UPDATE ON CASH GRANT ALLOWANCE

Posted in: 2010-07-02 08:37PM

The following summary was provided by Lance T. Brasher of Skadden, Arps, Slate, Meagher & Flom LLP on July 7, 2010

The Treasury Department recently posted on its website frequently asked questions and answers regarding the rules for determining when construction of property is considered to begin for purposes of the grant program for specified energy property (the "FAQ"). The grant program, which was instituted pursuant to Section 1603 of the American Recovery and Reinvestment Tax Act of 2009, requires the Treasury Department to provide a payment in lieu of tax credits to each qualifying applicant that places in service eligible energy property. In order to receive such a payment with respect to eligible energy property, such property must either (1) be placed in service during 2009 or 2010 or (2) be placed in service after 2010 and before a specified termination date, but only if the construction of such property began during 2009 or 2010. The FAQ sets forth several material clarifications to the rules for determining when construction of property is considered to begin for these purposes. Those clarifications include the following:

· The FAQ states that an applicant can demonstrate that construction of property began during 2009 or 2010 by showing that any physical work on the property began during 2009 or 2010, even if such work relates to only a small part of the property. This is an applicant-friendly clarification of written guidance previously issued by the Treasury Department, which provided that physical work is sufficient only if it is of a significant nature. The FAQ cautions that construction activity will be closely scrutinized if it does not involve a continuous program of construction, but notes that disruptions beyond the applicant's control will be taken into account.

· The FAQ clarifies the application of a safe harbor test that was described in written guidance previously issued by the Treasury Department. That safe harbor test generally permits an accrual method applicant to demonstrate that construction of property began during 2009 or 2010 if the applicant shows that it incurred more than five percent of the total cost of the property by the end of 2010. The FAQ states that, for purposes of that safe harbor test, the economic performance rules of Section 461(h) of the Internal Revenue Code apply in determining when costs are incurred. The Treasury Department’s original guidance with respect to the safe harbor test, issued in July 2009, expressly stated that the economic performance rules would be applicable, but recent revised guidance, issued in March 2010, deleted such express statement. This clarification in the FAQ resolves the discrepancy on this point.

· The FAQ provides further information with respect to a "look-through" rule that was contained in written guidance previously issued by the Treasury Department. Under the look-through rule, an applicant can satisfy the safe harbor test described above by including, as costs incurred by the applicant, costs incurred by another person that will manufacture, construct or produce property for the applicant under a binding written contract (a "Supplier"). The FAQ provides that, although the look-through rule allows an applicant to include costs incurred by a Supplier, the Supplier’s costs incurred do not include, for these purposes, costs incurred by a subcontractor that manufactures, constructs or produces components for the Supplier. Instead, the costs of such components are considered incurred by the Supplier only when the components are actually provided to the Supplier. One can assume that this clarification of the limits of the otherwise applicant-friendly look-through rule was intended to avoid the complexities that the Treasury Department might have faced in reviewing applications in which the costs incurred by multiple subcontractors are attributed to one or more Suppliers and then re-attributed to an applicant that is a customer of those Suppliers.

· The FAQ describes the documentation that an applicant will be required to submit to show that physical work on property began during 2009 or 2010 or that the safe harbor test was met by the applicant with respect to property. For example, an applicant seeking to show that physical work on property began during 2009 or 2010 will be required to submit, among other things, a written report from an engineer or the installer of the property, signed under penalties of perjury, describing the property’s eligibility for a grant. If the cost basis of the property is anticipated to be $1 million or more, the report must be from an independent engineer. For an applicant seeking to show that the safe harbor test was met with respect to property manufactured, constructed or produced by a Supplier, the applicant will be required to submit, among other things, a declaration from the Supplier, signed under penalties of perjury, describing the costs paid or incurred and allocated to the applicant’s property. Also, such an applicant will be required to submit a statement from an authorized representative or, for property with an anticipated cost basis of $1 million or more, from an independent accountant, signed under penalties of perjury, detailing the amount of costs incurred before the end of 2010 and an estimate of the total cost of the property. These documentation requirements are similar to those imposed on applicants submitting applications in respect of property that has already been placed in service by the time the application is submitted.

UPDATE ON CASH GRANT ALLOWANCE

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