise of the contractual right to purchase. In addition, the developer (or any related party) may not have a contractual right to purchase the facility or an interest in the partnership earlier than five years after the qualified facility is first placed into service.
- Purchase and sale rights. The partnership may not have a contractual right to require any party to purchase the facility or any property included in the facility, excluding electricity, from the partnership. A partner may not have a contractual right to require any party to purchase its partnership interest.
- Developer and partner independence. No person may guarantee the partners the right to any allocation of the credit under Code Sec. 45. In addition, neither the developer, nor any related party, may lend a partner funds to acquire an interest in the partnership.
- Credit allocations. The Code Sec. 45 credit must be allocated in accordance with Reg. §1.704-1(b)(4)(ii).
Additional requirements and details are further explained in Revenue Procedure 2007-65.
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