Renewable Energy For Non Profits Sec 50 Amend

Memo in Support of Amendment to Tax Code Incentives for Non-Profit Institutions Solarsa Inc. / Strategic Energy Advisors, Inc.

I N S U P P O R T O F A M E N D M E N T T O I N C R E A S E R E N E W A B L E E N E R G Y U S E B Y N O N - P R O F I T S

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The proposed amendment will provide non-profit organizations, such as hospitals, museums, religious institutions and universities, a subsidized incentive to install clean, renewable energy property. The incentive is similar to that available to for-profit enterprises. Under current law, for-profit enterprises can claim a nonrefundable tax credit equal to 30% of their costs of clean energy equipment, such as photovoltaic arrays.1 Non-profit entities, however, cannot obtain the economic advantage of the tax incentive, absent complex financing structures. Such structures almost always transfer the benefits of the incentives to the for-profit third party, leaving the non-profit owner with little incentive to install renewable or energy efficiency improvements. As a result, non-profit organizations likely will install clean, renewable energy equipment at a substantially slower rate than for-profit companies. At the same time, non-profit organizations, such as hospitals and universities, use a substantial portion of all energy consumed in the United States.

While the Code contains numerous renewable energy incentives — a number of them were added or amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”) — none of them provide an incentive that would assist non-profit institutions to install renewable energy equipment to generate heat and electricity. Moreover, changes to the Code made by ARRA strongly suggest there is no sound policy objection to allowing tax-exempt organizations to benefit from such incentives as pass-through energy credits.

Congress Allowed Multiple Tax Benefits to Enhance Renewable Energy Projects. Prior to amendment by ARRA, the energy property credit of IRC § 48 was reduced if the

owner financed the energy property with industrial development bonds or other subsidized financings.2 Presumably, this evinced a policy that a taxpayer could not both claim a tax credit and be the beneficiary of tax-exempt financing for the same property. Congress has reversed this policy in the ARRA: a taxpayer may now claim the full energy property credit even if the property were financed with IDBs or other subsidized financing.3

1 IRC § 48. 2 See, IRC § 48(a)(4) as in effect prior to January 1, 2009. 3 ARRA § 1103.


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Congress has decided that multiple incentives for renewable and energy efficiency should be allowed in light of the multiple benefits accrued by rapid and widespread installation of efficiency and renewable energy sources. Extending the benefit of the energy credit to tax-exempt organizations is consistent with current congressional policy and the Code should be modified accordingly. The simplest way to do this is to allow the pass-through of the energy credit by an exempt-organization, as is done with tax incentives related to housing rehabilitation.

Historic Rehabilitation Tax Credit Financing Structure Provides a Model for Shifting

Energy Credits to Investors Section 47 of the Code provides a tax credit of 20% of qualified rehabilitation

expenditures with respect to historic buildings (10% in the case of pre-1936 non-historic buildings). Rather than using such credits themselves, owners normally want to “monetize” the credits, and use the proceeds to rehabilitate the building. Transactions typically are structured in one of two ways.4 In the more tax-efficient structure, the investor (or funding entity) organizes and controls a “master tenant.” The owner then leases the property to the master tenant and the owner and master tenant enter into a “tax credit pass-through” agreement. The owner (which may be a non-profit entity) benefits because the master tenant/investor pays for a significant portion of the rehabilitation and receives the benefit of the tax credit. For tax purposes, the tax credit pass-through agreement treats the master tenant as the owner of the property and thereby enables the master tenant to claim the tax credit.5. Most important, under current law, there appears to be no reason why an exempt-organization, which is barred from using the tax credit if it owns the building, cannot pass-through the credits to a taxable entity such as the investor or funding entity.6 The Code does not disallow the tax credit merely because a non-profit organization leases the building.7

While this type of transaction structure may seem complex, these structures are well understood by tax attorneys and accountants who represent developers, investors (including credit syndicators) and lenders involved in economic development projects. They are routinely used and provide a model for allowing a non-profit organization to benefit from tax credits.

4 In the first method, the owner will form an LLC or partnership with an investor.

The investor owns 99% or more of the LLC or partnership. Under the tax laws, the investor is allocated its proportional shares — i.e., 99% — of the credits. See, Treas. Reg. § 1.46-3(f)(1) and (2)(i). Of course, numerous other provisions must be satisfied. For example, the parties will have to satisfy the at-risk rules (IRC § 465) and demonstrate that the transaction has a reasonable chance of making a profit (see, e.g., PLR 8931001).

5 While this may seem to be a “fiction,” nonetheless, Congress has specifically sanctioned this fiction. IRC § 50(d)(5) (applies pre-1990 law pass-through tax-credits to lessees); Treas. Reg. § 1.48–4 (adopted under pre-1990 law).

6 See, D. Miller and R. Borod, 477-2nd T.M., Rehabilitation Tax Credit and Low-Income Housing Tax Credit, at A-24.

7 IRC § 50(b)(3). Generally, such leases cannot be “long-term leases.” See IRC §§ 47(a)(2)(B)(v)(I) and 168(h).


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Tax-Exempt Section 501(c)(3) Financing Does Not Offer a Practical Solution to Permit the Financing of Renewable Energy Property by Non-profit Organizations

Generally, exempt organizations are eligible to finance capital improvements with

proceeds of tax-exempt bonds.8 Use of such bonds, however, is subject to both legal and practical considerations. First, the economic benefit of a tax-exempt interest rate after taking into account all transaction costs and ongoing fees such as bond insurance premiums or letter of credit fees, may not produce the savings that would be available for energy property under IRC § 48. More important, for most large hospitals and universities, the relatively small amounts involved would not warrant a separate bond issue. Finally, while most, if not all, States may issue bonds for the benefit of hospitals or universities, other types of non-profits, such as religious institutions and museums, may not have a ready way of accessing the tax-exempt market.

CREBs and New CREBs Are Not Available to Non-profit Energy Users In 2005, Congress added to the Code Section 54, which authorized issuance of Clean

Renewable Energy Bonds.9 More recently, Congress authorized “New Clean Renewable Energy Bonds.” 10 Both types of bonds are tax-credit bonds. Generally, the issuer of tax-credit bonds does not pay interest and the bondholder, instead of receiving tax exempt interest, may claim a credit against taxes.

These bonds, however, may only be issued by a governmental body, a cooperative electric company or a body that is a cooperative which is owned by other cooperatives.11 In any event, neither CREBs nor new CREBs can be issued by non-profits nor do such bonds provide any direct benefits to non-profit organizations, unless they are lucky enough to have a contract with a state or other public entity and the power provider actually passes along the benefit, if any, of the tax-credit bond financing.

Non-profit Organizations are not Eligible for Grants in Lieu of Energy Property

Credits ARRA § 1603, permits the Secretary of the Treasury to provide grants for installing

renewable energy property, generally the same property described in IRC § 48. These grants, however, are not available to tax-exempt organizations.12

8 See, IRC § 145. 9 Energy Tax Incentive Act of 2005, Pub. L. 109-58, § 1303(a). 10 IRC § 54C, added by Energy Improvement and Extension Act of 2008, Pub. L.

110-343, Div. B, § 107(a). 11 IRC § 54(i); § 54C(c). For new CREBs, a qualified issuer also includes a “public

power provider,” which is defined as a State utility with a service obligation under the Federal Power Act. See, 16 U.S.C. § 824g(c) (imposing a requirement to meet certain service obligations).

12 ARRA § 1603(g)(2).


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Conclusion The national interest in economic recovery, reduction of dependence upon carbon-based

energy resources, and reduction of imported energy places a priority on rapid and widespread deployment of renewable and energy efficiency technologies to all segments of our economy. There are programs for energy research and development, commercialization programs, retrofit programs for residential and commercial establishments and a plethora of other programs and targets, with only one exception: the non-profit sector. All renewable incentives are targeted to tax-paying entities. However, there are large targets of opportunity among the non-profit sectors, especially universities, hospital complexes, museums and religious institutions which equally need the incentive to convert to sustainable energy resources.

The attached amendment redresses this oversight in the tax code and in our energy policy.

Technical Explanation of Amendment The amendment modifies I.R.C. Section 50(b) to exempt non-profit organizations from

limitations on use of tax credits. The amendment inserts new language in Section 50(b) to include non-profit investments in renewable energy and energy efficiency in the same language that enables non-profits to use tax credits for historic rehabilitation. The energy investment must be in connection with the non-profit’s tax-exempt purposes, and can not exceed $25 million per project. The energy investment must be in energy property as defined in I.R.C. Section 48(a), which creates the tax credit and describes renewable energy technologies. The provision clarifies that an exempt organization may pass through the energy credit with respect to property it uses under the rules of section 48(d) as in effect before its repeal by the Revenue Reconciliation Act of 1990. The provision is effective for energy property placed in service after December 31, 2008.

For further information please call:

Scott Jorgensen, CEO Jeanine Hull Solarsa, Inc. Strategic Energy Advisors, Inc. 4015 S. Dale Mabry Highway 3804 Albemarle Street Tampa, FL 33611 Washington, DC 20016 (813) 495-5174 (202) 468-0155 [email protected] [email protected] Andrea Dravo Strategic Energy Advisors, Inc. (703) 862-4727 [email protected]

Gregory Hilty, Exec. VP Solarsa, Inc. 2333 Martinique Ave Henderson, NV 89044 [email protected] 702.372.0706 - Direct Mobile

mailto:[email protected]




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Proposed amendment to extend renewable and energy efficiency tax incentives

to not-for-profit institutions

[Proposed new language is in bold font.]

Sec. 50. OTHER SPECIAL RULES.

* * *

(b) Certain Property Not Eligible* * *

(3) Property used by certain tax-exempt organizations

No credit shall be determined under this subpart with respect to any property used by an

organization (other than a cooperative described in section 521) which is exempt from

the tax imposed by this chapter unless such property is used predominantly in an

unrelated trade or business the income of which is subject to tax under section 511. If the

property is debt-financed property (as defined in section 514 (b)), the amount taken into

account for purposes of determining the amount of the credit under this subpart with

respect to such property shall be that percentage of the amount (which but for this

paragraph would be so taken into account) which is the same percentage as is used under

section 514 (a), for the year the property is placed in service, in computing the amount of

gross income to be taken into account during such taxable year with respect to such

property. If any qualified rehabilitated building is used by the tax-exempt organization

pursuant to a lease, or if any energy property (as defined in section 48(a)(3)(A)) is

used by a tax-exempt organization primarily in connection with its exempt

purposes, this paragraph shall not apply for purposes of determining the amount of the

rehabilitation credit or energy credit with respect to such energy property.

http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00000521----000-.html



http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00000514----000-.html#b


http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00000514----000-.html#a


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* * *

(d) Certain rules made applicable.

For purposes of this subpart, rules similar to the rules of the following provisions (as in effect on

the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply:

(1) Section 46(e) (relating to limitations with respect to certain persons).

(2) Section 46(f) (relating to limitation in case of certain regulated companies).

(3) Section 46(h) (relating to special rules for cooperatives).

(4) Paragraphs (2) and (3) of section 48(b) (relating to special rule for sale-leasebacks).

(5) Section 48(d) (relating to certain leased property).

(6) Section 48(f) (relating to estates and trusts).

(7) Section 48(r) (relating to certain 501(d) organizations).

Paragraphs (1)(A) , (2)(A) , and (4) of section 46(e) referred to in paragraph (1) of this

subsection shall not apply to any taxable year beginning after December 31, 1995. Section

48(d) referred to in paragraph (5) of this subsection shall apply without regard to whether

the lessor is an organization exempt from the tax imposed by this chapter.

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Renewable Energy For Non Profits Sec 50 Amend