Beginning Construction Continuity Safe Harbor Extended for National Security Concerns

July 24, 2019

Earlier this month, the Internal Revenue Service issued Notice 2019-43, which modifies guidance provided in prior Notices 2013-29, 2013-60, 2014-46, 2015-25, 2016-31, 2017-04 and 2018-59 to provide that the continuity safe harbor may be tolled and extended in certain limited circumstances involving significant national security concerns.

Two methods are used to determine whether a taxpayer has satisfied the beginning-of-construction requirement under Sections 45 and 48 of the Internal Revenue Code of 1986, as amended. One method is by commencing “physical work of a significant nature,” and the other method is if the taxpayer pays or incurs 5 percent or more of the total cost of the facility. In addition to satisfying either the physical work method or the 5 percent safe harbor method, the taxpayer is required to make continuous progress toward completion once construction has begun. (See IRS Notice 2013-29 at Section 4.06, Continuous Construction Test, and Section 5.02, Continuous Efforts Test, collectively, the continuity requirement.) Notice 2013-60 provides a safe harbor, pursuant to which a facility will be deemed to satisfy the continuity requirement if it is placed into service during a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began (the continuity safe harbor). If the continuity safe harbor is not satisfied, then the continuity requirement must be determined by the relevant facts and circumstances.

Notice 2019-43 notes that a plan to develop or construct a facility or energy property includes the construction of the electricity-generating equipment that is not part of the facility or energy property itself but which is necessary to connect the facility or energy property to the energy grid or to customers. It includes the distribution or transmission line or other interconnection equipment.

The IRS recognizes that such a construction or development plan may raise significant national security concerns for the Department of Defense (DOD) and efforts to mitigate such concerns by pursuing a modification to the plan may delay the development and construction of the facility or energy project. As such, Notice 2019-43 provides that the continuity safe harbor will be tolled and extended for a period of time to account for delays, on a day-for-day basis, that result from pursuing modifications to a project’s construction plan (including interconnection) to mitigate national security concerns raised by the DOD. Such extensions to the continuity safe harbor are allowed only when all of the following requirements are met:

  1. Construction has begun (within the meaning of the IRS’ prior notices) with respect to the facility or energy property.
  2. Current or future owners of property that is part of the plan (including facility or energy property or additional equipment that is not part of the facility or energy property itself but is necessary to connect the facility or energy property to the grid or to customers) have received one or more government permits or approvals necessary to implement the plan.
  3. The DOD provides written notice to an owner that one or more aspects of the plan raise significant concerns related to national security and that modification of the plan would be in the best interest of national security objectives.
  4. The owners pursue a modification of the plan acceptable to the DOD to mitigate these national security concerns and to further the national security objectives.
  5. The modification to the plan requires the parties to obtain new or additional permits or licenses, which delays placing the facility or energy property in service.

The tolling period will result in a day-for-day extension of the continuity safe harbor. The first day of the tolling period is the date on which the DOD provides the written notice to an owner, as described above. The last day of the tolling period is the date on which the owners:

  1. obtain all new or additional permits or licenses (and any potential administrative appeals or potential judicial review by the applicable federal or state courts are finally resolved);
  2. obtain written confirmation that the new or additional permits or licenses to be completed will not be issued; or
  3. notify the relevant federal or state regulatory, permitting and/or licensing authorities in writing that the modification to the plan will no longer be pursued.

McGuireWoods lawyers are experienced in energy, project finance and tax equity structures. Do not hesitate to reach out if your business would like to discuss any of the above information.