Investor’s Await Carbon Details on Carbon Tax Credit Before Acting

Investors Await Details on Carbon Tax Credit Before Acting

by Joshua Rosenberg, Law360 Editing by John Oudens and Neil Cohen T he Internal Revenue Service (IRS) recently released guidance on beginning-of-construction requirements and partnership allocations for the new carbon sequestration tax credit, but investors are still waiting for more guidance from the agency before moving their capital off the sidelines.

The IRS’ latest guidance, released as a notice and revenue procedure on February 19, provides two avenues for meeting the carbon capture credit’s beginning-of-construction requirements and provides a safe harbor for partnership allocations. And while the guidance largely creates parity among the agency’s treatment of other alternative energy credits, by itself it doesn’t provide the certainty necessary for investors to activate their capital.

That’s because the IRS has yet to articulate which sequestration activities themselves will qualify for the credit and the process by which the agency may seek to recapture credits later if projects’ capture efforts prove unsuccessful.

Internal Revenue Code Section 45Q https://www.law360.com/images/lexis_

partnership allocation rules is not yet actionable, Barbara de Marigny, tax partner at Baker Botts LLP.

The IRS has stated that it will release additional guidance on the credit soon.

Investors have been clamoring for clarity on the provision and have been vexed by the IRS’ somewhat measured approach toward promulgating more guidance. The delay may be due to the fact that the agency has committed itself to promptly releasing regulations related to the 2017 Tax Cuts and Jobs Act https://www.law360. com/images/lexis_advance/kb-icon-red. png, which takes up considerable bandwidth, according to Julio Gonzalez, chief executive officer of Engineered Tax Services, an engineering and tax services firm.

In order to encourage investors to activate their capital, the IRS should answer the question of what qualifies for sequestration, otherwise known as geological storage, by providing a simple, binary test, Shah said. For instance, the agency could accept the Environmental Protection Agency’s permits — which are certifications the EPA already issues — as evidence that facilities have successfully sequestered carbon, he said.

A standard that says “If you’ve done ‘X,’ then you meet that requirement” is what the market would prefer, he said, instead of a general set of rules that would result in facts-and-circumstance analyses.

Although that kind of safe harbor would “make the credit much more attractive to investors,” Gonzalez said, it may get pushback from those who are concerned primarily with protecting environmental resources from contamination.

Another area of concern for investors is the standard the IRS may employ when seeking to recapture credits in instances of leakage, de Marigny said.

One way to possibly address that concern would be for the IRS to assume the position that any investor who received a permit from the EPA would not be subject to credit recapture, Shah said.

In all, while it’s difficult to quantify investors’ interest in projects that would satisfy the carbon capture credit, anecdotal evidence suggests they would be willing to deploy substantial amounts of capital if provided the right set of circumstances, Shah said.

▫advance/kb-icon-red.png provides for a tax credit of up to $50 per metric ton of carbon captured in qualified facilities. The Bipartisan Budget Act of 2018 expanded the scope of the credit so that it can be claimed for the sequestration of “carbon oxide” rather than merely “carbon dioxide” and required that facilities begin construction before January 1, 2024, to qualify.

Under the most recent guidance, those hoping to claim the credit can demonstrate that construction has begun on a carbon capture facility by either beginning significant, physical labor on a qualified facility or by paying or incurring five percent of a facility’s total cost. Once construction has begun, both avenues require continuous progress toward completion of the project to qualify for the credit, the agency said.

One helpful element of the recent guidance is that it provides a six-year safe harbor, according to Amish Shah, partner at Eversheds Sutherland LLP. That means projects will qualify for the credit as long as they’re completed within that time. If not, then the IRS will apply a facts-and-circumstance test to determine compliance.

The safe harbor’s time frame is two years longer than in the agency’s treatment of wind and solar projects, Shah said, in order to account for the inherent complexity of properly executing carbon sequestration activities.

However, without answering the central question of which sequestration activities themselves will satisfy the credit, the guidance on the beginning of construction and

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Remembering The Future W ell, aren’t we special! To hear the talking heads on TV you’d think we were all super heroes for having survived the computer revolution. I swear, we’re turning into a nation of sissies. We’re supposed to feel sorry for deeply indebted college graduates who are suffering so much they’ve had to move back in with their parents. But I really doubt their suffering is on par with the young men sent to storm the beaches at Normandy, or the teenagers who spent two years in the killing fields of Vietnam.

We’ve been here before folks. Can you imagine the changes in society when Americans switched from the horse and buggy to the automobile? The only difference is the junk collected along the way. Today’s information superhighway is littered with spam, junk mail and Nigerian princes while their dirt roads were littered with rocks, hoboes and horse apples.

It’s amazing how similar the car/computer revolutions are. I get the same confused look on my face when I stare inside my MacBook as I did when I first popped the hood on our family’s Delta 88. A century ago folks cussed their horses and Model T’s just as we cuss computer calls and Microsoft Windows. We speak in bits and bytes while they geed, hawed and giddiupped. We feel so superior because we can buy a pair of boxer shorts online. No sirree, no previous generation has so successfully dealt with such unprecedented challenges! I say horsefeathers! There was a day when Americans traded horseshoers for mechanics, horse traders for used car salesmen, and the smell of horses for the smell of diesel. The car made most horse equipment useless so now you see vintage horse collars holding mirrors. Will one day desktop computers do the same?

History repeats itself, only the names change. The computer made it possible for hackers, cable companies, Wall Street and Amazon to take a good chunk of your

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change just as the switch to cars made it possible for Olds, Ford, Chevrolet and John D. Rockefeller to do the same.

One hundred years ago Americans bought stock and underwear from Sears and JC Penney but now investors can’t seem to get their money, or their butts, out of Sears and Penneys fast enough. Apple and Amazon are now the place to be. Today we have Bill Gates and Jeff Bezos, back then it was Henry Ford, Ransom Olds, the Chevrolet and Dodge brothers. We go to Costco once a month while they hitched up the wagon for the monthly trip to the general store and I bet they were just as awed and excited by all the fancy new products they saw as we are today.

No one knows more than I do how the computer revolution has devastated some industries. You can’t hardly find a milk man, newspaper delivery boy, telephone operator, or a typesetter anywhere. Being a syndicated newspaper columnist I am reminded almost weekly that the newspaper business isn’t exactly a growth industry. Just as their ranks shrunk so too did most whip makers, carriage drivers, and blacksmiths. Some day kids will laugh at the taxi cab, television set, Post Office, internal combustion engine and the Geek Squad for being so out of date, just as we did the wringer washer, ice cube trays and the hi-fi. Sure, it saddens me to see all the old professions nearly vanish. I became quite melancholy when the Sears closest to my home closed its doors. But you can bet your bottom dollar some day it will be Amazon and Apple’s turn to go broke. Just as old and tired carriage horses were put out to pasture some day so too will television sets and desktop computers. Nearly every generation has a “going out of business” sale. Americans will always complain about the times in which they live. In the horse and buggy era Americans complained about rocky roads and horse pucky, just as I complain about potholes and people who talk on their smart phone in the grocery store. But I think it sounds sorta ridiculous in an age where our toilet paper is quilted and our butts are heated to complain how tough times are. Not for one minute do I want to go back to using the Sears catalog, if you even know what I mean?

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