Article Review

AR6
Spring
Article Review—Extra Credit
After completing this assignment, you should understand the importance of using technical tax articles in
conducting tax research.
Assignment
Prepare a review of an article from a professional journal regarding federal taxation. This assignment
requires you to identify an appropriate article, obtain approval of it, read it, and write up your findings.
Both the article and the review should be submitted to the Article Review Assignment in Canvas as a
Word document by the due date in the Gradebook and the syllabus. A sample article review appears as
a Reading Assignment.
Requirements
Select an authored article from a professional tax journal that deals with a topic covered in the
introductory taxation text. The article should go one step beyond the information normally included
in an introductory text. It should focus on information that should in fact be incorporated in the text
or would be appropriate for class discussion.
 Note: An eligible authored article may be written by one or more professionals and will be several pages
in length (generally, at least 3,000 words). Most periodicals also publish columns that may be called
“departments” or “clinics.” These are not considered authored articles, even though they may include the
columnist’s name. Avoid articles that contain over 6,000 words. It is difficult to keep your review to one
page if the article is too long.
Please ensure that your article satisfies all of the following criteria:
 The article must have been published no earlier than 2022 (meaning 2022 or later).
 The title of the journal usually must contain the word tax, taxation, or some derivation thereof.
 Articles from the popular press, including the Wall Street Journal, Money Magazine, Time,
Business Week, and the like, are not acceptable. Although they provide useful insights to the general
public, they do not provide authoritative answers to tax questions.
 Do not select an article that deals with tax policy (e.g., should we have a flat tax, repeal the estate
tax, etc.).
 Avoid articles that review a wide range of topics (e.g., a comprehensive update on a new law).
 Avoid topics for which you have no background—for most students, this will include areas such
as international taxation, partnerships, corporations, trusts, and similar topics.
AR6
Spring
You must request and receive approval for your selected article by messaging me through IUPUI
email. This is not a group assignment. Don’t wait until the last minute! Be sure to include the
following information regarding your proposed article:
• Title of the article
• Author
• Journal name and publication month/year
The article, with its important points underlined or highlighted, must be submitted with your review.
The review should be a brief summary explaining the pertinent information. The review should not
rehash basic rules governing your topics that can be found in an introductory text. Instead, the review
should focus on the additional information found in the article. The review should be about one page,
single-spaced. The format for the review is as follows:
Article Review
Name: Your name
Article: Why the Marriage Penalty in Federal Income Tax Continues to Increase
Author: By Wallace Hoffman and Rachel Price
Journal: Taxes–The Tax Magazine, July 1999
This article examines the federal income tax penalty incurred by married couples filing jointly and
offers some recommendations for eliminating this inequity. Part of the article concerned… … SEE A
SAMPLE OF A COMPLETE ARTICLE REVIEW UNDER READINGS
S OURCES OF ARTICLES
You can locate acceptable articles on-line through the VitalLaw and RIA, services. Following are
screen prints showing how to locate articles through these services. Alternatively, you may find
articles in professional journals in the library.
•
•
You can look in VitalLaw for articles from The Tax Magazine through the Accounting
Databases in the University Library link:
https://iupui.libguides.com/c.php?g=260328&p=1739405
o On the VitalLaw home page, click on Tax – Federal
o Under Journals & News, click on TAXES—The Tax Magazine (2006 to Present)
o Expand the publication year and then expand on of the publication months.
o Expand Articles and select an article that meets the guidelines listed.
In RIA under Table of Contents, click on Titles, then click on the letter “J”. Select an article
from the Journal of Taxation.
Then click on Taxes—The Tax Magazine:
AR6
Spring
Be sure to select and article, not a column:
AR6
Spring
AR6
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For RIA:
SAMPLE ARTICLE REVIEW
Reminder: The article chosen for review should look at a particular topic in depth, as if you
had researched it.
An article review should provide enough information for a colleague to determine whether the entire article merits his or her attention. It should also include citations to the primary authorities. This is a 2021
article. If you have a client who needs advice on energy tax credits, could you use this review (and the
article) as a research shortcut, to identify the Code sections and IRS guidance that you need to check for
updates.
Note: Spelling and grammar are important. You may find some errors in this review.
Name:
Article:
Author:
Journal:
Brad Pitt
Renewable Energy Tax Credits: Green Energy Saving Greenbacks
Joshua D. Smeltzer
Taxes – The Tax Magazine, July 2021
In Taxes–The Tax Magazine article, “Green Energy Saving Greenbacks,” author
Joshua D. Smeltzer describes the increasing efforts to create renewable energy without hurting
the environment. Investment in the renewable energy sector is continuing to grow, which also
increases the need for tax advice in this area. Therefore, if tax compliance is not done properly
the benefits may no longer be offered. Smeltzer describes the two alternatives of tax credits as
well as the three primary business structures used to invest in renewable energy.
The Production Tax Credit (PTC) is primarily used for wind projects but can potentially be used by other electricity production projects if construction began in 2020 or 2021. The
PTC was extended by one year under Code Sec. 45. Section 45(a) explains the general rule for
taking a production tax credit. The amount of credit can be equal to 1.5 cents multiplied by the
kilowatt hours of electricity produced by the taxpayer. Section 45(a)(2)(A)(i) acknowledges that
the energy must be a qualified resource from a qualified facility (no older than 10 years) sold by
the taxpayer to an unrelated person during the taxable year. Unless a renewable energy production facility began construction between 2009 and January 1, 2022 they will elect to use the Investment Tax Credit (ITC). Under Code Sec. 48 the ITC is irrevocable once elected. The ITC is
primarily used for solar energy projects but can also be used for other technologies if construction begins before 2024. Section 48(a)(5) states that a facility must be a qualified investment
credit facility to accept the credit and must be treated as energy property for the purposes of this
section. Generally, a 30 percent ITC is allowed under §48(a)(5)(ii) but may be a different value
depending on the source of renewable energy. Construction must be started in 2021 to use the
Production Tax Credit, so we can assume that most new wind projects will move to use the Investment Tax Credit.
One of the most popular business structures used by renewable energy projects is the
partnership flip transaction. In this transaction, most tax credit benefits are allotted to the investor
until the benefits are flipped to the developer at a specified point. This transaction can only be
used by PTC partnerships that producing wind energy, so it is not always recommended. The
second most common structure is the sale-leaseback transaction. This is when the developer sells
the project to a tax equity investor and then leases it from the investor. The investors usually
claim tax credits until the project is complete and the developer will either purchase the project
back or extend the lease. The least common structure is the inverted lease structure which is almost opposite to the sale-leaseback structure, but other traditional options are usually recommended.
In conclusion, investment in renewable energy production will only continue to grow.
As a result, taxpayers and their advisors must follow the rules more carefully than ever to maintain the credits being offered.
TAXES – The Tax Magazine (2006 to Present), Renewable Energy
Tax Credits: Green Energy Saving Greenbacks, (Jul. 8, 2021)
TAXES – The Tax Magazine (2006 to Present)
Click to open document in a browser
© 2021 J.D. Smeltzer.
By Joshua D. Smeltzer [*]
Joshua D. Smeltzer is a Counsel at Gray Reed & McGraw, P.C. and a former Department of
Justice, Tax Division Honors Attorney.
Click below for a downloadable/printable version of this article. Click to Launch
Joshua D. Smeltzer examines renewable energy tax credits.
The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.
– William Arthur Ward
The world needs energy, and increasingly more of it, but people are becoming concerned that the production of energy be done responsibly. A growing trend involves efforts to create more energy from renewable sources
in hopes of both creating the energy we need without damaging the environment in which we live. The new Biden
administration is clearly signaling that renewable energy will be a key focus of its plan going forward. For example,
the Biden administration has set a goal to deploy 30 gigawatts of offshore wind generation capacity by the year
2030. Therefore, it can be expected that tax advisors will be seeing more questions about renewable energy tax incentives as investment in the sector increases.
A large driver of investment in renewable energy is caused by specific tax credits offered as part of the deal
structure. However, tax credits are strictly construed by both the IRS and the courts and must follow specific guidelines. Therefore, if the partnership, associated agreements, and negotiations and dealings among the investors and
developers of renewable energy are not done properly the tax benefits might disappear.
The Basics of Renewable Energy Tax Credits
Investment in renewable energy has been a tax incentive for many years now, but the benefits were approaching phase-out until they were renewed as part of the Consolidated Appropriations Act. The new legislation
provided both COVID pandemic relief and extended the tax credits associated with renewable energy such as solar,
wind, biomass, geothermal, and others. The primary tax credits involved for renewable energy are the Production
Tax Credit (PTC) and Investment Tax Credit (ITC). However, the new law also created a new stand-alone tax credit
for offshore wind projects. These changes are all designed to encourage more investment in renewable energy going
forward but, as with any tax benefit, taxpayers and their tax advisors must be careful to follow the rules carefully.
Production Tax Credit
The PTC is governed by Section 45 of the Internal Revenue Code (IRC). The PTC under Code Sec. 45 was
also extended for one year. Primarily used for wind projects, it also applies to production of electricity from other
reviewable sources that begins construction in either 2020 or 2021 ( i.e., biomass, geothermal, landfill gas, trash facilities, qualified hydropower and marine and hydrokinetic renewable energy facilities). If construction begins after
2021 then there is no eligibility for any PTC.
Recent IRS guidance has provided inflation-adjusted amounts for producers of electricity from renewable
sources. However, there are different percentages allowed depending on the renewable source used. The PTC is 2.5
cents per kilowatt hour (kWh) for 2021 for electricity produced from wind, closed-loop biomass, and geothermal
energy. The PTC is 1.3 cents per kWh for 2021 for electricity produced from open-loop biomass, landfill gas, trash,
qualified hydropower, and marine and hydrokinetic sources. The PTC is $7.384 per ton for 2021 for refined coal,
which is a modest increase from previous amounts. In all cases the electricity must be produced and sold to an unrelated third party.
Effective for renewable electricity production facilities placed in service after 2008, the construction of
which begins before January 1, 2022, taxpayers otherwise entitled to the PTC (determined on a cents per kWh basis)
may elect the ITC, under Code Sec. 48, in lieu of the PTC. The election is irrevocable. The energy percentage is
30% for such property making the election. Under the election, any qualified property that is part of a qualified ITC
facility is treated as energy property. If the taxpayer makes the election, no production credit for any year is allowed
for any qualified ITC facility.
To make the irrevocable election to treat a qualified facility as a qualified investment credit facility, the taxpayer must make a separate claim for the ITC on each qualified property that is an integral part of the facility using a
completed Form 3468 filed with the taxpayer’s timely filed (including extensions) income tax return for the year in
which the property is placed in service.
Investment Tax Credit
The ITC under Code Sec. 48 was extended by two years. This tax credit is popular for solar energy projects
as well as other technologies ( e.g., fuel cells, microturbines, small wind energy.) However, it is the solar energy
companies that appear to primarily be using the ITC. In general, solar projects beginning construction in years 2020
through 2022 are eligible for a 26% ITC, 22% ITC in year 2023, and 10% after 2023. The ITC is similar for other
technologies except that it drops to 0% if construction begins after 2023, or if the project is placed in service after
2025.
The new standalone ITC for offshore wind has different specifications. These are facilities located in the
inland navigable or coastal waters of the United States. Offshore wind projects are eligible for a 30% ITC for projects beginning construction before 2026 without any apparent phase-down provisions like contained in the other
renewable ITC projects. The extension of the PTC requires construction to begin in 2021, so it can be expected that
most wind energy investment will likely move to these new offshore wind ITC guidelines.
The property must be qualified energy property, construction must be done by the taxpayer, must be property that is allowed to be depreciated or amortized, must meet performance and quality standards, and must NOT be
part of a facility where production is taken into account in computing the credit for electricity produced from renewables or which the taxpayer receives a grant in lieu of the energy credit. This includes solar, geothermal, fuel cell,
microturbine, heat and power systems, and qualified small wind energy property that begins construction before
2024. Energy property also includes property that is part of a renewable electricity production facility placed into
service after 2008 and beginning construction before January 1, 2022 if the taxpayer makes an irrevocable election
to treat facility as energy property and no production credit has been allowed. It is important to note that the IRS indicated that it will NOT issue rulings on the application of the beginning construction requirement. [1] Beginning
construction is determined by two tests ( i.e., physical work test and a 5% safe harbor). [2] Both methods require that
a taxpayer make continuous progress towards completion once construction has begun. If a facility is placed in service by the end of a calendar year, that is no more than four calendar years after the calendar year during which construction of the energy property began, the energy property will be considered to satisfy the requirements.
Each type of renewable energy (solar, geothermal, etc.) has its own unique qualifications for which property qualifies for the credit. Therefore, tax advisors must look at each piece of specific property to ensure that it
qualifies for the tax credit. This includes the type of renewable energy involved and when it needs to be placed into
service. Also, if multiple properties are involved there are special rules for treating the property as a single project.
[3]
Taxpayers should also be aware that there is sometimes a risk of ITC recapture. This recapture usually occurs in two situations. First, when an unvested portion of the ITC is recaptured due to something that occurs after the
project is placed in service. The ITC usually vests 20% each year, after placed in service, and if the taxpayer disposes of the project or the project is otherwise no longer eligible for the ITC the unvested portion might be recaptured. A change of ownership ( e.g., lease or sale-leaseback) is unlikely to qualify as disposal, depending on the specific facts involved. The second situation involves an IRS determination that the credit was not allowed in the
amounts claimed ( e.g., inflated costs or costs misallocated to ITC eligible equipment). This IRS determination
might also cause recapture.
The Implementation of Renewable Energy Investments and Tax Credits
Developers and investors use a variety of business structures to invest in renewable energy. However, the
primary structures tend to be investment partnerships, sale-leaseback transactions, and inverted lease transactions.
Each structure has different benefits and detriments that should be carefully considered.
One of the most popular structures is a partnership flip transaction where a majority of the tax credit benefits are given to the investor until a specific point when the percentages then flip to the developer. This structure
mimics a similar structure used by the IRS as a safe harbor for PTC projects involving wind. [4] However, IRS Chief
Counsel Advice [5] has indicated that this structure is limited to PTC credits and wind. Therefore, although it provides guidance on what appears to be acceptable under the partnership rules, it should not be seen as a “safe harbor”
for anything other than PTC partnerships involving wind. If questioned by the IRS, this explanation can help provide
support for compliance with the applicable partnership rules but will probably not avoid IRS scrutiny entirely. In
this structure there is a capital infusion from the project developer and the tax equity investor, the partnership then
constructs the project, customers make payments for the power services, and then prior to the “flip” the partnership
distributes 99% profits/losses, most of the tax credits, and some cash to the tax equity investor and the remaining 1%
to the project developer. The “flip” is where the allocations of profit/losses, cash, and any tax credits between the
developer and investor change at either a pre-determined date or a target yield or other pre-determined condition.
The flip usually occurs after five years to avoid recapture and, after the flip, the developer usually has the option to
buy out the tax equity investor. There are several variations, but this is the basic structure and the further away from
this structure you get the less you will be able to claim its similarity to the safe harbor provisions of the PTC for
wind it is based on. The primary advantages of this structure are that it is easy to close and monetizes most or all of
the tax benefits available and allows the developer and investor to part ways relatively easily when the agreed benefit is reached. Its primary disadvantage is that the developer will need to contribute equity and at least a portion of
the losses and credits will be allocated to the developer that may not need such losses or credits.
Another fairly common structure is a sale-leaseback transaction. In this transaction, a project developer locates a customer and signs an agreement for services, the developer then builds the system and sells the system to a
tax equity investor. The developer leases the system from the tax equity investor and the developer incurs all costs
of operations. At the end of the project the developer may purchase the project or extend the lease. The tax equity
investor can usually claim the tax credits, depreciation, and receive the cash flow as owner of the energy property.
The lease term, again, usually exceeds five years in order to avoid recapture under the ITC. Although, if the costs
are high enough the lease term might be 10–15 years. The primary advantage of a sale-leaseback transaction is that
the investor finances the entire cost of the project through the purchase price. It may have some developer costs (
e.g., capital contributions during construction or lease pre-payments) but generally requires the least developer equity. Also, 100% of the tax benefits are absorbed by the investor instead of a part of the tax benefits being left with a
developer that may not need those benefits. The primary disadvantage is that there are stringent agreement rules
such as fixed rent schedules, indemnifications, and potential guarantees.
A less common structure is an inverted lease structure. In this structure, a tax equity investor leases the systems from the developer, the tax equity investor then makes an agreement to provide services with a customer, customer pays the tax equity investor for services and investor then pays the developer. This also allows for the investor
to take 100% of the ITC. There is sometimes a partnership variation on this inverted lease structure. [6] Similar issues
can be present in the inverted lease variant as both the sale-leaseback and partnership flip structures depending on
the details of the transaction. Therefore, unless this structure serves a specific purpose, other more traditional options
are probably a better option.
Potential Risks Involving Applicable Tax Rules
Tax benefits are considered a matter of legislative grace and are closely scrutinized by both the IRS and the
courts. Therefore, tax advisors must be aware of traditional tax principles, developed by the IRS to combat abuse of
the tax credits, and other rules in the IRC.
Passthrough ITC is based on the Fair Market Value (FMV) and that involves having a qualified appraisal
and all the rules surrounding a properly done appraisal. Partnerships passing through losses and credits must abide
by both the “at risk” [7] rules and the “passive activity rules” [8] when applicable. Also, in the lease context, the IRS
has specific rules that must be followed under Code Sec. 467. [9]
Beyond limitations specifically listed in the Internal Revenue Code, all transactions are subject to the judicial doctrines of substance over form, step-transaction doctrine, and the economic substance doctrine. The agreements and actions of the parties must document a clear business purpose outside of the tax benefits and show that all
parties have a meaningful upside and downside potential outside of any tax benefit. An investor may desire, and a
developer may be willing to provide, certain guarantees or indemnifications that could prove problematic if the tax
credits are later challenged by the IRS. For example, direct or indirect guarantees of the investor being able to claim
the credit, cash equivalents of the credits, guaranteed repayment of capital contributions because the credit can’t be
claimed, or guarantees of repayment or indemnification if the credit is challenged by the IRS all might cause problems. Just because Congress is encouraging the use of these benefits, does not prevent the IRS or the courts from
doing an economic substance analysis and disallowing benefits. [10] Therefore, the terms of the agreement must be
evaluated carefully for provisions that could raise questions about the parties having a real stake in the transaction.
Footnotes
*
Mr. Smeltzer can be reached by email at jsmeltzer@grayreed.com.
1
See Rev. Proc. 2021-3.
2
See IRS Notice 2018-59.
3
See id.
4
See Rev. Proc. 2007-65.
5
CCA 201524024.
6
See Rev. Proc. 2014-12.
7
See Code Sec. 465.
8
See Code Sec. 469.
9
See Code Sec. 467.
10 See Alt. Carbon Res., LLC, FC, 939 F3d 1320 (2019) (denying taxpayer argument that the benefits approval by
Congress prevented economic substance analysis).