1603 Cash Grant Applications Underpaid

On October 31, 2016, the Federal Court of Claims ruled that the U.S. Department of the Treasury underpaid 1603 cash grant applications made in respect of the Alta Wind Energy Center by approximately $206 million. The much-awaited decision in a 2013 case filed by the owners of the 1,500-megawatt wind project may be a harbinger of good news for similarly situated cash grant applicants who did not receive full awards on their 1603 applications and investment tax credit players, though there are mitigating circumstances surrounding the case that leave some questions as to whether other stakeholders will have similar success.

The 11-phase Alta Wind Energy Center was developed by Terra-Gen Power LLC following its acquisition of the project development rights for the plant in 2008. The first five phases of the project were sold into trust vehicles designed to facilitate sale/leaseback financing transactions with Union Bank of California and Citibank. The sixth phase was sold outright to EverPower Wind Holdings, Inc. Each transaction was designed, in part, to ensure that the project would qualify for cash grants under Section 1603 of the American Recovery and Reinvestment Act, and each transaction required Terra-Gen to indemnify the purchaser against the risk that the 1603 grant would be short-paid.

Each cash grant application was supported by a cost segregation analysis from KPMG that validated the portion of the project basis that was eligible for a 1603 grant and the portion that was not. These portions were applied to the purchase price for the facilities to arrive at the fair market value eligible basis of the wind energy facility and, in turn, the amount of 1603 grants for the project (30 percent of the fair market value eligible basis). The government challenged the purchase prices of each phase as the fair market value (and thus the cost basis), arguing that the eligible basis needed to be adjusted to account for ineligible goodwill associated with the purchase price, that the purchase price was not established through an arm's-length negotiation and that the purchase price was influenced by an economic incentive to increase the purchase price.

The Court of Claims discarded each of these arguments in turn, specifically finding that:

No goodwill or going-concern value could have been attached to the purchase prices because the projects had not begun operations at the time of the sale, the projects had an exclusive customer through a...