On June 6, 2026, the U.S. District Court for the District of Columbia issued a memorandum opinion in Oregon Environmental Council v. Internal Revenue Service, Case No. 25-4400 (CKK), vacating IRS Notice 2025-42 in full and remanding the matter to the IRS for further administrative proceedings. An appellate reversal or additional guidance from the IRS is possible, but for now the decision restores the 5% Safe Harbor as an available method of establishing the beginning of construction for wind and large-scale solar projects seeking to qualify for the Section 45Y clean electricity production tax credit and the Section 48E clean electricity investment tax credit.
The timing is significant. The statutory deadline for wind and solar projects to begin construction under the One Big Beautiful Bill Act (OBBBA) is July 4, 2026. Developers, sponsors, tax equity investors and credit transfer counterparties with wind and solar projects under development should assess their positions considering this decision, especially for projects that may have stalled completing physical work earlier in 2026.
Background
Since 2013, the IRS recognized two methods by which a taxpayer can establish the beginning of construction for purposes of clean energy tax credits: (1) the qualitative Physical Work Test, which requires “physical work of a significant nature” to commence before the applicable statutory deadline, and (2) the quantitative 5% Safe Harbor, which requires a taxpayer to pay or incur 5% or more of the total cost of a facility before the deadline. Both methods were reaffirmed by the IRS repeatedly through Notice 2022-61 and applied across successive rounds of legislation creating and extending clean energy tax credits.
The OBBBA, enacted July 4, 2025, shortened the credit eligibility period for wind and solar projects under Sections 45Y and 48E, requiring those projects to begin construction on or before July 4, 2026. If a project does not begin construction by the statutory deadline, it must be placed in service by Dec. 31, 2027, to remain credit-eligible. This standard is less predictable than the beginning of construction because project completion can depend on factors outside the owner’s control, including interconnection queue delays, permitting timelines, financings, and other development or construction bottlenecks. For purposes of the OBBBA’s foreign entity of concern (FEOC) restrictions, Congress expressly adopted the IRS’ existing beginning of construction framework by cross-referencing Notice 2013-29 and Notice 2018-59, but this statutory adoption did not extend to the entire universe of begin construction considerations. (For a detailed discussion of the OBBBA’s renewable energy provisions, see McGuireWoods’ July 7, 2025, legal alert)
On Aug. 15, 2025, the IRS issued Notice 2025-42 in response to Executive Order No. 14,315, which directed Treasury to “strictly enforce” the credit termination dates for wind and solar and to restrict “broad safe harbors” unless a substantial portion of a facility had been built. Notice 2025-42 eliminated the 5% Safe Harbor for all wind projects and solar projects with a nameplate capacity greater than 1.5 MW, requiring new projects to establish beginning of construction by commencing Physical Work Test alone. Additionally, Notice 2025-42 requires that, to the extent the four-year Continuity Safe Harbor is not satisfied, continuity must be maintained under the continuous program of construction test instead of the continuous efforts test, which has the effect of requiring continuous physical work instead of the broader continuous efforts test permitted prior to Notice 2025-42. The continuous efforts test takes into consideration a wider set of circumstances, including permitting, entering into contracts and incurring costs, and it is therefore viewed as a less onerous burden to satisfy. (For a detailed discussion of Notice 2025-42, see McGuireWoods’ Aug. 15, 2025, legal alert.)
The Court’s Decision
The court granted the plaintiffs’ motion for summary judgment and vacated Notice 2025-42 in full, holding that the Notice is arbitrary and capricious under the Administrative Procedure Act. The court’s analysis and conclusions rest on three independent grounds.
- Inadequate Explanation for a Major Policy Change. The court held that the IRS’s sole explanatory paragraph in Notice 2025-42 — stating that the guidance was “necessary and appropriate to properly enforce the credit termination date” and would “prevent taxpayers from circumventing the statutory credit termination date” — was insufficient to justify eliminating a method of establishing beginning of construction that had been available and consistently reaffirmed for more than 12 years. The court found that the record contained no explanation of how projects satisfying the 5% Safe Harbor constitute “circumvention” or “artificial manipulation of eligibility,” as the Notice asserted.
- Failure to Address Serious Reliance Interests. When an agency changes longstanding guidance, it must take account of serious reliance interests engendered by its prior policy and provide a reasoned explanation for its departure. The court rejected the government’s argument that reliance interests were minimal because Sections 45Y and 48E are credits of recent vintage, holding that the relevant pedigree is the 12-year history of the 5% Safe Harbor as a defined concept in energy tax law, not the age of any individual credit. The court noted that the IRS had received explicit comments from numerous industry participants identifying substantial reliance on the Safe Harbor before issuing the Notice, and that the Notice did not address those comments.
- Failure to Consider Alternatives or Justify Technology-Specific Treatment. The court found that the Notice offered no explanation for why the 5% Safe Harbor was eliminated for wind and large-scale solar projects while remaining available for other technologies, even though the underlying credits are technology-neutral. The court further found that the IRS failed to engage with targeted alternatives proposed by commenters before the Notice was issued — such as restricting the Safe Harbor only for purchases from prohibited foreign entities and implementing new reporting and audit procedures, rather than eliminating the Safe Harbor wholesale. The court rejected as a post hoc rationalization the government’s “stockpiling” rationale, which appeared in litigation briefs but not in the Notice or administrative record.
Remedy
The court vacated Notice 2025-42 in full and remanded the matter to the IRS. The government requested the remand be issued without vacating the Notice, which is a remedy typically used when an agency’s action has only minor legal defects. The court’s move reflects its conclusion that the seriousness of the Notice’s deficiencies outweighed concerns about disruption, and that leaving the Notice in place risked even greater disruption as the July 4 deadline approaches with the legal status of the Safe Harbor unresolved. The court also declined to limit the vacating order to the specific plaintiffs before it, holding that universal vacatur was necessary to fully redress the plaintiffs’ injuries, which flow from the Notice’s effects on the broader market for clean energy development.
Key Takeaways for Developers and Investors
The immediate effect of this decision is that Notice 2025-42 is no longer in effect. The 5% Safe Harbor is technically restored as a valid method of establishing beginning of construction for wind and solar projects under Sections 45Y and 48E, subject to the terms of the Pre-IRA Notices. However, several important caveats apply:
- The government will almost certainly seek a stay of the vacatur pending appeal and will likely appeal the decision on jurisdictional and merits grounds. The court itself acknowledged that the appellate timeline almost certainly extends past the July 4, 2026, beginning-of-construction deadline. As a reversal of the court’s holding could have retroactive effect, market participants should not treat the decision as final. Therefore, the vacatur of Notice 2025-42 might not have practical use to developers looking to safe harbor projects prior to July 4, 2026, given the uncertainty of what might occur on appeal.
- On remand, the IRS will be free to issue new beginning of construction guidance that addresses the procedural deficiencies the court identified. A new notice that provides adequate reasoning, engages with reliance interests and considers alternatives could reinstate limitations on the 5% Safe Harbor on a going-forward basis.
- Developers that pivoted to the Physical Work Test in response to Notice 2025-42 and incurred additional costs in doing so should consult with counsel regarding whether and how to adjust their approach given the restored availability of the Safe Harbor and the uncertainties that remain. Relatedly, projects that stalled after incurring costs but did not timely complete physical work may have had their ITC/PTC viability restored.
- Tax equity investors, lenders and tax credit purchasers should revisit their diligence checklists and representations and warranties for transactions involving projects that were restructured in reliance on Notice 2025-42 or that are now reconsidering their beginning of construction strategy.
Projects that sought to establish beginning of construction under the Physical Work Test while Notice 2025-42 was in effect and may not be placed in service within the four-year Continuity Safe Harbor should consider preserving records supporting continuous construction and continuous efforts. Although those projects may already be focused on documentation for the continuous program of construction test, broader continuous efforts evidence may be useful if the project ultimately needs to rely on a facts-and-circumstances showing to satisfy the continuity requirement.
McGuireWoods continues to monitor developments, including a government motion for a stay and further IRS guidance issued on remand. For questions about how this decision affects your projects or transactions, contact the authors, your McGuireWoods contact or a member of the Renewable Energy Practice Group.