Partnership determination of eligible basis for energy grants.

• Author: Smith, Annette B.

Section 1603 of the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), gave Treasury the authority to make payments to reimburse eligible applicants for a portion of expenditures for specified energy property (30% for most projects) used in a trade or business or held for the production of income.

This item discusses whether a partnership should take a partner's Sec. 743(b) adjustment into account in determining eligible basis of qualified energy property that the partnership has not yet placed in service. (In many cases, a partnership interest is purchased after the partnership places the project in service, but that scenario is not addressed here.) Although there is no specific guidance on this point, certain tax provisions may be helpful in considering the issue.

Note: Applicants receiving Section 1603 payments cannot claim tax credits under Secs. 45 and 48 with respect to the property for the tax year in which the payment is made or any subsequent tax year, and the basis in the property for income tax purposes must be reduced by 50% of the grant amount.

Background

Grant applicants must submit support for the cost basis claimed for the property, with supporting documentation detailing the breakdown of all included costs. For property with basis in excess of $500,000, applicants must submit an independent accountant's certification attesting to the accuracy of all costs claimed as part of the basis. Applicants are eligible to receive a grant if they are the owner or lessee of the property and originally placed the property in service. Property must be placed in service, defined as being ready and available for its specific use, by December 31, 2011, or placed in service after 2011 but only if construction of the property began during 2009, 2010, or 2011. Applicants for a grant must submit their applications before October 1,2012.

The legislative history indicates that Section 1603 of ARRA is intended to mimic the Sec. 48 credit rules, which allow investment tax credits (ITCs) equal to the energy percentage of the basis of each energy property placed in service during the tax year (generally 30%). Taxpayers have used various financing structures to take advantage of the energy tax credits under Secs. 45 and 48, including flip partnership (flip) transactions. The flip structure allows smaller companies operating with narrow profit margins and lower tax liabilities to monetize their tax credits and obtain an additional source of financing for a project by allowing a developer to transfer tax credits to an investor who can use them more immediately.

In a typical flip structure, an investor and a developer form an LLC that is treated as a partnership for tax purposes. The investor contributes cash, while the developer generally contributes a project company and equity. Usually, the investor is allocated a majority of the tax benefits from the project (e.g., tax credits and depreciation deductions). Sec. 45 production credits are allocated to the investor (based on the investor's share of gross revenue) until the investor earns a target rate of return or until the...