Court holds for IRS in ARRA grants case

Tax Hot Topics newsletter The Court of Federal Claims held in Ampersand Chowchilla v. United States, No. 14-841C (Nov. 9, 2020) that the placed-in-service date of the taxpayer’s new open-loop biomass facility was before the statutory period for the grants provided by the American Recovery and Reinvestment Act (ARRA).

ARRA provided grants to taxpayers that placed in service certain specified energy property between Jan. 1, 2009, and Dec. 31, 2011. In this case, the issue was whether the facility should be placed in service during the specified statutory period to qualify for grants under ARRA. Treas. Reg. Sec. 1.46-3(d)(1)(ii) provides that a facility is placed in service when it is “in a condition or state of readiness and availability for a specifically assigned function.”

In 2007, CalBio purchased an open-loop biomass facility that had been inoperable since 1995. The facility required refurbishment to return to operating at the capacity specified per the master power purchase and sale agreement (PPA) held with its customer. Due to the complicated nature of the refurbishment, CalBio was only able to operate at a reduced capacity beginning in 2008. In 2010, because of the financial issues stemming from the reduced output and environmental violations, CalBio was forced to cease its operations, and the taxpayer acquired the facility. In 2011, the taxpayer completed the refurbishment and became compliant with the environmental regulations, which allowed it to operate at its full capacity and meet the terms of the PPA.

In applying for the grant under ARRA, the taxpayer argued that the facility was placed in service in 2011 because the power output specified in the PPA was the “specifically assigned function” of the facility. In denying the taxpayer’s request, the court applied the five-factor test under Oglethorpe Power Corp., et al. v. Commissioner, T.C. Memo. 1990-505, and held that the facility at issue was placed in service in 2008. Although all five factors favored the government, the court considered three in detail: necessary permits and licenses; critical tests necessary for proper operations; and daily or normal operations.

The Court found that the facility had the necessary permits to operate, was not in a state of pre-operational testing and was able to conduct daily operations. Therefore, the facility was “ready and available to perform [its] specifically assigned function – to produce and sell electricity – in 2008 …” when the facility “began selling electricity, operated under their PPAs, and generated approximately $2.26 million in revenue.”

Sharon Kay
Washington National Tax Office
T +1 202 861 4140

Caleb Cordonnier
Washington National Tax Office
T +1 202 521 1555

Jason Seo
Senior Associate
Washington National Tax Office
T +1 202 521 1556

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