Treasury Dept says SGIG awards to corporations are tax free

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Treasury Dept says SGIG awards

to corporations are tax free

March 11, 2010

BREAKING NEWS



LLCs could be taxed,

demo grants left in dark



Smart Grid Investment Grant (SGIG) awards to corporations will not be taxable incom
e, the
US Treasury Dept declared yesterday, resolving a question that has held up the $3.4 billion
program for many weeks. We've been expecting word since last Wednesday, when a senior
advisor to Energy Secretary Steven Chu told us SGIG and smart grid dem
o grant awardees
could within two weeks expect a resolution to the taxable
-
income snag that has prevented
the signing of grant contracts (SGT,
Mar
-
04
).


But the long
-
awaited
IRS ruling

is not good news for everyone. It specifically
excludes non
-
corporate SGIG awardees, meaning those that are neither corpor
ations nor
municipal utilities are subject to federal income tax (and we look at Vermont Transco's
situation later in this article).


Left hanging are the winners of smart grid demonstration project grants. The
document Treasury made public yesterday spec
ified

that the “revenue procedure” it came
up with for SGIG awards does not apply to “smart grid technology, research, development
and demonstration.” But the Treasury document did not directly state what the tax status of
the demo grants is or might be in

the future.


DOE is “continuing to work with the IRS and Dept of Treasury to see if the same
analysis applies to other smart grid and Recovery Act programs,” DOE Deputy Press
Secretary Jen Stutsman told us late yesterday.


The provisions that authorize th
e SGIGs and demo grants differ slightly, she added.
“As a result, grantees under the different programs will require separate explanations for
how the tax code applies. We wanted to make sure there was clarity for the SGIGs as soon
as possible, as they r
epresent the vast majority of [DOE's] smart grid funding.”


The Energy Dept had hoped to sign contracts with many of the chosen recipients in
December. We reported in mid
-
January that DOE was looking into whether SGIG awards
and demo grants were taxable i
ncome (SGT,
Jan
-
13
). President Obama had in October
announced

the selection of 100 projects that DOE plans to distribute $3.4 billi
on worth of
ARRA funds for under SGIG (SGT,
Oct
-
28
).


Energy Secretary Steven Chu a month later awarded $620 million to 32 smart g
rid
demo projects, to “further our knowledge,” he said, “and understanding of what works best
and delivers the best results for the smart grid, setting the course for a modern grid that is
critical to achieving our energy goals” (SGT,
Nov
-
25
).


The principal author of the Treasury document addressing the taxation issue
--

David
McDonnell of the IRS Office of Associate Chief Co
unsel

Passthroughs & Special Industries
--

declined to answer any questions yesterday, as did Sandra Salstrom, a spokesperson for
Treasury. An IRS representative did not supply details we sought yesterday. NARUC in
January urged Treasury and DOE to quic
kly resolve the tax issue holding up contract
execution for smart grid demo projects and SGIGs (SGT,
Jan
-
27
), and the state regu
lators
association declined to comment on Treasury's move yesterday.


While Treasury said

in the ruling that its “revenue procedure” was effective as of
yesterday, it was not clear what action, if any, the federal government would still need to
take to bri
ng closure to the taxation issue. The tax question had left grant winners feeling
“desperate for guidance,” Tim Fallaw, Southern Company's tax VP, told us the week before
last (SGT,
Feb
-
23
).



Demos kept waiting



Treasury's ruling seems counter
-
productive, Kurt Yeager, told us yesterday. He's
executive director of the Galvin Electricity Initiative, former long
-
time EPRI

chief and recent
co
-
author of smart grid and micro
-
grid primer “Perfect Power.” The demo projects
--

not the
SGIGs
--

have “the greatest potential of demonstrating the value of the smart grid
transformation,” he said.


Prolonged delays in clarifying the d
emo grants' taxability could negatively impact the
programs, all of which involve co
-
funding with Uncle Sam, said Yeager. If it turns out the
demo grants are taxable income, it could kill some “already
-
tight projects,” he added.


Yet some demonstration gr
ant applicants were undeterred by DOE rejection.


New Mexico lost its bid for a $59 million demo grant but the state and the Japanese
government forged ahead with their plans for four New Mexico smart grid projects. Japan's
New Energy & Industrial Technol
ogy Development Organization (NEDO) and five
organizations signed memos of understanding with five organizations Friday, Tom Bowles,
science advisor to New Mexico Gov Bill Richardson, told us this week. He noted that one
planned project would have been ha
lf its size without Japanese involvement and another
“simply would not have happened” (SGT,
Mar
-
09
).




Promise from IRS



IRS is “providing a safe harbor under section 118(a) of the Internal Revenue Code
for corporations receiving funding under the [$3.4 billion SGIG] program,” DOE told the
press midday yesterday. “With [this] determination … corporate utilities will be able

to
launch their investments with a clear indication of the tax status for their projects. This
decision will allow DOE to move forward quickly to finalize grant agreements over the
coming weeks.”


The IRS is promising to accept “a corporation's treatment

of an SGIG made by DOE
to the corporation as a non
-
shareholder contribution to the capital of the corporation under
section 118(a) of the code if the corporation properly reduces the basis of its property under
section 362(c)(2) and the regulations thereu
nder,” said the Treasury document.



Duke, others react



Duke Energy plans to review the SGIG ruling in depth, spokesman

Dave Scanzoni
told us yesterday. “We've said all along that we believe these grants should be tax
-
free, so
that all of the funds ca
n go for the intended purpose in terms of developing the smart grid
and moving expeditiously.” Duke believes it will sign its grant contract with DOE in the near
future, he added.


It is unclear how many of the 100 SGIGs are not taxable, said Katherine Ham
ilton,
president of trade group GridWise Alliance.


One taxable grant is set to go to Vermont Transco. The limited
-
liability corporation
is owned by Vermont Electric Power and won a $69 million SGIG to install 272,000 smart
meters and automate T&D systems

(SGT,
Feb
-
17
).


“We know we are going to be taxed,” spokesman

Kerrick Johnson told us yesterday,
acknowledging that limited
-
liabili
ty corporations and conventional corporations are treated
differently under the tax laws. The SGIG
-
supported project will proceed anyway, at a
slower pace, he added.


The only other LLC to win an SGIG was American Transmission Co, of Waukesha,
Wisc, Johns
on said. American Transmission won an $11.4 million SGIG for a fiber
-
optics
network. Spokeswoman Ann Spaltholz said yesterday that she had not yet determined

how
Treasury's ruling would affect

her firm.




What about co
-
ops?



Electricity co
-
ops

that won

SGIGs are likely freed from income tax under the
guidance, Patrick Lavigne, a spokesman for the rural cooperative association NRECA, told us
yesterday. Some co
-
ops have lost their not
-
for
-
profit status by receiving over

15% of their
income from selling t
o non
-
members, he added. In any case, “both groups are not taxable
under this guidance, under a cursory reading by the tax lawyers here,” he added. About 21
co
-
ops

won $215.6 million in SGIGs, according to the association.


Glendale, a city of 207,000 to
uching Los Angeles, last week became the first SGIG
awardee to actually sign a contract with DOE (SGT,
Mar
-
04
). Municip
al utilities such as

Glendale are exempt from federal tax.


Several firms denied SGIGs made commitments to carry on without federal funds.
Those include National Grid
, of Westborough, Mass; Bluebonnet Electric Cooperative,
Bastrop, Texas, and two subsidiar
ies of Wisconsin Integrys (SGT,
Nov
-
16
).


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ments]


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