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Precedent setting tax credit ruling -- Murky area made clear

Wind projects across the United States can collect on state and local tax credits without jeopardizing eligibility for federal production tax credits (PTC) following a public guidance issued in February by the US Treasury Department.

The guidance stems from a small-scale effort begun in December 2003, when Eurus Energy, a Tokyo-based wind project developer with an outpost in San Diego, asked the US Internal Revenue Service (IRS) to issue a private letter ruling that receiving credits from the Oregon Business Energy Tax Credit Program would not reduce the company's claim to the federal PTC. The development in question is the 41 MW Eurus Combine Hills Project in Oregon's Umatilla County, which was completed that same December.

At issue was language in the tax code that says the PTC must be reduced by the amount of any other credit. The campaign by Eurus, costly both in time and lawyers' fees, eventually involved efforts on its behalf by the Oregon Department of Energy, the American Wind Energy Association and US Senator Ron Wyden of Oregon.

"There's a long history to it," says Mark Anderson of Eurus, "But the original intent was that the federal government didn't want people to be able to build a project for next to nothing by using an investment tax credit along with a PTC. It was set up to prevent double dipping on the federal government, but it was reducing the attractiveness of state support. The net effect was that the states were essentially giving money to the federal government."

In May 2004, Eurus got notice that the IRS could not issue a private letter ruling because the request would have to go higher up the Treasury Department ladder. Ed Ing, a Washington DC attorney, advised Eurus to file a request for expedited guidance.

Attention

The public guidance can now be used by companies in all 50 states and there is no longer a need to go to the extreme of seeking a private letter. Anderson says there was no particular turning point in the protracted process, but that the problem was not getting proper attention until a pair of letters was sent to the Treasury Department -- one by Wyden and another by AWEA -- which eventually spurred the Treasury Department into finalising the paperwork.

The IRS cannot change its mind on the issue. "The process of going to the IRS and seeking a private letter is not a cheap affair," says Anderson. "But with this guidance, other companies won't have to spend that money. Now, if you had to, you could take the IRS to court on this issue and win."

That is not all, according to tax-expert Ing. "The interpretation should apply retroactively to the legislation's enactment date," he says. "Past projects that had claimed a reduced PTC might try to secure the full federal credit within the time period allowed for amended returns."

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