Senate Finance Committee Chairman Orrin Hatch (R-Utah) sent letters to the Department of Treasury, the Internal Revenue Service (IRS) and the Treasury Inspector General for Tax Administration (TIGTA) requesting additional information into the use and administration of Section 1603 cash grants and energy tax credits.
Created by the American Recovery and Reinvestment Act of 2009 (Recovery Act) to subsidize “green energy”, the Section 1603program has awarded approximately $25 billion in cash grants to date.
“Congress has an obligation to conduct rigorous oversight of how the Executive Branch spends taxpayer dollars. These programs have directed billions of dollars toward green energy projects, and taxpayers deserve nothing less than full transparency and accountability from the Administration,” Hatch said. “I expect full cooperation from the agencies involved in administering this multibillion dollar grant program as we seek answers into how the funds were awarded.”
In March, Hatch requested information from the Treasury Department and the IRS regarding the safeguards and coordination strategies the agencies had in place to review and award Section 1603 grants.
Hatch’s review of the grant program follows a 2013 Treasury Inspector General for Tax Administration (TIGTA) which found that the IRS did not have a system in place to catalogue the taxpayer accounts of entities that received Section 1603 granted, allowing recipients the opportunity to later amend tax returns and claim a tax credit in addition to the grant.
The text of the full letters is below. A signed copy of the letter to the Treasury Department can be found here. A signed copy of the letter to the IRS can be found here. A signed copy of the letter to the TIGTA can be found here.
June 9, 2016
The Honorable Jacob Lew
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Secretary Lew:
Pursuant to the Committee’s inquiry into the use of certain energy-related tax provisions, I write concerning the Treasury Department’s (“the Department”) administration of Section 1603 Payments for Specified Energy Property in Lieu of Tax Credits (“Section 1603 program / Section 1603 payments”) program. Last March, I wrote to you and Commissioner Koskinen about the Section 1603 program and appreciate the Department’s response of May 11. In light of this response, as well as the ongoing inquiry by the Committee, I write today to request additional information on the administration of the Section 1603 program and the question of overlapping federal subsidies.
In an October 25, 2010 memorandum for the President, Carol Browner, Ron Klain, and Larry Summers detailed concerns over “double dipping” and a lack of “skin in the game” by recipients of overlapping renewable energy subsidies, including the Section 1603 program and Department of Energy (“DOE”)-administered Sections 1703 and 1705 energy loan guarantee programs (“energy loans”). The memo noted Office of Management and Budget and Department questions regarding “the total government subsidy for loan guarantee recipients, which have exceeded 60%… [and] the relatively small private equity (as low as 10%) developers put into projects….”
To assist the Committee in its ongoing inquiry, I ask that you provide the following information by no later than Thursday, June 30, 2016:
1. The Department’s response stated that the review process uses “risk-based criteria” to apply additional scrutiny to certain applications.
a. Please explain further what components are included within the “risk-based screening criteria” that trigger an additional review.
b. How many Section 1603 applications warranted additional screening through this “risk-based screening criteria”?
c. Other Department guidance states that “in order to ensure that a Section 1603 applicant’s claimed cost basis reflects the eligible property’s fair market value, basis is more closely scrutinized in cases involving related parties, related transactions, or other unusual circumstances.” Is this level of screening performed by the Department or elsewhere?
2. According to Department documents, the Section 1603 review team evaluates a project’s claimed basis by comparing the basis against certain market-based benchmarks.
a. Provide the benchmarks used since this review method was established.
b. What system characteristics does the team consider in evaluating an applicant’s claimed basis against these benchmark prices?
c. What factor(s) does the team consider in evaluating whether a transaction is conducted at arm’s length or involves related parties or transactions?
3. An independent accountant’s report is required for projects with a claimed basis over $500,000.
a. Of the 104,733 awarded applications to date, how many required an independent accountant’s report?
b. Does the Department have the ability to verify accountant independence or qualifications? If so, how are these verified?
4. The Department’s response stated that of the 104,733 Section 1603 payments, 29,249 awards have been reduced from the amounts requested.
a. Were these reductions made during the initial review of the application (prior to the grant being awarded) or after the award?
b. What were common reasons for these reductions?
5. Public records indicate that numerous Section 1603 payments were used to repay DOE energy loans.
a. Does the Department have a view on the use of Section 1603 payments to repay loans from other government entities?
b. Is a Section 1603 payment recipient (“recipient”) required to file a Notice of Assignment when the recipient uses a Section 1603 payment to repay a federal loan, similar to the requirement when the payment is assigned to a financial institution?
6. How do the Department and DOE coordinate when awarding Section 1603 grants?
a. Is there a total combined percentage of the basis which DOE and the Department seek not to exceed when providing loans and grants? Public records indicate that, in numerous cases, federal financing provided appears to exceed the basis value of a given property.
b. The 2010 memorandum stated that “Treasury and OMB believe that clear policy principles – and associated metrics for evaluation – should be developed for the energy loan guarantee program. These principles would … address issues like double dipping [and] skin in the game…” Has the Department instituted similar policy principles and metrics for the Section 1603 program? Please provide any supporting policies, procedures, or any other written documentation.
7. Department guidance requires the recapture of a portion of a Section 1603 payment if the energy property ceases to be a “specified energy property” or is transferred to a “disqualified person” within five years of the property being placed into service.
a. Describe how the Department monitors recipients to determine whether either of these events has occurred within the specified period.
b. What actions does the Department take if it determines a portion of Section 1603 payment is eligible for recapture?
8. What actions, if any, does the Department take to authenticate claims on Section 1603 program participant annual performance reports?
9. Please provide a list of the 177 Section 1603 grant recipients who have not submitted annual reports for 981 projects as of the end of March of this year. Please include the company name, property or facility name, award amount, award date, and status of collection proceedings at a minimum.
10. Is the Department taking any actions to monitor the financial stability of energy companies who receive taxpayer assistance through programs such as the Section 1603 grant program?
I also ask that you provide your answers on a question by question basis, indicating which question you are answering. Thank you in advance for your assistance with this request.
June 9, 2016
The Honorable John Koskinen
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Dear Commissioner Koskinen:
Pursuant to the Committee’s inquiry into the use of certain energy-related tax provisions, I write concerning the Treasury Department’s Section 1603 Payments for Specified Energy Property in Lieu of Tax Credits (“Section 1603 program / Section 1603 payments”) program and the Internal Revenue Service’s administration of the energy investment tax credit under Internal Revenue Code §48(a) (“energy credit”). Last March, I wrote to you and Secretary Lew about the administration of the Section 1603 program specifically. In light of the Treasury Department’s response on behalf of the IRS, I ask that you provide the following additional information:
1. At the IRS’s earliest opportunity, I request a briefing for my Committee staff on:
a. The 1603 Compliance Initiative Project; and
b. Considerations regarding the fair market value of energy properties claiming the energy credit, including considerations of appropriate cost basis and whether transactions are conducted at arms’ length.
2. For taxpayers claiming an energy credit, describe the IRS’s process for reviewing claims regarding fair market value (FMV) of the project’s cost basis and whether the agency is considering changes to how it evaluates FMV.
3. Detail the IRS’s verification process for tax returns claiming the energy credit.
a. What later follow-up verification does the IRS do to ensure that the energy credit is not eligible for recapture?
b. What actions does the IRS take in the event that it determines an energy credit is eligible for recapture?
4. Please provide a list of all instances when the IRS sought to recapture an energy credit of $10 million or more claimed for an energy property since 2010. Please include the following:
a. Taxpayer name;
b. Total value of the energy credit;
c. Amount sought to be recaptured;
d. Amount recaptured;
e. Tax year(s) in which the energy credit was claimed;
f. Property name; and
g. Copies of any relevant Forms 4255, Recapture of Investment Credit filed.
5. What, if any, verification does the IRS conduct of a taxpayer claiming depreciation of a renewable energy project?
6. When the Treasury Department sends the IRS details of Section 1603 grant recipients:
a. In what form does it arrive?
b. Does the IRS do any follow-up review to check for “double-dipping” of both the energy credit and Section 1603 grants?
7. The Treasury Department’s response to my March 2016 letter stated that of the 104,724 awarded Section 1603 payments (Treasury’s website states 104,733), 29,249 have been reduced from the amounts requested. Does the IRS plan to determine whether these taxpayers are also overstating the costs solar properties for which an energy credit was claimed?
Please respond to these questions by no later than Thursday, June 30, 2016. I also ask that you provide your answers on a question by question basis, indicating which question you are answering. I designate Christopher Armstrong and Lindsay Steward to have access to Section 6103 information under this letter. Thank you in advance for your assistance with this request.
June 9, 2016
The Honorable J. Russell George
Treasury Inspector General for Tax Administration
1401 H Street, NW
Washington, DC 20005
Dear Inspector General George:
The American Recovery and Reinvestment Act of 2009 created the Section 1603 Payments for Specified Energy Property in Lieu of Tax Credits (“Section 1603”) program. Under the program, taxpayers making certain commercial investments in energy properties could elect to receive a cash grant in lieu of claiming the energy investment tax credit under Internal Revenue Code §48(a) (“energy credit”). As of May 1, 2016, the Treasury Department has awarded over $25 billion in Section 1603 cash grants. While the program has undoubtedly funded legitimate projects throughout the country, it has also proven susceptible to misuse and fraud.
Despite TIGTA’s earlier recommendation, the Internal Revenue Service (“IRS”) declined to establish an indicator on taxpayer accounts receiving Section 1603 cash grants. The IRS instead opted to extend its narrowly focused Compliance Initiative Project, and risks remain that the program is vulnerable to double-dipping and other abuses. Given the IRS’s limited work in this area, the extent that this is occurring is not fully known. Therefore, I write to request that TIGTA conduct further oversight in this area by undertaking the following:
1. Using a statistically valid sample of recipients of all sizes, determine the extent to which Section 1603 grant recipients have claimed disallowed energy credits;
2. In cases where a Section 1603 grant recipient also claimed an energy credit, determine if this was already known to the IRS and, if so, were appropriate actions taken; and
3. Examine the methods of property valuation used by taxpayers claiming the Section 1603 cash grant, including methods of measuring the cost basis of the property, the role of tax equity investors, and the use of independent accountants for properties with a cost basis of more than $500,000.
Due to the Committee’s ongoing work in this area, I ask that numbers 1 and 2 of this request be expedited. Thank you in advance for your assistance with this request.