News + Events
Court Rejects Treasury Challenge to Section 1603 Cost Basis
February 8, 2011
In a recently decided case, the United States Court of Federal Claims held that Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 compels the United States Treasury Department (“Treasury”) to award cash grants in lieu of renewable energy tax credits under the Section 1603 program to qualified applicants. Treasury has no discretion to refuse to award a grant to an applicant that has met all statutory requirements for the program. Under the Section 1603 program, if a person places specified energy property into service in 2009, 2010, or 2011 (or begins construction in those years on specified energy property that will be placed in service before an applicable deadline) and satisfies other requirements under Section 1603, the person will be awarded a cash grant equal to 10% or 30% of the basis of the specified energy property, depending on the type of property. In this case, the Court held that Treasury cannot refuse payment of the grant in a case where all statutory requirements are met, but Treasury was not satisfied with the documentation presented by the taxpayer to demonstrate the cost basis of the property.
The decision, ARRA Energy Co. I v. United States, No. 10-84 C (Fed. Cl. Jan. 18, 2011), can be found here. The taxpayers placed 25 mobile solar-powered generating systems into service in 2009 at a cost of approximately $7.8 million. The taxpayers purchased the systems from a manufacturer and leased the systems to end-users to be used to generate off-grid electricity. The taxpayers applied for Section 1603 grants for the systems, submitting one application for each system and requesting approximately $2.3 million in grants (equal to 30% of the systems’ claimed cost basis). With their applications, the taxpayers submitted initial valuation reports prepared by the manufacturer to substantiate the systems’ cost basis and the amounts claimed in the grant applications. At Treasury’s request, the taxpayers later submitted an independent fair market valuation report to further support the amounts. Treasury denied the taxpayers’ applications on the grounds that the claimed cost basis for the systems was not supported by sufficient documentation. The taxpayers otherwise met all statutory requirements for the grants.
In its decision on the application, the Treasury stated that the claimed cost basis was not supported by sufficient documentation. Treasury notified the taxpayer that “[a]lthough you submitted documentation regarding your cost basis, we found the documentation insufficient to support your claimed basis.” Treasury confirmed its decision on the applications was final and that “any further action would need to be pursued through the judicial process.”
The taxpayers filed suit, asserting that Treasury violated Section 1603 by denying the grant applications. The government brought a motion to dismiss for lack of subject matter jurisdiction on the grounds that Section 1603 is not a “money-mandating source of law.” Whether a statute is a money-mandating source of law turns on whether the government has discretion to refuse to make payments under the statute. The court found that nothing in the legislative history of Section 1603 suggests that Congress intended to endow Treasury with the discretion to refuse payments to any applicant that met the requirements set forth in the statute.
Even where the government does not possess complete discretion over whether to make a payment under a statute, the court can exercise jurisdiction where the statute provides clear standards for payments or compels payment upon satisfaction of specified conditions.
The court found that Section 1603 “compels the government to provide a grant to any person who places specified energy property into service, subject only to the express requirements set forth in the statute.” The government has no discretion under Section 1603 to refuse to award a grant when the requirements of the statute are met. The court’s conclusion raises the issue: if the statute requires the taxpayer to furnish fact-based documentation as to cost basis, can the government reject the application if the government questions the validity of that documentation? The court held that the government is only permitted to make a “ministerial determination” that the requirements are met (for example, that the project qualifies in kind as “specified energy property” or that it was placed into service during the prescribed period).
While the government may decide, as it has in this case, that an applicant has miscalculated or misrepresented the basis of its property, under the court’s ruling it has no discretion to award grants to qualified applicants for less than (or more than) 30% of the correct cost basis. Of course, this merely begs the question: how should the correct cost basis be determined? How can the government protect itself against fraudulent claims? The Treasury’s briefs reflect this frustration:
Congress did not pass the statute to permit those seeking grants to take advantage of the government … If an applicant inflates the basis, the Treasury has the discretion of denying the grant and protecting the statute’s objectives. Congress has not legislated itself into being a patsy.
The court’s reply is that the government has the authority to deny fraudulent claims and applications that do not meet the requirements set forth in the statute, but those conditions do not prevent the statute from being “money-mandating” and do not preclude the court from having jurisdiction over the case.
The court’s opinion highlights the differences between the cash grant in lieu of tax credit under Section 1603, and the tax credit itself. The tax credit is governed by the Internal Revenue Code which allows the IRS to challenge credits claimed on income tax returns through the audit procedure. Regulations designed to protect tax payers and the government control tax audits. Awards under the Section 1603 cash grant program are not subject to those rules.
Treasury’s own published guidance on the program provides that a notice of a rejected application will include the reasons for the determination, but “will be considered the final agency action on the application.” The court’s opinion calls into question Treasury’s position that its decisions on applications are not subject to administrative appeal. It is not clear from the court’s opinion what documentation the taxpayers should have provided to properly substantiate their claimed cost basis for the property or whether the taxpayers must (or would be permitted to) resubmit their applications until they meet the statutory requirements to the satisfaction of Treasury. The court’s order instructs the parties to confer to determine how to proceed and to determine whether the issue may be settled.
For more information about the Section 1603 Treasury cash grant program, please visit here (summary),here (update) and here (extension of program).
Philip H. Spector