“Clearly, the interpretation of what constitutes ‘begin construction’ is important. Yet at no time during the two years since the PTC was extended with this wording did the IRS bother to seek public comment under the Administrative Procedure Act (APA), the federal statute that requires federal agencies to provide notice and an opportunity to comment before promulgating rules.”
When Congress extended the wind energy production tax credit (PTC) at the beginning of 2013 , it relaxed the terms upon which developers could qualify for the credit by requiring projects “begin construction” by the end of 2013, the expiration date of the PTC. The IRS released guidance a few months later defining what it meant to begin construction.
Similar to the Section 1603 Program, the IRS provided two methods for determining when construction began. Projects must start “physical work of a significant nature” by the deadline or, in the alternative, developers could meet the five-percent safe harbor rule.[1]
Since Congress did not mandate a project in-service date, the IRS introduced a rule requiring projects show “continuous construction” as a backstop to ensure that projects could not be delayed for an indefinite period and still claim the PTC.
Considerable debate followed regarding how the IRS would enforce “continuous construction.” This ultimately led to the IRS releasing a second guidance wherein it offered developers the generous rule that if they were to get their projects in-service by Jan 1, 2016, the IRS would not closely scrutinize their development efforts. In effect, the IRS imposed a 2015 deadline for projects that wind developers took seriously and raced to meet.
More than a year after the IRS released its first guidance, and six months after the PTC had expired, however, the wind industry was still complaining that the rules defining ‘begin construction’ were too vague. By August 2014, the IRS responded with new guidance that further relaxed the requirements by, in part, lowering the 5 percent safe harbor requirement to 3 percent.
Enter the Administrative Procedure Act
Clearly, the interpretation of what constitutes “begin construction” is important. Yet at no time during the two years since the PTC was extended with this wording did the IRS bother to seek public comment under the Administrative Procedure Act (APA), the federal statute that requires federal agencies to provide notice and an opportunity to comment before promulgating rules.[2]
“Good cause” exemptions from the APA’s notice and comment requirements are available. But to qualify an agency must clearly articulate why the use of traditional procedures are “impracticable, unnecessary, or contrary to the public interest.”[3]
The IRS insists that it does not need to adhere to the APA procedural requirements since Section 553(b) of the APA exempts “interpretative rules” from the procedural requirements.
However, under the APA, “interpretive rules” refer to nonbinding rules that “advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power.”
In its recent decision in Cohen v. United States, [4] the U.S Court of Appeals for the District of Columbia Circuit held that an IRS “notice” is final agency action, thus justiciable under the APA. In the Court’s words “The IRS is not special in this regard; no exception exists shielding it—unlike the rest of the Federal government—from suit under the APA.”
New IRS Guidance Expected
It is widely expected that the IRS will again update its guidance to reflect the PTC extension enacted at the end of 2014. And wind developers are, once again, complaining.
In anticipation of this action, the Windaction Group sent a letter to the IRS expressing its strong objection to any amendment or extension of the guidance issued in 2013 and 2014 respecting the “begin construction” without full compliance with the APA, including Federal Register notice and a period for public comment.
It is our belief that the Service has run afoul of the Administrative Procedure Act in its actions to define “begin construction” without engaging the public as required under the law. If challenged in court, it is possible that the PTC rules could be declared invalid and sent back to the IRS. At the very least, it would be highly controversial for the IRS to take any further action. A copy of the Windaction letter can be accessed here.
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[1] A taxpayer pays or incurs five percent or more of the total cost of the facility before January 1, 2014, and thereafter must make continuous efforts to advance towards placing the facility in service.
[2] The fundamental purposes of the Administrative Procedures Act are (1) to require agencies to keep the public informed of their organization, procedures and rules; (2) to provide for public participation in the rulemaking process; (3) to establish uniform standards for the conduct of formal rulemaking and adjudication; (4) to define the scope of judicial review. Attorney General’s Manual on the Administrative Procedure Act (1947).
[3] 5 U.S.C. § 553(b)(B).
[4] Cohen v. United States, 578 F.3d 1, 6–7 (D.C. Cir. 2009), aff’d en banc, 650 F.3d 717, 723 (D.C. Cir. 2011)