Alta Wind I Owner Lessor v. United States

• Citation: 897 F.3d 1365
• Decision Date: 27 July 2018
• Docket Number: 2017-1412,2017-1410,2017-1422,2017-1411,2017-1423,2017-1417,2017-1424,2017-1415
• Parties: ALTA WIND I OWNER LESSOR C, Alta Wind I Owner Lessor D, Alta Wind II Owner Lessor A, Alta Wind II Owner Lessor B, Alta Wind II Owner Lessor C, Alta Wind II Owner Lessor D, Alta Wind II Owner Lessor E, Alta Wind III Owner Lessor A, Alta Wind III Owner Lessor B, Alta Wind III Owner Lessor C, Alta Wind III Owner Lessor D, Alta Wind IV Owner Lessor A, Alta Wind IV Owner Lessor B, Alta Wind IV Owner Lessor C, Alta Wind IV Owner Lessor D, Mustang Hills, LLC, Alta Wind V Owner Lessor A, Alta Wind V Owner Lessor B, Alta Wind V Owner Lessor C, Alta Wind V Owner Lessor D, Plaintiffs-Appellees v. UNITED STATES, Defendant-Appellant
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

897 F.3d 1365

ALTA WIND I OWNER LESSOR C, Alta Wind I Owner Lessor D, Alta Wind II Owner Lessor A, Alta Wind II Owner Lessor B, Alta Wind II Owner Lessor C, Alta Wind II Owner Lessor D, Alta Wind II Owner Lessor E, Alta Wind III Owner Lessor A, Alta Wind III Owner Lessor B, Alta Wind III Owner Lessor C, Alta Wind III Owner Lessor D, Alta Wind IV Owner Lessor A, Alta Wind IV Owner Lessor B, Alta Wind IV Owner Lessor C, Alta Wind IV Owner Lessor D, Mustang Hills, LLC, Alta Wind V Owner Lessor A, Alta Wind V Owner Lessor B, Alta Wind V Owner Lessor C, Alta Wind V Owner Lessor D, Plaintiffs-Appellees

v.UNITED STATES, Defendant-Appellant

2017-1410

2017-1411

2017-1412

2017-1415

2017-1417

2017-1422

2017-1423

2017-1424

United States Court of Appeals, Federal Circuit.

Decided: July 27, 2018

Steven Rosenbaum, Covington & Burling LLP, Washington, DC, argued for plaintiffs-appellees. Also represented by Dennis Auerbach, Margaret Brennan, Thomas Brugato.

Andrew M. Weiner, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellant. Also represented by David A. Hubbert, Jonathan S. Cohen, Gilbert Steven Rothenberg, Francesca Ugolini.

Before Newman, Dyk, and Chen, Circuit Judges.

Dyk, Circuit Judge.

In order to encourage the construction of alternative energy production facilities, Congress enacted section 1603 of the American Recovery and Reinvestment Act (ARRA) of 2009, Pub. L. No. 111-5, 123 Stat. 115, 364–66 (set forth at I.R.C. § 48note), which provides a cash grant to entities that "place[ ] in service" certain renewable energy facilities, id. § 1603(a). The amount of the grant is determined using the basis of the tangible personal property of the facility (with certain exclusions). Id. § 1603(b)(1).

Here, plaintiffs, the owners of the Alta windfarms, placed into service various windfarm facilities and applied for approximately $703 million in section 1603 grants. The government awarded grants in the amount of approximately $495 million. Plaintiffs brought suit in the Court of Federal Claims ("Claims Court"), seeking approximately $206 million in additional grant payments, and the government counterclaimed, asserting that it had overpaid plaintiffs in the amount of $59 million. The difference in the amounts was attributable solely to different methods for calculating basis. The Claims Court found in favor of plaintiffs, approving their method of basis calculation and rejecting the government's argument that basis must be calculated using the residual method of I.R.C. § 1060, which applies in the case of an acquisition of a trade or business. The government argues that, under the residual method, the overall purchase price must be allocated on a waterfall basis among several categories of assets, some grant-eligible and some not, resulting in a lower basis in eligible property than plaintiffs' method.

On appeal, we hold that the Claims Court erred in re-fusing to utilize the residual method of I.R.C. § 1060 and in excluding the testimony of the government's expert witness as to the appropriate basis calculation. We vacate and remand.

BACKGROUND

I

Congress has long used tax incentives to promote investment in new renewable energy projects. Initially, these incentives came in the form of tax credits—specifically the production tax credit ("PTC") under I.R.C. § 45 and the investment tax credit ("ITC") under I.R.C. § 48. It was often the case, however, that renewable energy investors could not directly monetize these tax credits because "the size of tax benefits available for renewable energy investors ... exceeded the investor's tax liability." Phillip Brown & Molly F. Sherlock, Cong. Research Serv., R41635, ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy 1 (2011). For this reason, it became "common industry practice for renewable energy developers to partner with tax-equity investors, where the tax-equity investors [would] offer cash in exchange for project ownership, project cash flows, tax credits, and depreciation benefits." Id . By 2009, however, poor economic conditions had reduced the availability of tax-equity investors for renewable energy projects. Id. at 1, 16. Congress created the section 1603 grant program, which has since expired, to address this tax-equity shortfall. Id. at 16.¹

Under section 1603, "each person who place[d] in service specified energy property" during a designated period, ARRA § 1603(a), was entitled to receive a cash grant equal to a percentage—here, 30 percent, id. § 1603(b)(2)(A)—of the "basis" of the specified energy property, id. § 1603(b)(1). Specified energy property, which the parties also refer to as "eligible property," is defined by references to § 45 and § 48 of the Internal Revenue Code. ARRA § 1603(d). "Eligible property" only includes tangible personal property and other tangible property, used as an integral part of the facility, for which depreciation or amortization is allowable.² It does not include real estate, buildings, or transmission equipment. It also does not include intangibles. The amount of a section 1603 grant is determined by the basis of the eligible property. ARRA § 1603(b)(1).

II

Between 2010 and 2012, plaintiffs acquired six completed windfarm facilities near Los Angeles, California—Alta I, Alta II, Alta III, Alta IV, Alta V, and Alta VI (collectively "the Alta facilities")—from developer Terra-Gen Power LLC ("Terra-Gen").³ Five of the six transactions were sale-leasebacks, in which plaintiffs both acquired the windfarm and leased it back to Terra-Gen, which was to operate the windfarm and pay rent to plaintiffs. Immediately after the transactions, plaintiffs placed each windfarm into service and applied for section 1603 grants.

The dispute here is how to calculate plaintiffs' basis in eligible property for purposes of the section 1603 grants. Both parties agree that the portion of the purchase prices attributable to grant-ineligible tangible property (primarily real estate, transmission equipment, and buildings) must be deducted. The difference between the parties' positions concerns the allocation of the remainder of the purchase prices. Plaintiffs contend that the entire remainder can be allocated to grant-eligible tangible personal property, with none allocated to intangibles. The result would be that the entire purchase price, absent the small deduction for grant-ineligible tangible property, would be included in plaintiffs' basis. We refer to this view as the "unallocated method."

The government argues that the transactions involved intangibles, including goodwill, and that the remaining purchase price therefore must be allocated between grant-eligible tangible personal property and grant-ineligible intangibles using the residual method required by I.R.C. § 1060.

Section 1060 and corresponding Treasury regulations require that the residual method be used to calculate basis in the case of "applicable asset acquisition[s]," I.R.C. § 1060(a), which are, in relevant part, any group of assets (i) the use of which "would constitute an active trade or business under [ I.R.C. §] 355," or (ii) to which "goodwill or going concern value could under any circumstances attach," Treas. Reg. § 1.1060-1(b)(2)(i). According to the government, in the residual method (or " § 1060 method"), the overall purchase price is allocated on a waterfall basis among several categories of assets, some grant eligible and some not, with each category calculated at the fair market value of the assets in that category. See Treas. Reg. §§ 1.338-6(b), 1.1060-1(a)(1). We refer to this as the "residual method" or the " § 1060 method."

Because the plaintiffs do not attribute any of the purchase price to intangibles, their unallocated method results in a much higher basis and, consequently, a much higher section 1603 grant amount than the government's residual method. Some background on the transactions is useful to an understanding of the dispute.

III

The development process began for the Alta facilities in 2006, when Oak Creek Energy Systems ("Oak Creek") entered into a partnership with Allco Wind Energy Management Pty. Ltd. ("Allco") to finance, develop, and construct windfarms in the Tehachapi region of California. Over the next two years, they secured land rights, constructed meteorological towers, collected wind data, completed environmental studies, started the environmental permitting process, and purchased some of the needed turbines.

In July 2008, Terra-Gen acquired Allco's U.S. wind energy business, including its stake in the planned Alta facilities. After acquiring Allco's interests, Terra-Gen completed the process of developing and constructing the Alta windfarms. This involved obtaining additional land, securing all required permits, acquiring additional turbines, and constructing the six windfarms at issue in this case.

In addition, Terra-Gen completed the process of securing a customer for the output of the Alta facilities. In 2006, Oak Creek and Allco had executed a Master Power Purchase and Wind Project Development Agreement ("Master PPA") with Southern California Edison ("SCE"), which provided that Oak Creek and Allco would develop windfarms with an aggregate capacity of 1,550 megawatts and that SCE would purchase the windfarms' entire electricity output for a period of roughly 24 years. To effectuate this arrangement, SCE was to enter into a separate long-term PPA with each individual windfarm, with the price to be set according to a formula included in the Master PPA. Terra-Gen executed these windfarm-specific PPA contracts and entered into other necessary contracts, such as interconnection agreements.

In 2009, Congress enacted section 1603, under which the owners of the Alta windfarms could receive a cash grant in lieu of tax credits. Terra-Gen itself was not qualified to receive a section 1603 payment, as section 1603(g)(4) barred a "pass-thru entity" from receiving a grant if any "holder of an equity or profits interest" in the...