Close
Close

Court holds for IRS in ARRA grants case

RFP
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.”

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

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

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

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.