Appeals court rejects taxpayer’s eligible basis for energy grant

Jul 31, 2018
Jul 31, 2018
0 min. read

Purchase price allocation required to determine basis for wind farms

The Federal Circuit Court of Appeals handed a victory to the IRS in United States v. Alta Wind I Owner Lessor C.1 The Federal Circuit held that the taxpayers in Alta Wind were required to allocate their wind farm facility purchase prices using the residual method set out in regulations under sections 1060 and 338 of the Internal Revenue Code. As the Alta Wind case illustrates, the residual method is broadly applicable, so taxpayers purchasing groups of assets generally should consider whether they are required to use it.

Consequences of tax basis allocation for section 1603 grants

The taxpayers in Alta Wind applied for cash grants under section 1603 of the American Recovery and Reinvestment Act (ARRA) for investingin renewable energy facilities, specifically six wind farms. The grant amounts were based on 30 percent of the basis of specified energy property placed in service between 2009 and December 2012. The eligible basis of specified energy property was the amount portion of the capitalized cost allocated to the tangible personal property of the eligible facility based on the definitions in sections 45 for the renewable electricity production tax credit (PTC) and in section 48 for the energy investment credit (ITC). Eligible property included only tangible personal property used in the production of renewable energy and other tangible property used as an integral part of the qualified facility. Eligible property did not include real property, transmission equipment or intangible assets.

In the case of the Alta Wind farms, the purchase price paid by the investors was significantly higher than the cost to construct the wind farms. This resulted in a dispute between the taxpayers and the IRS, where the taxpayers’ position was that the eligible basis for purposes of the section 1603 grant should be equal to each wind farm’s purchase price, minus the cost of any grant-ineligible tangibles such as interconnection fees. The IRS argued that these were “applicable asset acquisitions” as defned under section 1060 and the eligible basis therefore should be determined based on based on purchase price allocations using the residual method required under section 1060.

Residual method of purchase price allocation required to determine asset tax basis

Whenever a taxpayer acquires certain groups of business assets, it must allocate its purchase price using the residual method. Regulations apply the residual method to a broad class of asset acquisitions, including acquisitions of assets (i) the use of which would constitute an active trade or business, or (ii) to which goodwill or going concern value could under any circumstances attach.

The Federal Circuit noted that for the residual method to apply, there is no need to show that a transaction had actual goodwill or going concern value at the time of the transaction. Accordingly, it reversed the trial court’s (Claims Court’s) determination that the regulations did not apply because the wind farms were not yet operational when purchased.

The Federal Circuit addressed three factors that regulations cite as indicative of goodwill were present: (1) intangible assets; (2) an excess of the total consideration over the aggregate book value of the assets purchased; and (3) related agreeements between the purchaser and seller. In this regard the court noted that: (1) The taxpayers’ transactions included customer contracts under which a customer committed to producing the wind farms’ output and contracts providing transmission rights; (2) the purchase prices were well in excess of book value; and (3) the transactions involved related agreements, such leasebacks and indemnities.

Because the circumstances indicated that goodwill could under some circumstances attach to the assets purchased, the Federal Circuit remanded the case to the Claims Court to determine the proper purchase price allocation using the residual method. Although the Federal Circuit stated that the excess purchase price would be comprised of some combination of “turn-key value”, power purchase agreement (PPA) and goodwill it is leaving it up to the Claims Court to determine the allocation of excess purchase price among the eligible tangible turn-key value, and ineligible intangible PPA and goodwill.

Consequences of tax basis allocations are often important

Tax basis allocation of asset purchase prices has important consequences in many situations. For example, 100 percent bonus depreciation (also called “expensing”) applies to certain depreciable tangible property under section 168(k). For a taxpayer acquiring a group of assets, the purchase price allocated to assets eligible for the 100 percent bonus depreciation generally may be recovered immediately after the acquisition.

Purchase price allocations have continuing relevance in the area of tax credits. For example, even though the section 1603 grant program expired after 2012, sections 45 and 48 are still in effect for a few more years,2 and provide the ability to elect the ITC in lieu of the PTC.3 Accordingly, residual method purchase price allocations may be required for purchases of renewable energy property in order to compute the eligible basis for determining the ITC.


Alta Wind illustrates the broad applicability the residual method has to purchase price asset tax basis allocations. Taxpayers purchasing or selling groups of business assets should consult with their tax advisors regarding both making purchase price allocations and the allocations’ tax consequences.

1. Case numbers 2017-1410, 2017-1411, 2017-1412, 2017-1415, 2017-1417, 2017-1422, 2017-1423, 2017-1424 (D.C. Cir., July 27, 2018)↩

2. The credit rate for 30 percent ITC property, is phased down over the next several years so that the credit will no longer be available for property for which construction begins after 2021 or is placed in service after 2023 (except solar wich remains permanent after those dates at a 10 percent credit rate). The credit will also no longer be available for 10 percent ITC property after 2021 (except solar and geothermal will remain permanent). ↩

3. The PTC will no longer be available for qualifying property for which construction begins after 2017, except for wind for which the credit rate is phased down incrementally until the credit is no longer available for wind property for which construction begins after 2019.↩

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