Tax News
Rev. Proc. 2014-12: New Safe Harbor for Tax Equity Deals
December 31, 2013
Administrative Actions
Yesterday Treasury released the much anticipated post- Historic Boardwalk safe-harbor applicable to certain tax equity deals. This is the second safe-harbor that the IRS has released in the domain of tax equity transactions. The first one was released in 2007 (Rev. Proc. 2007-65 applicable to wind energy projects). For readers that do not specialize in this area, tax equity transactions are prevalent in the energy sector and other sectors that offer tax credits or other incentives to stimulate particular activities (for example, historic rehabilitation in the case of Historic Boardwalk).  The main parties to the transaction are the tax equity investor and the developer of the project. Typically the deal will be structured as a partnership flip whereby the investor receives 99% of the tax benefits until a flip point (based on IRR or fixed date) and a 5% of profit/loss thereafter. One of the key tax considerations in these deals is whether the investor is technically a partner for tax purposes. Pitney Bowes experienced this issue first hand in Historic Boardwalk where the Third Circuit ruled that Bowe’s affiliate was not a partner for tax purposes and all of the tax credits and deductions should have been allocated to the developer of the project (the case was denied certiorari by the Supreme Court).

In the dawn of this decision Treasury released Rev. Proc. 2014-12 which sets forth the safe-harbor rules for rehabilitation credit tax equity deals. The Procedure specifically states, just as the 2007 procedure did, that it applies only to the specific credits at issue. However, considering that the 2007 and 2014 procedures are the few substantive pronouncements on the issue, tax practitioners are advised to heed them in other tax equity deals (e.g. solar).  The safe harbor in the 2014 procedure is similar to the one in the 2007 procedure. For example under both safe harbors the investor must keep at least a 5% interest after the flip date. Also, the investor must fund at least 20% of its expected total contributions by the date the project is placed in services. However, there are some notable differences as well. The 2007 safe-harbor clearly prohibits investor puts. The 2014 safe-harbor on the other hand permits investor puts as long as they are at FMV. Where does this leave a put at a price set at the higher of FMV and the amount that causes the investor to reach a Target IRR? A conservative mind would reason that such a put may be subject to scrutiny. In fact, Boardwalk involved a higher of put.  What about a developer/company call after the flip date? The 2007 safe-harbor allows the developer to call the investor as long as the call is at FMV and it the exercise date is at least 5 years after the project is placed in service (the expiration of the rehabilitation credit recapture period). On the other hand, the 2014 procedure flatly prohibits calls by the developer or the company.  So what’s the practical implication of all of this? If you are involved in a wind project, the sensible thing is to follow the 2007 procedure. If you are involved in a rehabilitation project, you would follow the 2014 procedure. For anything else in between, like solar, you have some choices to make where the two safe harbors diverge, such as put/calls. Following fundamental tax principles could be helpful in making a decision.  Does the deal have a put/call structure that eliminates any potential for profit to the investor after the flip date?   For example, as in the Boardwalk case, the deal may call for a put/call at higher of FMV or accrued but unpaid IRR. However, if in reality the parties never expected that FMV would exceed the unpaid IRR, the deal may be subject to scrutiny because the investor would be entitled to FMV only in form.  Talk to your counsel about this new procedure, or if you are counsel, parse the procedure in case you come across a tax equity deal. The procedure could be found here.
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Tags: Historic Boardwalk, rehabilitation credits, Rev. Proc. 2014-12, tax equity, tax equity deal