Background
In 2009, the American Recovery and Reinvestment Act (ARRA) offered cash grants equal to 30% of the basis of tangible personal property for qualifying renewable energy facilities. Terra-Gen Power, which developed multiple wind facilities in California’s Tehachapi region, could not directly apply for these grants because some of its owners were tax-exempt entities. To resolve this issue, Terra-Gen sold six Alta wind facilities to plaintiffs between 2010 and 2012 through sale and sale-leaseback transactions.
Plaintiffs applied for over $703 million in Section 1603 cash grants using an unallocated method to determine basis. The Treasury Department awarded approximately $495 million based on documented construction and development costs of grant-eligible property. Plaintiffs then sued for the $206+ million shortfall, claiming the higher purchase price they paid Terra-Gen (which reflected anticipated grant value) should determine eligible basis.
After a 2016 trial resulted in judgment for plaintiffs, the Federal Circuit vacated and remanded, holding that the purchase price must be allocated among seven asset classes under IRC Section 1060, properly distinguishing between turn-key value (grant-eligible) and goodwill or intangibles (ineligible). The case was reassigned for retrial before a different judge.
The Court’s Holding
The central dispute at retrial was the proper valuation method to determine the fair market value of grant-eligible assets. Plaintiffs advocated a discounted cash flow (DCF) model that valued the facilities based on projected future revenues, while the government proposed a cost approach based on replacement cost plus developer profit. The court concluded the cost approach was more suitable because it better reflects fair market value, avoids evidentiary problems with plaintiffs’ DCF methodology, and more effectively distinguishes assets across the seven Section 1060 classes.
The court rejected plaintiffs’ inclusion of 98% of the anticipated cash grant value in their valuation of grant-eligible assets, finding insufficient evidence supporting this treatment. The court noted that while DCF is not inherently defective for Section 1060 valuations, the record evidence here favored the cost approach. The court instructed the parties to apply the cost approach starting with grant-eligible costs from cost segregation reports, excluding Development Rights but retaining Interest During Construction and the Oak Creek Development Fee, and applying developer profit markups of 15% for Alta I and 20% for Alta II–VI.
Key Takeaways
- When allocating purchase price under IRC Section 1060 for ARRA Section 1603 cash grant basis, courts may prefer the cost (replacement) approach over discounted cash flow depending on the asset type and evidentiary record.
- The anticipated value of the cash grant itself cannot constitute tangible personal property or be incorporated into the grant-eligible basis to calculate the grant itself—this would be circular and contradicts ARRA and Treasury regulations.
- Turn-key value (the premium a buyer pays for an integrated, fully operational facility) must be carefully distinguished from goodwill, going concern value, and other intangibles under the Section 1060 allocation framework.
- Developer profit and certain construction costs (including Interest During Construction) are properly included as grant-eligible basis, even if they exceed documented hard costs.
Why It Matters
This decision provides critical guidance for renewable energy developers and investors seeking ARRA Section 1603 cash grants or similar tax-incentive programs. The court’s framework clarifies how to allocate purchase prices across asset classes and what costs qualify for basis calculations. By adopting the cost approach, the decision signals that Treasury’s cost-based methodology—rather than inflated purchase prices reflecting anticipated grant value—governs eligible basis determinations. This limits the extent to which anticipated tax benefits can inflate the calculation of those very benefits, addressing a circularity concern that has plagued ARRA litigation.
The ruling also reinforces the importance of proper cost segregation analysis and detailed documentation of grant-eligible versus ineligible costs. For developers and their tax advisors, the decision underscores that purchase prices negotiated with downstream purchasers (especially sale-leaseback buyers) should not be mechanically applied to determine grant basis without careful Section 1060 allocation and evidence of fair market value for each asset class.