Industry Input on Energy Tax Credits Is Critical After Loper

The Aug. 2 comment deadline for the IRS’s proposed rules on two Inflation Reduction Act tax credits is coming fast, and the US Supreme Court’s Loper Bright ruling increases the significance of industry feedback. Taxpayers and advisers who hope for clear rules have a lot of commenting to do.

The proposed rules followed a prior IRS notice generating over 100 comments, but other than some repeated comments regarding disallowing certain waste to energy projects, the Regulations.gov portal shows only a handful of comments and requests to testify.

Zero-emission electric production tax credits and investment tax credits take effect next year. Under the statute, taxpayers generate the PTCs or ITCs to the extent a taxpayer’s facility emits zero greenhouse gas emissions in electricity production. The taxpayer must either sell such electricity to a third party or otherwise sell, use, or store the electricity with third-party metering. Certain energy storage activities also qualify.

A separate test applies to facilities producing electricity through “combustion or gasification,” such as biofuels, allowing the PTC or ITC where net lifecycle greenhouse gas emissions under the Clean Air Act would be zero.

Without industry and practitioner guidance, the IRS has a difficult task (with an unfunded mandate, no less) of clarifying how one determines the amount of greenhouse gases that are emitted by a facility or in the production of electricity.

Complicating the endeavor is the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which overturns general Chevron deference to federal agencies in the interpretation of ambiguous law.

There, the Supreme Court confirmed where a statute has one or more ambiguities or lacks express guidance, courts don’t give up their interpretive authority and “instead understand that that such statutes, no matter how impenetrable, do—in fact, must—have a single, best meaning. That is the whole point of having written statutes; ‘every statute’s meaning is fixed at the time of enactment.’”

Commenters will need to consider that future courts will use this reasoning to apply general statutory interpretation principles to the Inflation Reduction Act—using plain, ordinary meanings for greenhouse gas emissions “by a facility” and “in the production of electricity,” whether under the Clean Air Act or general environmental or engineering principles, as of that date. If final regulations are inconsistent with such principles, taxpayers would have avenues to attack the rules.

Detailed proposed rules raise more questions than they answer, because the Treasury Department and IRS don’t have industry informed understandings as of the date of the statute necessary to clarify the law and avoid uncertainties that would impede or increase the cost of financing otherwise eligible projects.

Among the specifically requested comments are numerous details regarding renewable natural gas, biofuels, and fugitive sources of methane such as flared gas—including comments about ways to avoid incentivizing taxpayers to create more waste for the purpose of generating more ITCs or PTCs.

The Treasury and the IRS request many comments on net greenhouse gas lifecycle analysis modeling, including the scope of time and space, and substantiation and recordkeeping, such as to what extent to use environmental attribute certificates or supply chain tracing requirements for combustible resources.

The energy industry should also confirm proposed definitions of “combustion” and “gasification” are consistent with August 2022 understandings and whether the definitions unwittingly exclude certain fuel cells.

Industry comment on how to allocate emissions to byproducts or co-products separate from electricity production are requested as are methods to determine the efficiency of certain combined heat and power systems.

Taxpayers can’t assume other government agency pronouncements will inform Treasury and IRS approaches in the regulations. Congress removed language in the statute that would have instructed the Treasury to consult with the Secretary of Energy and the Administrator of the Environmental Protection Agency in connection with its guidance during negotiations with the Senate and its budget reconciliation process.

This makes public comment more critical so that a clear and understandable standard emerges for greenhouse gas emissions by a facility in the generation of electricity as of the date of the statute.

The case is Loper Bright Enterprises v. Raimondo, U.S., 22-451, 6/28/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

James Chenoweth is managing director for tax insurance at Alliant Insurance Services and was tax partner at Gibson Dunn and Baker Botts.

Write for Us: Author Guidelines