THOMAS C. WHEELER, Judge.
Plaintiffs are the owners of six wind farm facilities in the Alta Wind Energy Center near Los Angeles, California. They commenced these actions on June 14, 2013, alleging that the Government underpaid them by over $206 million when it made a grant to them pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 ("ARRA"). Congress passed the ARRA in the wake of the 2008 financial crisis to stimulate the United States economy. As part of this strategy, Section 1603 created a system whereby certain renewable energy facility owners became entitled to cash grants. Owners of "specified energy property" like Plaintiffs became entitled to grants equal to thirty percent of "the basis of such property."
And therein lies the dispute. Plaintiffs argue that "basis" means the purchase prices of their wind farm facilities, minus small allocations for ineligible property such as land and energy transmission lines. The Government maintains that basis really should be calculated from the value of each wind farm's grant-eligible constituent parts and their respective development and construction costs, citing a myriad of factors that allegedly made the purchase prices an unfair measure of each wind farm's value. To bolster its arguments, the Government maintains that the purchases were subject to Section 1060 of the Internal Revenue Code, which calls for the residual method of tax accounting. Using the residual method, the Government argues that a substantial portion of the wind farms' purchase prices must be allocated to intangibles such as goodwill and going concern value.
The Court conducted a nine-day trial in this case from May 9 to May 23, 2016. At trial, the Court heard the testimony of eleven witnesses. Plaintiffs' nine witnesses were, in the order presented: James Pagano, George Revock, James Spencer, Lance Markowitz, Damon Huplosky, Anthony Johnston, Donald Edward Settle, Dr. Edward Maydew, and Dr. Colin Blaydon. The Government's witnesses were Ellen Neubauer and Judson Jaffe.
The Government sought to introduce expert testimony from Dr. John Parsons in the areas of economics, finance, and valuation. Parsons, Tr. 1889. Dr. Parsons is a Senior Lecturer at the Massachusetts Institute of Technology ("MIT") Sloan School of Management, where he has worked since 2005.
Dr. Parsons' Curriculum Vitae lists forty-seven articles and publications that he authored or co-authored from 1985 to the present.
Plaintiffs' counsel also introduced Dr. Parsons' March 10, 1997 expert report from another case,
However, Dr. Parsons' lists of articles both in this case and in
After Plaintiffs' counsel revealed these glaring omissions in Dr. Parsons' publication history, the Court had no choice but to exclude Dr. Parsons' testimony. The Court found that Dr. Parsons failed to disclose his articles relating to Marxist and socialist economic thought, and thereby provided untruthful testimony under oath to the Court. It is reasonable to infer that when Dr. Parsons left academia in 1995 to join a private-sector consulting firm, he likely found it uncomfortable to have these articles associated with his name. The Court based its ruling to exclude Dr. Parsons' testimony solely on the conclusion that he was untruthful under oath at trial and in his deposition, and not in any way on the substance of any articles he authored when he was a college professor. The Court simply could not rely on the substantive expert testimony of a witness who was untruthful in describing his background and qualifications. This outcome was especially dispositive here because Dr. Parsons' untruthfulness related to his writing on economics topics, which was the area in which he was called to testify as an expert. As one court facing a similar situation noted:
For these reasons, the Court excluded the expert testimony of Dr. Parsons. The Government did not identify any other experts on its pretrial list of witnesses, and therefore had no expert testimony to rebut Plaintiffs' experts, Dr. Maydew and Dr. Blaydon, or to support the Government's counterclaims. Therefore, the Government's counterclaims fail for lack of evidence.
After weighing the evidence and applicable law, the Court finds in Plaintiffs' favor. The Court holds that Plaintiffs' basis in their wind farm facilities must be calculated according to the facilities' purchase prices, minus reasonable allocations for land and other grant-ineligible property. Therefore, the Government underpaid Plaintiffs when it awarded them Section 1603 grants, and Plaintiffs are entitled to damages in amounts equal to the difference between the grants they received and the grants they were owed.
This case centers on six of the wind farms that make up the Alta Wind Energy Center.
In short, if one were going to build a wind farm, this would be the ideal place to do it. Unsurprisingly, companies have been developing wind power facilities in the Tehachapi region since the early 1980s. PX 299 at 12 ¶ 14. By 2009, five percent of all wind power generation in the United States came from the Tehachapi Region.
Building and operating a wind farm requires many physical assets. For example, a wind farm requires turbines, foundations to support them, meteorological towers, roads, and interconnection and transmission equipment.
The Alta Wind projects at the center of this lawsuit were developed in two stages. In the first stage, Oak Creek Energy Systems ("Oak Creek") began the development process and partnered with Allco Wind Energy Management Pty. Ltd. ("Allco") to finance the projects' development. Stip. ¶ 5;
In December 2006, Southern California Edison ("SCE") and a subsidiary of Oak Creek and Allco entered into a Master Power Purchase and Wind Project Development Agreement (the "Master PPA").
Oak Creek and Allco completed development work on the promised wind facilities, but did not actually begin construction. See Pagano, Tr. 86. Specifically, by June 2008, they had (1) completed environmental studies; (2) secured key transmission and interconnection queue requests in the Tehachapi Renewable Transmission Project (a project designed to generate more electricity to customers in Southern California,
In July 2008, Terra-Gen acquired Allco's U.S. wind energy business, including the Tehachapi Projects, for approximately $394 million. Stip. ¶ 6. In the transaction, Terra-Gen acquired development rights, transmission rights, some leased land, some land in fee simple, and an unrelated wind facility (Alite). Pagano, Tr. 119-21, 130; JX 14 at 17-39. Most of the land rights Terra-Gen acquired were unperfected; Allco had secured an option to lease the land, with the lease itself to be negotiated later. Pagano, Tr. 86-90, 457; JX 14 at 29-36; PX 223.
When Terra-Gen purchased Allco's assets, it engaged Duff & Phelps ("Duff"), an appraisal firm, to perform an appraisal of all of these assets in July 2008. Stip. ¶¶ 9-13. Duff's first appraisal report describes Duff's estimation of the fair market value of the identifiable tangible and intangible assets acquired by Terra-Gen for the purpose of allocating the purchase price among the acquired assets. Stip. ¶ 9; JX 32; Pagano, Tr. 120. Duff allocated approximately $36 million of the $394 million purchase price to the Alite wind farm, $1.5 million dollars to land owned by Allco, as well as other assets. JX 32 at 7; Huplosky, Tr. 1136. Duff estimated that the remaining $350 million pertained to the Tehachapi Projects. Of that amount, $68 million of the purchase price reflected payments that Terra-Gen had made for GE turbines that would be used in what later became Alta I. JX 32 at 35; Huplosky, Tr. 1137-38. The remaining $282 million reflected the acquisition of certain rights and intangible assets for the Tehachapi Projects. JX 32 at 35. Duff determined that $272 million of this amount reflected the value of the development rights Terra-Gen had acquired from Allco (valued at $195 million) and power transmission rights (valued at $77 million). Stip. ¶¶ 11, 12; JX 32 at 45. Duff allocated both of these intangible asset values solely across Altas I through XI. See Stip. ¶ 14.
Even though Oak Creek and Allco had made valuable progress on developing what eventually became the Alta Wind Energy Center, much work remained to be done when Terra-Gen took over the project. Terra-Gen had to secure required permits, negotiate and enter into turbine and construction contracts, execute interconnection and crossings agreements, obtain additional land rights, obtain construction financing, and oversee and implement the actual construction of the Alta Wind Energy Center. Pagano, Tr. 110-15. Terra-Gen did all of these things, at a total cost of over $4 billion for the entire Alta Wind Energy Center (of which over $2 billion related to costs associated with Altas I through VI).
Several factors outside Terra-Gen's control also increased the value of Altas I-VI during their development. First, California instituted and then increased its Renewable Portfolio Standards, which dictated that utilities were required to purchase a certain percentage of their electricity from renewable sources. Pagano, Tr. 73-74. Second, Section 1603 was passed during this development period. The grants available under the Section 1603 program were much more valuable than the preexisting tax credits that would have applied to the Alta projects.
After Terra-Gen had invested the necessary resources into the Alta projects, it began the process of selling them. Terra-Gen would have preferred to keep and continue to develop the Alta projects, but Section 1603 made this approach impractical.
The weight of the evidence demonstrates that all of the Alta I-VI transactions were negotiated by sophisticated parties at arm's length. Specifically, Citibank, N.A. ("Citi") and Google, Inc. negotiated the Alta II-V transactions, General Electric Capital Corporation ("GE") and Union Bank of California (through UnionBanCal Corporation) ("UBOC") negotiated the Alta I transaction, and Everpower Wind Holdings, Inc. ("EverPower") negotiated the sale of Alta VI (all parties negotiated with Terra-Gen). The testimony at trial cumulatively showed that these parties extensively negotiated to achieve the best possible purchase prices.
First, Terra-Gen sold Altas II-V to Citi and additional investors after an initial bidding process in a series of transactions that lasted from December 2010 to June 2011.
Citi and Terra-Gen then individually closed all four project transactions, with Citi divesting some or all of its interest in each individual phase to other potential investors, either by recruiting a co-investor before closing (as with Google) or divesting its interest in an owner-lessor entity after closing. Revock, Tr. 740-41, 773-74, 707; PX 13. The agreements also leased Altas II-V back to Terra-Gen. Essentially, this meant that Terra-Gen would continue to operate Altas II-V while paying a steady income stream to Plaintiffs. This income stream was generated by the wind farms as integrated facilities, and reflected benefits derived from use of each entire wind farm. Revock, Tr. 735, 785. As Mr. Revock testified on behalf of Citi, the parties used a computer program to generate a leaseback transaction that optimized Plaintiffs' income from the leaseback and met Terra-Gen's objectives. Revock, Tr. 746, 747. In total, the purchase prices that Plaintiffs paid Terra-Gen in the Alta II-V transactions were (approximately): $440.25 million for Alta II, $444.5 million for Alta III, $288.8 million for Alta IV, and $488 million for Alta V. See Stip. ¶¶ 18-21; JX 225; JX 286; JX 344; JX 402. These purchase prices reflect only property that the parties deemed eligible for grants under Section 1603; the parties exchanged grant-ineligible property in separate agreements.
In December 2010, Terra-Gen closed a similar sale-leaseback transaction for Alta I. GE and UBOC formed a consortium to participate as equal co-investors in the sale-leaseback. Markowitz Tr. 925-27. To accomplish the deal, GE and UBOC formed trusts that became the owner-lessors in the leaseback (as with Altas II-V, these trusts are Plaintiffs in this case). Stip. ¶ 17. The overall transaction created a structure whereby Terra-Gen continued to operate Alta I, and Plaintiffs received an income stream from the cash flows Alta I generated. Markowitz, Tr. 989-90. The overall purchase price for Alta I was $560 million. Stip. ¶ 17; JX 212. In contrast to the sale-leaseback transactions of Altas II-V, the Alta I transaction conveyed both grant-eligible and ineligible property. JX 212.
EverPower bought Alta VI from Terra-Gen in 2012 for $439.388 million. Mr. Spencer, on behalf of EverPower, testified that the purchase price reflected the fact that Alta VI was a complete facility with all of its necessary contracts and was capable of generating income. Spencer, Tr. 850. EverPower also acquired some project land free of charge in the transaction. Spencer, Tr. 895-97. Terra-Gen also required EverPower to change the name of Alta VI to "Mustang Hills." Huplosky, Tr. 1211. The parties changed the name because they hoped Treasury would not lower the claimed Section 1603 grant amount for Alta VI (as Treasury had for the other Alta facilities).
The parties to the Alta I-VI transactions also included indemnity provisions in their transactions. With the indemnities, Terra-Gen agreed to accept the risk that the Government would not pay the full amount Plaintiffs would claim under Section 1603, using the purchase price as basis. Specifically, the Alta II-V transactions provided that Terra-Gen would take the financial risk of any difference between the payments requested using the purchase price as the basis (as Plaintiffs argue basis should be calculated in this case) and any actual reduced payment, up to a certain amount. Revock, Tr. 723-24. In the Alta I transaction, Terra-Gen went even further: it agreed to indemnify the purchasers for any difference between the Government's actual grant and a purchase price-basis grant with no upper limit on Terra-Gen's liability.
Before Plaintiffs submitted Section 1603 applications, Terra-Gen first prepared cost schedules for the Alta projects that broke down the total development and construction costs into various components, including property that was eligible for a Section 1603 grant and property that was not. Huplosky, Tr. 1041-50, 1052-53. Terra-Gen "capitalized" the indirect costs into the hard assets—meaning that the indirect cost effectively becomes part of the hard asset. Huplosky, Tr. 1046-48. In some instances, indirect costs were entirely eligible—for instance, if they were associated with only eligible assets, such as permits for the wind turbines. Huplosky, Tr. 1049. In other instances, indirect costs were entirely ineligible, such as costs related solely to electricity transmission.
Treasury required companies applying for a Section 1603 grant to provide an opinion from an independent auditor validating the claimed grant-eligible costs. Plaintiffs retained KPMG to examine, and prepare an opinion validating, Plaintiffs' claimed eligible costs. Johnston, Tr. 1215-16. Terra-Gen and KPMG first evaluated the costs incurred by Terra-Gen to construct each component of the facility, and determined which of these costs were eligible and which were ineligible. Huplosky, Tr. 1038;
In addition to classifying costs as eligible or ineligible, KPMG also confirmed that the costs had actually been incurred, a process referred to as "vouching" the costs. Huplosky, Tr. 1202, 1282. KPMG vouched eighty percent or more of the construction costs for each Alta Wind lawsuit facility. Johnston, Tr. 1220, 1226-29; JX 86 at 3. Based on this vouching work, KPMG verified "that management's assertion of the eligible cost basis" for each Facility with respect to Terra-Gen's construction costs "is accurately stated." Johnston, Tr. 1227-29.
Terra-Gen then prepared cost schedules that set forth Plaintiffs' claimed allocations of the purchase price to eligible and ineligible property. Huplosky, Tr. 1079-80. Thus, for Altas I and VI, Plaintiffs submitted applications for Section 1603 grants that multiplied the percentage of construction costs that Terra-Gen deemed eligible for Section 1603 grants by the purchase price. Huplosky, Tr. 1080, 1117. Plaintiffs' analysis deemed 93.1 percent of Alta I to be eligible property under Section 1603. Huplosky, Tr. 1080, 1100. Similarly, Plaintiffs deemed 96.9 percent of Alta VI to be eligible for a Section 1603 grant.
Plaintiffs' expert, Dr. Maydew, testified that this allocation method was reasonable. Maydew, Tr. 1411-14, 1415-16; PX 326 at 27-28 ¶¶ 2-4. He also testified that at least three of the "Big 4" accounting firms have approved and used the pro rata allocation method to determine the basis of eligible property at wind power facilities. Maydew, Tr. 1418-19. Mr. Settle's testimony further showed that both the industry and the National Renewable Energy Laboratory ("NREL") accept, as a "rule of thumb," that generally ninety-five percent of the construction costs of a wind farm are eligible. Settle, Tr. 1305-06. Indeed, Mr. Settle noted that NREL "tested" this ninety-five-percent ratio "early on multiple projects and determined that a good representation is five percent nonqualifying, ninety-five percent eligible out of total project costs." Settle, Tr. 1309-10, 1314. Thus, the 93.1 percent and 96.9 percent allocations for Altas I and VI would be within the range of this "rule of thumb."
Each Plaintiff timely applied to Treasury for a cash grant equal to thirty percent of the purchase-price basis of its eligible property. JX 195; Stip. ¶¶ 36-37. Treasury had entered into an interagency agreement with NREL, which performed a review of cash grant applications and completed an "application checklist" for each Plaintiff application. These application checklists confirmed that Plaintiffs had satisfied all statutory requirements to receive Section 1603 grants. Settle, Tr. 1306-07; PX 205; PX 132. Instead of paying Plaintiffs cash grants equal to thirty percent of their purchase price basis, the Government paid cash grants equal to thirty percent of Terra-Gen's construction and development costs for each facility.
ARRA Section 1603 allows owners of "specified energy property" to apply for grants. ARRA § 1603(a). Wind facilities are one type of specified energy property,
The question in this suit has always been what the basis of Altas I-VI is. If the Court were to follow the Government's approach in awarding the Section 1603 grants, basis would mean the development and construction costs of each Alta facility—
Basis, as defined in the IRC, is the cost of property to its owner.
There are exceptions to the general rule that purchase price determines basis, and the Government argues that several of them apply here. Essentially, the Government argues that the purchase prices cannot be Plaintiffs' basis in the wind farm facilities because they do not capture the fair market value of the tangible property that is eligible for Section 1603 grants. The Government first points to the fact that the purchase prices included ineligible property to show that the fair market value of the eligible property is not ascertainable from the purchase prices. Next, the Government argues that Section 1060 of the IRC, and its accompanying "residual method" of tax valuation, applies because intangible goodwill or going concern value was included in the purchase prices. Finally, the Government argues that the purchase prices cannot serve as Plaintiffs' basis because (a) the transactions were not "conducted at arm's-length by two economically self-interested parties;" and (b) the transactions were "based upon `peculiar circumstances' which influence[d] the purchaser to agree to a price in excess of the property's fair market value."
Both parties agree that the price Plaintiffs paid for Altas I-VI was higher than the mere cost of developing and assembling the facilities. Therefore, the question is whether some of this additional value constitutes goodwill or going concern value. If it does, then Section 1060 applies, and the parties would have to use the "residual method" promulgated under Section 338(b)(5) of the IRC to value the grant-eligible assets. The residual method allocates value on a waterfall basis among several categories of tangible and intangible assets, and the Government argues that much of the value in the Alta I-VI transactions would be allocated to ineligible intangibles (such as goodwill or going concern value) if the residual method applied.
Section 1060 applies to "applicable asset acquisitions." 26 U.S.C. § 1060(a). An applicable asset acquisition "means any transfer . . . of assets which constitute a trade or business, and with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets."
There is a structural problem that becomes apparent when one tries to parse this Treasury Regulation. First, in subsection 1.1060-1(b)(2)(ii), the Regulation sets out specific definitions for goodwill and going concern value, which are presented as two distinct (if related) terms. Further, the definitions for goodwill and going concern value appear largely to incorporate the terms' common law meanings.
In the next subsection, however, the Regulation enumerates situations in which both of these two concepts "could apply." So, if one were to read the categories in subsection 1.1060-1(b)(2)(iii) as mandatory triggers for finding that either goodwill or going concern value could apply, then the definitions in the previous subsection—and, indeed, the body of case law that gave rise to them—would be meaningless. It is hard to believe the Treasury intended such a drastic result, particularly given the Regulation's phrasing: "Factors to be considered include . . . ." 26 C.F.R. § 1.1060-1(b)(2)(iii) (emphasis added). Therefore, it is more appropriate to view subsection 1.1060-1(b)(2)(iii) as a non-exhaustive list of factors that may mean goodwill or going concern value could apply. The Court must consider these factors along with the totality of the circumstances in the Alta transactions. As shown below, the Court finds that other factors are dispositive here.
As noted above, goodwill is the "expectancy of continued patronage."
The Court is aware of authority that appears at first blush to contradict this view.
With that definition in mind, there are a few Alta Wind-specific factors that deserve consideration here. When sold, Altas I-VI (1) were not yet operational, (2) had lined up only one long-term customer (SCE) to buy the entirety of their electricity output for the foreseeable future, and (3) were not capable of taking on any other customers. Thus, any "expectancy of continued patronage" would have to come from an expectancy that the Alta facilities would keep doing business with SCE, their sole customer.
It is true that goodwill may attach even where one customer purchases all of a business's output "for a long series of years."
The Government's argument that the location of Altas I-VI adds goodwill also fails. It is undisputed that the Alta facilities' location added value to the wind farm facilities. However, the value of an asset's permanent location is part of the basis of the asset itself, and is not goodwill or any other separate intangible asset.
Going concern value, while related conceptually to goodwill, is a distinct form of value.
Because the Court finds that neither goodwill nor going concern value could have attached to Altas I-VI at the time of the transactions, the transactions were not "applicable asset acquisitions" within the meaning of Section 1060. Therefore, Section 1060 and its accompanying residual method do not apply to the transactions.
Obviously, Altas I-VI had additional value over their development and construction costs because they were ready-to-use wind farm facilities located in the windy Tehachapi Region, not just collections of turbines lying on the ground somewhere. This is the real sticking point in this case. The Government argues that this value is goodwill or going concern value, but those labels do not capture the situation of Altas I-VI, as shown above. Rather, Altas I-VI had "turn-key" value because they were ready-to-use wind farm facilities.
Ready-built facilities may have value over and above the sum of their construction and development costs. Part of this value is turn-key value, which essentially describes value a facility has when it is ready for immediate use after purchase. Here,
Altas I-VI were ready-to-operate wind farm facilities at the time of purchase. Terra-Gen had completed the necessary development and permitting work before the purchase. Therefore, the wind farm facilities had turn-key value, and their tangible assets were more valuable than they would have been if the wind farm facilities were not ready to operate. This value was part of the fair market value of Altas I-VI.
Even when Section 1060 does not apply to a transaction, the Tax Court historically has looked to other measures of a property's fair market value if evidence shows that a "transaction [was] not conducted at arm's-length by two economically self-interested parties or where a transaction is based upon `peculiar circumstances' which influence the purchaser to agree to a price in excess of the property's fair market value."
Further, it is important to note that the Court should disregard the purchase price as basis only if the evidence shows that peculiar circumstances have highly inflated the purchase price. For example, in
As stated above, the Court finds that all of the Alta transactions occurred at arm's length between sophisticated and self-interested parties. Therefore, the only question remaining is whether any peculiar circumstances were present in the Alta transactions that highly inflated the Alta facilities' purchase prices. The Government argues that there were such peculiar circumstances, citing the sale-leaseback transactions for Altas I-V, several side-agreements between the parties to the transactions, and Terra-Gen's agreements to indemnify Plaintiffs' Section 1603 payments.
The parties to the Alta I-V transactions entered into sale-leaseback transactions in which Terra-Gen sold its facilities to Plaintiffs but immediately leased the facilities in order to operate them itself.
Therefore, to create peculiar circumstances, there must be some indication that the parties to the transactions adjusted various aspects of the sale and leaseback prices in order to highly inflate the purchase prices, as in
Other factors also show that the leasebacks did not fundamentally alter the Alta I-V transactions. First, the Alta II-V leasebacks were negotiated after Citi and Terra-Gen had separately agreed on a per-kilowatt purchase price. For example, Mr. Revock testified that "the value [sale price] is determined separately in advance of running the lease profile" in these sale-leaseback transactions. Revock, Tr. 809-10. Further, in the Alta I transaction, a competing bidder—Brookfield Renewable Power, Inc.—made a last-minute bid for an outright purchase of Alta I that was less than two percent lower than the price UBOC and GE eventually paid.
The rent prepayments in the sale-leaseback transactions also did not create peculiar circumstances. The purpose of such prepayments was merely to reduce the periodic rent payments due under the lease agreements, as this helps ensure that the project cash-flows will be enough to cover Terra-Gen's rent payments to Plaintiffs.
The Government points to land agreements and indemnification for certain financial obligations such as "wake payments" to show that the Alta I-VI transactions contained peculiar circumstances. However, there is nothing in the agreements to which the Government refers that would lead to a "highly inflated" purchase price for the Alta facilities.
First, Terra-Gen obligated itself during the construction and development phase to make wake payments from Alta VI to the other Alta facilities. These wake payments compensated facilities that were downwind of Alta VI for the disruption in wind-flow that Alta VI caused. In other words, facilities downwind of Alta VI could not generate as much electricity because they were in Alta VI's wake. Terra-Gen itself—not Alta VI—therefore took on the obligation to make wake payments to the downwind facilities because it was the developer of all six facilities.
Second, it is undisputed that Terra-Gen conveyed some fee land to Plaintiffs at no charge, and that it also transferred leased land to Plaintiffs as part of the Alta transactions. However, Plaintiffs have accounted for the fee land in their Section 1603 allocation. As shown below, the Court finds this allocation for land to be reasonable. Because Plaintiffs acknowledge that the land's value cannot be part of their basis in Altas I-VI, there is no reason to believe that Plaintiffs are attempting to highly inflate their basis by including ineligible fee land value.
Further, the evidence shows that the lease terms on the leased land that Plaintiffs acquired during the Alta transactions were not more favorable than other similar leases during the same time period.
In sum, no evidence demonstrates that the value of wake payments or grant-ineligible land highly inflated the Alta I-VI purchase prices. Therefore, these agreements do not constitute peculiar circumstances.
Terra-Gen indemnified Plaintiffs for the difference between their claimed Section 1603 grant amounts and lower grant amounts they might receive. Still, this is not a peculiar circumstance. One of the reasons Terra-Gen sold, and Plaintiffs bought, the Alta facilities was the existence of the Section 1603 cash grant program. Both Terra-Gen and Plaintiffs believed the facilities to be worth as much as they would be worth had the Government awarded a Section 1603 grant using the purchase price as basis. Nothing about this enhanced value estimate is peculiar; rather, "[w]hen examining a transaction, the reality that the tax laws affect the shape of most business transactions cannot be ignored."
In the absence of peculiar circumstances that highly inflated the Alta I-VI purchase prices, the Court looks to these purchase prices to determine basis for purposes of Section 1603.
Courts allow pro-rata allocations where they are necessary to determine the percentage of a purchase price that should be allocated to a particular asset. For example, in
Plaintiffs appear to have made such an allocation here for Altas I and VI (the transactions in which the parties conveyed both eligible and ineligible property). Their auditor, KPMG, prepared certifications of the fair market value of eligible and ineligible property in Altas I-VI.
Plaintiffs' expert witnesses also endorsed KPMG's allocations. Dr. Maydew testified to the reasonableness of KPMG's pro-rata allocation work.
Further, Plaintiffs' analysis takes into account the value of the fee land conveyed in the Alta transactions free of charge. This value is just over $4 million, which is about two-tenths of one percent of the total Alta I-VI purchase price. Blaydon, Tr. 1625; PX 219; PX 218; PX 299 at 92-93 ¶¶ 180-82. The Court finds that the value attributed to land—which is essentially de minimis, given its value compared to the overall value of the Alta transactions—is reasonable, and that Dr. Blaydon properly deducted this value in performing his damages calculations.
The Government argues that the KPMG allocation documents and related testimony are inadmissible as expert testimony under Rules 701 and 702 of the Federal Rules of Evidence.
The Government further argues that Plaintiffs' allocation fails to account for the PPAs, which it maintains are intangible, ineligible property. The Government argues that PPAs must be classified as "customer-based intangibles" within the meaning of 26 U.S.C. § 197(d)(2)(A)(iii). However, the Court finds Plaintiffs' treatment of the PPAs more persuasive. Plaintiffs' approach treats the PPAs like land leases. A land lease is not considered a separate asset from the underlying land, even if the land lease terms are better than market.
Many of the Government's arguments essentially boil down to an attack on the logic behind any pro-rata allocation method Plaintiffs could possibly use in this case. However, because the Court finds that the purchase price is the best measure of the Alta facilities' fair market value (and, therefore, basis), a pro-rata allocation method appears on the evidence to be the most reasonable solution to the problem Section 1603 presents. Under Section 1603, the value of certain property is ineligible as basis for a grant. In the real world, this grant-ineligible property is hopelessly intertwined with grant-eligible property. Having both types of property in one place makes a wind farm valuable as a wind farm generating cash flows, and not just as a disjointed collection of random assets.
In sum, the Court finds that applying the Government's preferred valuation approach, which would value the Alta facilities solely based on their construction and development costs, improperly excludes value from Plaintiffs' basis in these facilities in a way that is not supported under Section 1603 or the IRC. If Congress had intended some other definition of "basis" to apply in situations like this, then it should have said so when it drafted the statute. In the absence of such guidance, the Court finds that Plaintiffs have calculated the basis of their wind farm assets in the least imperfect way possible.
The Court finds that the Government should have used Plaintiffs' purchase prices, subject to reasonable allocations in the cases of Altas I and VI (and with de minimis deductions for land conveyed in fee simple), as basis in calculating Plaintiffs' grants under Section 1603. Therefore, the Court awards Plaintiffs damages in amounts equal to the shortfall between the grant amounts to which Plaintiffs were entitled and the amounts the Government awarded. In total, the Court awards Plaintiffs damages of $206,833,364. The following table shows the damages each Plaintiff is awarded:
The Clerk is directed to enter final judgment against the Government in the amount of $206,833,364. Pursuant to RCFC 54(d), the Court awards reasonable costs to Plaintiffs.
IT IS SO ORDERED.
