CALDERWOOD & HARKNESS LLP Attorneys at Law
600 Lexington Avenue New York, New York 10022
Telephone: (212) 574-6000 Facsimile: (212) 574-6001 www.calderwoodharkness.com
December 8, 2023
Pinehurst Insurance Group, Inc. 175 Constitution Plaza Hartford, Connecticut 06103
Attention: Catherine Moreau, Senior Vice President, Tax & Treasury
cc: Alec Drummond, Director, Alternative Tax Investments cc: Roland Thornberry, Esq., Thornberry Mack LLP, 280 Trumbull Street, Suite 1200, Hartford, Connecticut 06103
Re: Tax Opinion — Section 6418 Transfer Election; Tax Credit Purchase Agreement dated September 21, 2023 — Solstice Portfolio
Dear Ms. Moreau:
I. Introduction and Engagement
Calderwood & Harkness LLP ("we," "us," "our," or the "Firm") has acted as counsel to Calloway-Briggs Renewables Inc. ("CBR"), a Texas corporation, Employer Identification Number ("EIN") 84-3291076, in connection with the transactions contemplated by that certain Tax Credit Purchase Agreement dated September 21, 2023 (the "TCPA"), by and between CBR, as Seller, and Pinehurst Insurance Group, Inc. ("Pinehurst"), as Buyer. Pinehurst has requested that we deliver this opinion letter (this "Opinion") in connection with the closing of the transactions contemplated by the TCPA.
This Opinion is delivered pursuant to Section 7.2(d) of the TCPA as a condition precedent to the closing of the transactions contemplated thereby on the date hereof (the "Closing Date," December 8, 2023). We understand that Pinehurst is relying on this Opinion in connection with its decision to consummate the transactions described herein.
The transactions to which this Opinion relates involve the sale and transfer by CBR, through the seven utility-scale solar photovoltaic project companies comprising the Solstice Portfolio (as defined below, the "Projects"), of Sixty Million Dollars ($60,000,000) in face-value Investment Tax Credits ("ITCs") generated under Section 48 of the Internal Revenue Code of 1986, as amended (the "Code"), to Pinehurst pursuant to Section 6418 of the Code, as enacted by Section 13801(a) of the Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (the "IRA"). The aggregate purchase price to be paid by Pinehurst for the transferred ITCs is Fifty-Five Million Two Hundred Thousand Dollars ($55,200,000), which represents $0.92 per $1.00 of credit face value.
Unless otherwise defined herein, capitalized terms used in this Opinion have the meanings ascribed to them in the TCPA or, where the context requires, in the Code and Treasury regulations promulgated thereunder. All references herein to "Sections" are to sections of the Code unless otherwise indicated, and all references to "Treasury Regulations" or "Treas. Reg." are to the Treasury regulations promulgated under the Code, including proposed and temporary regulations where specifically noted.
II. Scope of Opinion
We are rendering this Opinion solely with respect to the United States federal income tax consequences of the transactions described herein. The opinions set forth below relate to the following matters:
(a) The eligibility of the Project Companies (as defined below) and Solstice Holdings, LLC (as defined below) to make transfer elections under Section 6418 of the Code with respect to the ITCs generated by the seven Projects comprising the Solstice Portfolio;
(b) The treatment of the transferred ITCs as tax credits allowed to Pinehurst for purposes of the Code;
(c) The federal income tax treatment of the cash purchase price received by CBR (through the applicable entities) and paid by Pinehurst in consideration for the transferred ITCs; and
(d) The compliance of the Transfer Election Statements (as defined below) prepared for each of the seven Project Companies with the applicable requirements of Section 6418 of the Code and the proposed Treasury Regulations and IRS guidance issued thereunder as of the date hereof.
This Opinion does not address any state, local, or non-United States tax consequences of the transactions described herein, including without limitation any consequences arising under the tax laws of the State of Texas, the State of Connecticut, the State of Delaware, the State of New Mexico, or any other jurisdiction. This Opinion does not address any estate, gift, or generation-skipping transfer tax matters. This Opinion does not address any tax consequences arising from the transactions to any party other than Pinehurst, including without limitation any tax consequences to CBR, Solstice Holdings, LLC, Ridgeline Capital Partners, LLC, or any of their respective partners, members, owners, or affiliates.
Furthermore, this Opinion does not address the availability, computation, or amount of the ITCs themselves, including without limitation the determination of whether the solar energy property comprising each Project constitutes "energy property" within the meaning of Section 48(a)(3) of the Code, the accuracy of the eligible basis of each Project, or the entitlement of the Projects to the prevailing wage/apprenticeship bonus credit rate or the domestic content bonus adder. The availability and computation of the ITCs is addressed in a separate opinion letter delivered by this Firm to Ridgeline Capital Partners, LLC, as tax-equity investor, dated the date hereof. We address such matters in this Opinion only to the extent necessary to opine on the eligibility of the Project Companies and the validity of the Section 6418 transfer elections.
III. Opinion Standards
The opinions expressed herein are rendered at the "should" level of confidence (that is, we believe the position described is supported by a greater than fifty percent (50%) likelihood of being sustained on the merits if challenged by the Internal Revenue Service (the "IRS") in an administrative proceeding or in litigation) unless otherwise specifically noted in the text of a particular opinion. We have used the term "should" in accordance with the meaning ascribed to such term in Circular 230, 31 C.F.R. Part 10, and in the American Bar Association Section of Taxation's guidelines for tax opinions.
Certain of our conclusions are rendered at the "will" level of confidence where the applicable statutory language or Treasury guidance is unambiguous and admits of only a single reasonable interpretation. Where we use the term "will," we believe that the position described would be sustained on the merits with a high degree of confidence if challenged.
Notwithstanding the foregoing, this Opinion is not a guarantee of any particular tax result. The IRS has not ruled on the specific matters addressed herein, and there can be no assurance that the IRS will not take positions contrary to those expressed in this Opinion. Moreover, if the IRS were to challenge any position described herein, there can be no assurance that a court would agree with our conclusions. The opinions expressed herein represent our best professional judgment as to the application of existing law to the transactions described, based on the facts and assumptions set forth below, as of the date of this Opinion.
Pinehurst is advised that, in accordance with Section 10.37 of Circular 230, we are obligated to inform Pinehurst that this Opinion may not be used by Pinehurst for the purpose of avoiding any penalty that may be imposed under the Code.
IV. Documents and Materials Reviewed
In rendering the opinions set forth herein, we have examined and relied upon the following documents, instruments, certificates, and other materials (collectively, the "Reviewed Materials"):
1. Tax Credit Purchase Agreement dated September 21, 2023, by and between CBR, as Seller, and Pinehurst Insurance Group, Inc., as Buyer (execution version) (the "TCPA").
2. Tax Indemnity Agreement dated September 21, 2023, from CBR in favor of Pinehurst (indemnification cap of Sixty-Nine Million Dollars ($69,000,000), representing 125% of the $55,200,000 purchase price) (the "Tax Indemnity Agreement").
3. Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC, dated September 21, 2023, among CBR Solstice Manager, LLC and Ridgeline Capital Partners, LLC (the "LLCA").
4. Certificates of Formation filed with the Delaware Secretary of State and Limited Liability Company Agreements for each of the seven Project Companies (each, a "Project Company" and collectively, the "Project Companies"):
(a) Pecos Sun Solar, LLC (85 MW(dc), Reeves County, Texas);
(b) Red Mesa Solar, LLC (70 MW(dc), Pecos County, Texas);
(c) Coyote Flats Solar, LLC (65 MW(dc), Ward County, Texas);
(d) Llano Verde Solar, LLC (55 MW(dc), Hudspeth County, Texas);
(e) Cimarron Solar, LLC (50 MW(dc), Lea County, New Mexico);
(f) Sandoval Ridge Solar, LLC (50 MW(dc), Sandoval County, New Mexico); and
(g) Amistad Solar, LLC (45 MW(dc), Val Verde County, Texas).
5. Certificate of Formation filed with the Delaware Secretary of State and Limited Liability Company Agreement of Solstice Holdings, LLC (EIN 88-4071523), formed August 14, 2023, in the State of Delaware (the "Holdings LLC Agreement").
6. Certificate of Formation filed with the Delaware Secretary of State and Limited Liability Company Agreement of CBR Solstice Manager, LLC (EIN 88-4071597), formed August 14, 2023, in the State of Delaware.
7. Articles of Incorporation of CBR filed with the Texas Secretary of State (Texas SOS File No. 803762114), together with all amendments thereto and the corporate bylaws of CBR.
8. Intercompany Contribution Agreement dated September 21, 2023, by and between CBR and Solstice Holdings, LLC (the "Contribution Agreement").
9. Master Engineering, Procurement, and Construction Agreement by and between CBR and Vasquez Brothers Construction, Inc. (EIN 75-2648103), together with the seven project-level EPC contracts entered into between the respective Project Companies and Vasquez Brothers Construction, Inc. (aggregate EPC cost of $384,600,000) (collectively, the "EPC Contracts").
10. Independent appraisal and fair market value report prepared by Greystone Worthington, LLC (Helen Farber, Managing Director), dated October 5, 2023, with respect to each of the seven Projects (the "Appraisal Report").
11. Independent engineer's reports prepared by Meridian Technical Advisors, LLC (Dr. Rajan Mehta, Principal Engineer), dated variously between September 2023 and November 2023, with respect to each of the seven Projects, including the report on mechanical completion and commercial operation (collectively, the "IE Reports").
12. Power Purchase Agreements between the five Texas Project Companies and Lone Star Grid Solutions, LLC (15-year terms, weighted average contract price of $32.50/MWh with a 1.5% annual escalator), and between the two New Mexico Project Companies and Enchantment Power Cooperative (20-year terms, weighted average contract price of $29.75/MWh with a 2.0% annual escalator) (collectively, the "PPAs").
13. Prevailing wage and apprenticeship compliance certifications from Vasquez Brothers Construction, Inc., dated variously between September 2023 and November 2023, covering all seven Projects, including certified payroll records, apprenticeship program registration documentation, and compliance attestations (the "PWA Certifications").
14. Domestic content certifications for all seven Projects, including the certifications of the steel, iron, and manufactured product cost analyses required under Section 48(a)(12) of the Code and IRS Notice 2023-38, 2023-27 I.R.B. 1 (the "Domestic Content Certifications").
15. Forms of Transfer Election Statements prepared for each of the seven Project Companies (the "Transfer Election Statements"), to be filed with the federal income tax return of Solstice Holdings, LLC for the taxable year ending December 31, 2023.
16. IRS pre-filing registration confirmations for each of the seven Project Companies, including the unique registration numbers assigned by the IRS through the IRS Energy Credits Online portal (the "Registration Confirmations").
17. Officer's Closing Certificate of CBR dated December 8, 2023, signed by Theo Vasquez, Chief Financial Officer of CBR (the "Closing Certificate").
18. ITC Claim Support Schedules and Workpapers setting forth the computation of eligible basis, ITC rate, and total ITCs for each Project, prepared by CBR and reviewed by Pinehurst's tax advisors (the "ITC Workpapers").
19. Escrow Agreement dated September 21, 2023, among CBR, Ridgeline Capital Partners, LLC, Pinehurst Insurance Group, Inc., and Clearwater Escrow Services, Inc. (Escrow Account No. CES-2023-80114) (the "Escrow Agreement").
20. Such other documents, records, certificates, and materials as we deemed relevant and necessary for purposes of rendering the opinions set forth herein.
In addition to the Reviewed Materials, we have reviewed and considered the relevant provisions of the Code (including, without limitation, Sections 38, 46, 48, 50, 168(h), 267, 707, 6418, and 7701), the Treasury regulations promulgated thereunder (including proposed and temporary regulations), published IRS rulings and guidance (including IRS Notice 2023-44, 2023-29 I.R.B. 1, and the proposed Treasury Regulations under Section 6418 published in the Federal Register on June 14, 2023, at 88 Fed. Reg. 40,496 (REG-101610-23), as corrected on June 21, 2023), and the legislative history of the IRA, including the Joint Explanatory Statement of the Committee of Conference and related Congressional reports, all as in effect and available as of the date hereof.
V. Facts Relied Upon
In rendering the opinions set forth herein, we have relied upon the following facts, which have been represented to us by CBR in the Closing Certificate, confirmed through our review of the Reviewed Materials, or otherwise made known to us in the course of our engagement. We have not independently verified any of the facts set forth below.
A. The Sponsor and Transaction Parties
CBR is a corporation organized and existing under the laws of the State of Texas, headquartered at 2700 Post Oak Boulevard, Suite 1450, Houston, Texas 77056. CBR was incorporated in 2015 and has been engaged in the development, construction, ownership, and operation of utility-scale solar energy generation facilities since 2017. As of the date hereof, CBR has developed approximately 1.2 gigawatts (GW) of solar photovoltaic projects across multiple states. For the fiscal year ended December 31, 2022, CBR reported total revenues of approximately $67.4 million and total assets of approximately $412 million. CBR currently operates approximately 780 MW of solar generation capacity across five states (Texas, New Mexico, California, Arizona, and Nevada). CBR files its federal income tax returns as a C-corporation and is not a tax-exempt entity described in Section 168(h)(2) of the Code.
The seven Projects that are the subject of this Opinion are collectively referred to as the "Solstice Portfolio" and have an aggregate nameplate capacity of 420 MW(dc). The Solstice Portfolio represents CBR's largest single portfolio of co-developed projects and its first utilization of the Section 6418 transferable credit mechanism enacted by the IRA.
Pinehurst Insurance Group, Inc. is a corporation organized and existing under the laws of the State of Connecticut, EIN 06-1938274, with its principal offices at 175 Constitution Plaza, Hartford, Connecticut 06103. Pinehurst is a diversified property and casualty and life insurance group, with total consolidated assets of approximately $18.3 billion as of December 31, 2022. Pinehurst's average annual federal income tax liability over the preceding three taxable years has been approximately $310 million. Gerald Fontaine serves as Chief Executive Officer of Pinehurst; Catherine Moreau serves as Senior Vice President, Tax & Treasury; and Alec Drummond serves as Director, Alternative Tax Investments. Pinehurst files its federal income tax returns as a C-corporation and is not a tax-exempt entity described in Section 168(h)(2) of the Code.
Pinehurst is not related to CBR, Solstice Holdings, LLC, any Project Company, or any other entity in the CBR corporate family within the meaning of Sections 267(b) or 707(b)(1) of the Code. We have been informed by both parties and have confirmed through our review of the relevant organizational documents that there is no direct or indirect ownership relationship, common ownership, or familial relationship between any officers, directors, or owners of Pinehurst and any officers, directors, or owners of CBR.
B. Project Structure
Each of the seven Projects is held by a separate limited liability company organized under the laws of the State of Delaware (each, a "Project Company"). Each Project Company has a single member and has not elected to be treated as a corporation for federal income tax purposes. Accordingly, each Project Company is treated as a disregarded entity for federal income tax purposes pursuant to Treasury Regulations Section 301.7701-3(b)(1)(ii).
Each Project Company is wholly owned by Solstice Holdings, LLC, a limited liability company organized under the laws of the State of Delaware on August 14, 2023 (EIN 88-4071523). Solstice Holdings, LLC has two members and is classified as a partnership for federal income tax purposes pursuant to Treasury Regulations Section 301.7701-3(b)(1)(i). The two members of Solstice Holdings, LLC are as follows:
(a) CBR Solstice Manager, LLC (EIN 88-4071597), a Delaware limited liability company formed on August 14, 2023, which serves as the managing member of Solstice Holdings, LLC. CBR Solstice Manager, LLC is wholly owned by CBR and is treated as a disregarded entity for federal income tax purposes; and
(b) Ridgeline Capital Partners, LLC (EIN 13-4827651), a Delaware limited liability company, which serves as the tax-equity member of Solstice Holdings, LLC. Ridgeline Capital Partners, LLC has committed aggregate capital contributions of One Hundred Twenty Million Dollars ($120,000,000) to Solstice Holdings, LLC under a partnership-flip structure, as documented in the LLCA.
CBR contributed 100% of the membership interests in each of the seven Project Companies to Solstice Holdings, LLC pursuant to the Contribution Agreement dated September 21, 2023. Following such contribution, each Project Company became a disregarded entity owned by Solstice Holdings, LLC. The contribution was structured as a contribution to a partnership in exchange for a partnership interest under Section 721 of the Code, with CBR's interest held indirectly through CBR Solstice Manager, LLC.
C. ITC Computation and Allocation Between Structures
The aggregate eligible cost basis (determined by reference to the EPC costs incurred by the Project Companies under the EPC Contracts) across the seven Projects is Three Hundred Eighty-Four Million Six Hundred Thousand Dollars ($384,600,000). The applicable ITC rate for the Solstice Portfolio is forty percent (40%), computed as follows:
(i) Base ITC Rate: Thirty percent (30%) under Section 48(a), reflecting the Projects' compliance with the prevailing wage and apprenticeship requirements of Section 48(a)(10) of the Code (as increased from six percent (6%) to thirty percent (30%) upon satisfaction of the labor requirements);
(ii) Domestic Content Bonus Adder: Ten percent (10%) under Section 48(a)(12) of the Code, reflecting the Projects' satisfaction of the domestic content requirements as certified in the Domestic Content Certifications; and
(iii) Energy Community Bonus Adder: Zero percent (0%) — the Projects do not qualify for the energy community bonus credit under Section 48(a)(14) of the Code, as none of the Project sites are located in a census tract that meets the statutory definition of an "energy community."
Accordingly, the total ITCs generated by the Solstice Portfolio are computed as follows:
$384,600,000 (aggregate eligible basis) × 40% (ITC rate) = $153,840,000 (total ITCs)
The ITCs generated by the Solstice Portfolio are allocated between two monetization structures as follows:
(a) ITCs allocated to the partnership-flip structure with Ridgeline Capital Partners, LLC (the tax-equity investor): $89,040,000. These credits are allocated to Ridgeline pursuant to the allocation provisions of the LLCA and are not subject to the Section 6418 transfer contemplated herein;
(b) ITCs available for Section 6418 transfer: $64,800,000. Of this amount:
(1) $60,000,000 in face-value ITCs are being sold to Pinehurst under the TCPA (the "Transferred Credits"); and
(2) $4,800,000 in face-value ITCs ($64,800,000 minus $60,000,000) are being retained by CBR for its own use against its federal income tax liability.
D. The Transferable Credit Sale
Under the TCPA, CBR (acting through the Project Companies, which are disregarded entities of Solstice Holdings, LLC) sells $60,000,000 in face-value ITCs to Pinehurst at a price of $0.92 per $1.00 of credit face value. The aggregate purchase price is calculated as follows:
$60,000,000 (face value of Transferred Credits) × $0.92 (per-dollar price) = $55,200,000 (aggregate purchase price)
The payment terms of the TCPA provide that Pinehurst deposited the full purchase price of $55,200,000 into an escrow account at Clearwater Escrow Services, Inc., Escrow Account Number CES-2023-80114, not later than five (5) business days prior to the Closing Date. Pursuant to the Escrow Agreement, the escrowed funds are to be released to CBR upon delivery by CBR of executed Transfer Election Statements for each of the seven Project Companies, the Closing Certificate, and satisfaction of all other conditions to closing specified in Section 7 of the TCPA.
The Tax Indemnity Agreement provides that CBR shall indemnify and hold Pinehurst harmless from and against any losses, damages, or liabilities arising from or related to (i) the recapture of any Transferred Credits under Section 50(a) of the Code, (ii) the disallowance of any Transferred Credits by the IRS, (iii) a reduction in the amount of Transferred Credits below $60,000,000 for any reason, or (iv) any breach of CBR's representations or warranties in the TCPA relating to the ITCs or the Projects. The indemnification obligation covers one hundred percent (100%) of the credit amount involved, plus a gross-up for Pinehurst's incremental tax cost resulting from any such recapture, disallowance, or reduction, subject to a maximum aggregate cap of Sixty-Nine Million Dollars ($69,000,000), representing 125% of the purchase price.
E. Placed-in-Service Dates
Each of the seven Projects achieved commercial operation and was placed in service within the meaning of Section 48 of the Code prior to the Closing Date. The commercial operation dates ("COD") for each Project, as confirmed by the IE Reports and the Closing Certificate, are set forth in the following table:
The capacity-weighted average COD for the Solstice Portfolio is approximately October 25, 2023. All seven Projects were placed in service prior to the Closing Date of December 8, 2023.
F. ITC Basis by Project
The eligible basis (EPC cost) for each Project, as set forth in the ITC Workpapers and confirmed by the Appraisal Report and the EPC Contracts, is as follows:
The foregoing eligible basis amounts represent the costs properly includable in the depreciable basis of the solar energy property comprising each Project under Section 48(a)(1) of the Code, as determined by CBR and its tax advisors and supported by the ITC Workpapers. We have not independently verified the accuracy of these amounts.
VI. Assumptions
In rendering the opinions set forth herein, we have assumed, with Pinehurst's consent and without independent investigation or verification, each of the following:
1. All representations and warranties made by CBR in the TCPA and in the Closing Certificate are true, correct, and complete in all material respects as of the Closing Date and will remain true, correct, and complete throughout the relevant periods described therein.
2. Each Project Company is and will remain a disregarded entity for federal income tax purposes within the meaning of Treasury Regulations Section 301.7701-3(b)(1)(ii), and Solstice Holdings, LLC is and will remain classified as a partnership for federal income tax purposes within the meaning of Treasury Regulations Section 301.7701-3(b)(1)(i), in each case for all relevant taxable years.
3. The solar energy property comprising each Project constitutes "energy property" within the meaning of Section 48(a)(3) of the Code and is eligible for the ITC under Section 48(a)(1) of the Code.
4. Each Project has been "placed in service" within the meaning of Section 48 of the Code and Treasury Regulations Section 1.48-2 on or before December 8, 2023, at the COD dates specified in Section V.E above, and no Project was placed in service prior to January 1, 2023.
5. CBR and the Project Companies have complied and will continue to comply with the prevailing wage and apprenticeship requirements under Section 48(a)(10) of the Code throughout the applicable compliance period (including, without limitation, the initial construction period and the ten-year period following the date on which each Project is placed in service), such that the thirty percent (30%) base ITC rate (rather than the six percent (6%) rate) is applicable to each Project.
6. Each Project satisfies the domestic content requirements under Section 48(a)(12) of the Code, as further described in IRS Notice 2023-38, entitling each Project to the ten percent (10%) domestic content bonus credit adder.
7. The aggregate eligible basis of the Projects has been accurately determined at $384,600,000 and has not been reduced by any grants, subsidized energy financing, tax-exempt bond proceeds, or other amounts that would reduce the eligible basis under Section 48(a)(4) or Section 50(b) of the Code, other than amounts reflected in the ITC Workpapers.
8. The IRS pre-filing registration for each Project Company has been completed through the IRS Energy Credits Online portal, and unique registration numbers have been obtained for each Project Company, in each case prior to the making of the transfer election under Section 6418, in compliance with the pre-filing registration requirements set forth in Section 6418(g) and the proposed Treasury Regulations thereunder.
9. The TCPA, the Tax Indemnity Agreement, the Escrow Agreement, the LLCA, and all other transaction documents (collectively, the "Transaction Documents") are valid, binding, and enforceable in accordance with their respective terms and were executed by duly authorized representatives of each party thereto.
10. All parties to the Transaction Documents will perform their respective obligations thereunder in accordance with the terms thereof, and no party will take any action, or fail to take any action, that would cause the Transaction Documents to become void, voidable, or unenforceable.
11. The cash consideration paid by Pinehurst ($55,200,000) represents the total and actual purchase price paid for the Transferred Credits, and no additional consideration — whether direct, indirect, contingent, in-kind, or otherwise — has been or will be paid by Pinehurst to CBR or any affiliate thereof in connection with the transfer of the Transferred Credits. No portion of the purchase price is attributable to any property, right, or benefit other than the Transferred Credits themselves.
12. Pinehurst is a "domestic corporation" within the meaning of Section 7701(a)(4) of the Code, is not a tax-exempt entity within the meaning of Section 168(h)(2) of the Code, and is not an entity described in Section 6418(f)(2) of the Code that would be ineligible to serve as a transferee taxpayer under Section 6418.
13. No Project will undergo a change in use, disposition, cessation of qualified activity, or other event that would trigger ITC recapture under Section 50(a) of the Code during the applicable five-year recapture period following the date on which such Project was placed in service.
If any of the foregoing assumptions proves to be inaccurate or incomplete, or if the facts at any time differ from those assumed, our opinions could be materially and adversely affected.
VII. Applicable Law
A. Section 6418 of the Code — Overview
Section 6418 of the Code was enacted by Section 13801(a) of the IRA, Pub. L. No. 117-169, 136 Stat. 1818, 1998 (2022), and is effective for taxable years beginning after December 31, 2022. Section 6418 represents a significant departure from prior law, which did not permit the direct transfer of federal tax credits for cash consideration. Prior to the IRA, taxpayers that generated renewable energy tax credits but lacked sufficient tax liability to fully utilize them were generally limited to monetizing the credits through tax-equity partnerships or sale-leaseback structures, both of which involve substantial transaction costs and structural complexity. Section 6418 was designed to broaden the market for renewable energy tax credits by permitting direct credit transfers, thereby increasing capital availability for clean energy projects.
Under Section 6418(a), an "eligible taxpayer" may elect to transfer all or a portion of an "eligible credit" to an unrelated "transferee taxpayer" in exchange for cash consideration. The term "eligible credit" is defined in Section 6418(f)(1) and includes, among other credits, the energy credit determined under Section 48 of the Code — that is, the ITC. The transfer election, once made, is irrevocable.
Upon a valid transfer election, Section 6418(a) provides that the transferee taxpayer is "treated as the taxpayer" with respect to the transferred credit for purposes of the Code. In other words, the credit is treated as a credit allowed to the transferee taxpayer under the applicable section of the Code, and the transferee taxpayer may apply the credit against its federal income tax liability as though it had generated the credit directly.
On June 14, 2023, the Department of the Treasury and the IRS published proposed regulations under Section 6418 in the Federal Register at 88 Fed. Reg. 40,496 (REG-101610-23), with corrections published on June 21, 2023 (the "Proposed Regulations"). The IRS also issued Notice 2023-44, 2023-29 I.R.B. 1, providing interim guidance on certain aspects of the transfer election mechanism. As of the date hereof, final Treasury Regulations under Section 6418 have not been promulgated. Our opinions herein are based in part on the Proposed Regulations and Notice 2023-44, both of which are subject to change or withdrawal and are not binding on the IRS or the courts.
B. Eligible Taxpayer
Under Section 6418(a), an "eligible taxpayer" is any taxpayer other than a "tax-exempt entity" as described in Section 168(h)(2) of the Code (which generally includes governmental units, tax-exempt organizations described in Section 501(a), and certain foreign persons and entities), subject to certain exceptions not relevant here.
In the present transaction, each Project Company is a Delaware LLC treated as a disregarded entity for federal income tax purposes. As a disregarded entity, a Project Company is not a separate taxpayer for federal income tax purposes; rather, its tax items (including credits) are treated as the tax items of its owner. Each Project Company is owned by Solstice Holdings, LLC, which is classified as a partnership for federal income tax purposes.
Under the Proposed Regulations, when the credit-generating property is owned by a disregarded entity that is, in turn, owned by a partnership, the transfer election under Section 6418 is made at the partnership level. Specifically, Proposed Treasury Regulations Section 1.6418-2(b)(3) provides that, in the case of a partnership that owns a disregarded entity that holds the credit-generating property, the partnership is treated as the "eligible taxpayer" that may make the transfer election. This is because, for federal income tax purposes, the partnership is the entity to which the credit is determined and allocated.
Accordingly, Solstice Holdings, LLC (as the partnership that directly owns the disregarded-entity Project Companies) is the eligible taxpayer for purposes of Section 6418. Solstice Holdings, LLC is not a tax-exempt entity described in Section 168(h)(2). Neither CBR nor CBR Solstice Manager, LLC is a tax-exempt entity. Ridgeline Capital Partners, LLC, as the tax-equity member of Solstice Holdings, is likewise not a tax-exempt entity.
Under the Proposed Regulations, a partnership making a transfer election allocates the specified credit amount to the transferee taxpayer rather than to its partners. Proposed Treasury Regulations Section 1.6418-2(b)(3)(ii) provides that, to the extent a partnership elects to transfer credits under Section 6418, those credits are not allocated to the partners of the partnership under Sections 702 and 704 but are instead treated as credits allowed to the transferee. This mechanism permits Solstice Holdings to direct $60,000,000 of the ITCs generated by the Projects to Pinehurst through the Section 6418 transfer election, while separately allocating $89,040,000 of the ITCs to Ridgeline Capital Partners, LLC through the partnership-flip structure.
C. Transferee Taxpayer Requirements
Section 6418(a) provides that the transferee taxpayer must satisfy two conditions: (i) the transferee must not be "related" (within the meaning of Sections 267(b) or 707(b)(1)) to the eligible taxpayer, and (ii) the transferee must not be a "tax-exempt entity" as described in Section 168(h)(2) of the Code.
Pinehurst Insurance Group, Inc. is a Connecticut C-corporation engaged in the property and casualty and life insurance business, with substantial federal income tax liability (averaging approximately $310 million per year). Pinehurst is not a tax-exempt entity within the meaning of Section 168(h)(2), is not a governmental unit, and is not a foreign person or entity. Based on our review of the organizational documents of Pinehurst, CBR, and the other transaction parties, and on the representations of the parties, Pinehurst is not related to CBR, Solstice Holdings, LLC, any Project Company, or any member or affiliate of any such entity within the meaning of Sections 267(b) or 707(b)(1) of the Code. Accordingly, Pinehurst satisfies the eligibility requirements to serve as a transferee taxpayer under Section 6418.
D. Transfer Election Mechanics
Section 6418(a) provides that the transfer election is made on the eligible taxpayer's federal income tax return for the taxable year in which the eligible credit is "determined." For purposes of the ITC, the credit is "determined" in the taxable year in which the energy property is "placed in service" within the meaning of Section 48. Because all seven Projects were placed in service during the taxable year ending December 31, 2023, the transfer election will be made on the federal income tax return of Solstice Holdings, LLC (Form 1065, U.S. Return of Partnership Income) for the taxable year ending December 31, 2023.
Under the Proposed Regulations, the eligible taxpayer is required to complete a pre-filing registration process with the IRS prior to making the transfer election. The pre-filing registration is conducted through the IRS Energy Credits Online portal and requires the eligible taxpayer to provide certain information about the credit-generating property and the intended transfer, including the type of credit, the estimated amount of credit, and identifying information for the eligible taxpayer and the transferee taxpayer. Upon completion of the pre-filing registration, the IRS issues a unique registration number for each credit-generating property (or each election). We have reviewed the Registration Confirmations for each of the seven Project Companies and confirmed that pre-filing registration has been completed and registration numbers have been obtained for each Project Company prior to the Closing Date.
The transfer election is effectuated by the filing of a Transfer Election Statement with the eligible taxpayer's tax return. The Transfer Election Statement must include, among other information: (i) the name, address, and EIN of the eligible taxpayer (Solstice Holdings, LLC, EIN 88-4071523); (ii) the name, address, and EIN of the transferee taxpayer (Pinehurst Insurance Group, Inc., EIN 06-1938274); (iii) the type of eligible credit being transferred (Section 48 ITC); (iv) the amount of credit being transferred, both on a per-project and aggregate basis; (v) the amount of cash consideration received by the eligible taxpayer; (vi) the registration number(s) obtained through the pre-filing registration process; and (vii) such other information as may be required by the Proposed Regulations and IRS guidance.
Once made, the transfer election is irrevocable. Section 6418(a)(3) provides that an election under Section 6418 may not be revoked or amended without the consent of the Secretary of the Treasury, except as otherwise provided in regulations.
E. Tax Treatment of Consideration
The statutory treatment of the consideration exchanged in a Section 6418 transfer is a critical feature of the transferable credit mechanism and distinguishes it from other credit monetization structures.
Section 6418(b)(1) provides that the amount paid by the transferee taxpayer for the transferred credit is not includible in the gross income of the eligible taxpayer. This exclusion from gross income applies regardless of the character of the payment and regardless of whether the consideration is paid directly or through an escrow arrangement. Accordingly, the $55,200,000 paid by Pinehurst to CBR for the Transferred Credits will not constitute gross income to CBR, Solstice Holdings, LLC, or any Project Company.
Section 6418(b)(2) provides that the amount paid by the transferee taxpayer for the transferred credit is not deductible by the transferee taxpayer. Accordingly, Pinehurst may not claim a deduction (whether as a business expense, investment expense, or otherwise) for the $55,200,000 paid to acquire the Transferred Credits.
The transferred credit is treated as a tax credit allowed to the transferee taxpayer under the applicable section of the Code (in this case, Section 48). The transferee taxpayer (Pinehurst) applies the credit on a dollar-for-dollar basis against its federal income tax liability, subject to the general business credit limitations of Section 38 and the ordering rules thereunder. No basis adjustment arises in the hands of the transferee taxpayer as a result of the credit acquisition; the transferee simply claims the credit on its federal income tax return for the relevant taxable year.
The economic benefit to Pinehurst of the transaction is equal to the spread between the face value of the Transferred Credits ($60,000,000) and the purchase price ($55,200,000) — that is, $4,800,000. This spread does not constitute taxable income to Pinehurst; rather, it represents the inherent economic benefit of acquiring a dollar-for-dollar reduction in federal tax liability at a discount. This tax-free treatment of the consideration is a deliberate statutory benefit of Section 6418, intended to incentivize participation in the transferable credit market by providing a clear and simple tax result for both sellers and buyers.
F. Recapture Considerations
Section 6418(d) addresses the allocation of recapture risk in a Section 6418 transfer. Under Section 6418(d)(1), if, after a transfer election has been made, the eligible credit is subject to recapture under Section 50(a) of the Code (for example, because the energy property ceases to be energy property, is disposed of, or undergoes a change in use during the five-year recapture period), the transferee taxpayer (Pinehurst) bears the recapture tax. That is, the recapture amount is added to the transferee's federal income tax liability for the taxable year in which the recapture event occurs.
This statutory allocation of recapture risk to the transferee taxpayer is one of the principal risks that buyers in transferable credit transactions seek to mitigate through contractual protections. In the present transaction, the Tax Indemnity Agreement provides that CBR will indemnify Pinehurst for any losses arising from recapture or disallowance of the Transferred Credits, including a gross-up for Pinehurst's incremental tax cost, subject to a maximum aggregate indemnification cap of $69,000,000 (125% of the purchase price). The existence and enforceability of the Tax Indemnity Agreement is a commercial matter and does not affect our opinions as to the federal income tax treatment of the transactions.
Section 6418(g) provides an "excessive credit transfer" rule. If the amount of credit transferred pursuant to a transfer election exceeds the amount of credit properly determined under the applicable section of the Code, an additional tax equal to twenty percent (20%) of the excess amount is imposed on the transferee taxpayer. This penalty is intended to discourage the transfer of inflated or improperly calculated credits. In the present transaction, the excessive credit transfer penalty should not apply provided that the ITC amount generated by each Project is correctly calculated at or above the amounts being transferred to Pinehurst. Based on the ITC Workpapers and our review of the Reviewed Materials, and subject to the assumptions set forth in Section VI above, we have no reason to believe that the total ITCs available for transfer have been overstated.
VIII. Opinions
Based on the foregoing, and subject to the qualifications, limitations, and caveats set forth in Section IX below, we are of the following opinions:
Opinion (i): Eligibility of the Project Companies to Make Section 6418 Transfer Elections
It is our opinion that Solstice Holdings, LLC (EIN 88-4071523), as the partnership directly owning the seven disregarded-entity Project Companies comprising the Solstice Portfolio, is an "eligible taxpayer" within the meaning of Section 6418(a) of the Code with respect to the ITCs generated by the seven Projects, and should be entitled to make transfer elections under Section 6418 of the Code to transfer $60,000,000 in face-value ITCs to Pinehurst Insurance Group, Inc. (EIN 06-1938274), as transferee taxpayer.
In reaching this opinion, we note the following:
(a) The Project Companies, as disregarded entities for federal income tax purposes, are not separate taxpayers; accordingly, the ITCs generated by the solar energy property held by each Project Company are determined at the level of the entity's owner. Because each Project Company is wholly owned by Solstice Holdings, LLC, and Solstice Holdings is classified as a partnership, the ITCs are determined at the partnership level.
(b) Under the Proposed Regulations, a partnership that owns a disregarded entity holding credit-generating property is the "eligible taxpayer" that may elect to transfer the credits under Section 6418. Solstice Holdings, LLC is the partnership owning the Project Companies and is therefore the eligible taxpayer for purposes of the transfer election.
(c) Neither Solstice Holdings, LLC, CBR, CBR Solstice Manager, LLC, nor any other entity in the ownership chain of the Project Companies is a "tax-exempt entity" described in Section 168(h)(2) of the Code. Accordingly, no entity in the ownership chain is disqualified from being an eligible taxpayer under Section 6418(a).
(d) The transfer election permits Solstice Holdings, LLC to allocate the Transferred Credits to Pinehurst rather than to its partners (CBR Solstice Manager, LLC and Ridgeline Capital Partners, LLC), to the extent of the election.
Opinion (ii): Treatment of Transferred ITCs as Credits Allowed to Pinehurst
It is our opinion that, upon a valid transfer election under Section 6418 of the Code, the $60,000,000 in Transferred Credits should be treated as tax credits allowed to Pinehurst Insurance Group, Inc. for Pinehurst's taxable year that includes the date on which the transfer election becomes effective — that is, the taxable year ending December 31, 2023 (or, if Pinehurst has a different taxable year, such taxable year of Pinehurst in which Solstice Holdings, LLC files its federal income tax return for the taxable year ending December 31, 2023, and the transfer election becomes effective with respect to Pinehurst).
Pinehurst should be entitled to claim the $60,000,000 in Transferred Credits against its federal income tax liability for the applicable taxable year, subject to the general business credit limitations of Section 38 of the Code and the ordering rules thereunder. We note that Section 38(c) of the Code imposes limitations on the amount of general business credits that may offset a taxpayer's tax liability in any given taxable year; however, the analysis of whether Pinehurst will be able to utilize the full $60,000,000 in Transferred Credits in any particular taxable year (or over multiple taxable years through carryback or carryforward) is outside the scope of this Opinion.
The Transferred Credits, once transferred pursuant to a valid Section 6418 election, will be treated for all purposes of the Code as if they were originally allowed to Pinehurst. Section 6418(a) is unambiguous in this regard: the transferee taxpayer is "treated as the taxpayer" with respect to the transferred credit. Accordingly, Pinehurst will be in the same position vis-à-vis the IRS and the Code as if it had directly owned the energy property generating the ITCs (except that Pinehurst does not acquire any ownership interest in the Projects or the Project Companies and does not claim any depreciation deductions with respect to the Projects).
Opinion (iii): Tax Treatment of the Purchase Price
It is our opinion that the $55,200,000 purchase price paid by Pinehurst to CBR (through escrow at Clearwater Escrow Services, Inc., Escrow Account No. CES-2023-80114) for the Transferred Credits will not be includible in the gross income of CBR, Solstice Holdings, LLC, or any Project Company under Section 6418(b) of the Code. Section 6418(b)(1) is unambiguous in excluding from gross income the consideration received by the eligible taxpayer for transferred credits.
Correspondingly, the $55,200,000 purchase price will not be deductible by Pinehurst under Section 6418(b)(2) of the Code. The statute is unambiguous in denying a deduction to the transferee taxpayer for the amount paid to acquire transferred credits.
The $4,800,000 spread between the face value of the Transferred Credits ($60,000,000) and the purchase price paid by Pinehurst ($55,200,000) does not constitute taxable income to Pinehurst. Rather, Pinehurst receives a dollar-for-dollar reduction in its federal income tax liability equal to $60,000,000 despite having paid only $55,200,000, resulting in an economic benefit equal to the $4,800,000 spread. This economic benefit is a direct consequence of the statutory structure of Section 6418 and the market pricing of transferable credits. The tax-free treatment of the consideration paid and received in a Section 6418 transfer is a specific statutory benefit that distinguishes the credit transfer mechanism from other monetization structures, including tax-equity partnerships and sale-leaseback arrangements, in which the economics of credit monetization are reflected in the allocation of taxable income, deductions, and partnership interests among the parties.
Opinion (iv): Compliance of Transfer Election Statements with IRS Requirements
It is our opinion that the forms of Transfer Election Statements prepared for each of the seven Project Companies, which are to be filed with the federal income tax return of Solstice Holdings, LLC (Form 1065) for its taxable year ending December 31, 2023, should comply with the requirements of Section 6418 of the Code and the Proposed Regulations and IRS guidance issued thereunder, as in effect as of the date hereof. Specifically, we have reviewed the Transfer Election Statements and confirmed that each such statement includes the following:
(a) Proper identification of the eligible taxpayer, including the name, address, and EIN of Solstice Holdings, LLC (EIN 88-4071523) and each disregarded Project Company through which the credit-generating property is held;
(b) Proper identification of the transferee taxpayer, including the name, address, and EIN of Pinehurst Insurance Group, Inc. (EIN 06-1938274);
(c) Specification of the type of eligible credit being transferred — the energy credit under Section 48 of the Code (the ITC);
(d) Statement of the amount of credit being transferred on a per-project basis and in the aggregate (aggregate Transferred Credits of $60,000,000);
(e) Disclosure of the cash consideration paid by the transferee taxpayer ($55,200,000);
(f) Inclusion of the unique pre-filing registration numbers obtained from the IRS through the IRS Energy Credits Online portal for each of the seven Project Companies; and
(g) Such other information as is required by the Proposed Regulations and Notice 2023-44 as in effect on the date hereof.
We note that the IRS has not yet issued final regulations under Section 6418, and the final regulations, when issued, may modify, supplement, or replace the requirements for Transfer Election Statements set forth in the Proposed Regulations. Our opinion as to the compliance of the Transfer Election Statements is based on the Proposed Regulations and available IRS guidance as of the date hereof. If the final regulations impose additional or different requirements, it may be necessary for Solstice Holdings, LLC to revise or supplement the Transfer Election Statements to conform to such requirements.
IX. Qualifications, Limitations, and Caveats
A. General Qualifications
This Opinion is based upon the Code, the Treasury regulations promulgated thereunder (including proposed and temporary regulations), published rulings and procedures of the IRS, judicial decisions of the United States federal courts, and other applicable authorities, all as in effect and available as of December 8, 2023. All of the foregoing authorities are subject to change at any time, possibly with retroactive effect, and any such change could affect the validity or correctness of the opinions expressed herein. No assurance can be given that the law will not change after the date of this Opinion in a manner that would adversely affect the opinions expressed herein.
Section 6418 of the Code was enacted in August 2022, and as of the date hereof, the IRS and the Department of the Treasury have not issued final Treasury Regulations under Section 6418. Our opinions are based in part on the Proposed Regulations published on June 14, 2023, at 88 Fed. Reg. 40,496 (REG-101610-23), and on IRS Notice 2023-44, 2023-29 I.R.B. 1. Proposed regulations, while instructive as to the likely direction of the government's position, do not carry the force and effect of law and are not binding on the IRS or the courts. If the final regulations, when issued, differ materially from the Proposed Regulations in respects relevant to the opinions expressed herein, our opinions may need to be revised, supplemented, or withdrawn. We will advise Pinehurst if we become aware of any such material differences, but we undertake no obligation to monitor the regulatory process.
No ruling has been sought or obtained from the IRS with respect to any of the matters addressed in this Opinion. This Opinion represents our best professional judgment as to the application of existing law to the facts and circumstances of the transactions described herein, but it is not a guarantee of any particular tax result. There can be no assurance that the IRS will not take positions contrary to those expressed herein. Moreover, if the IRS were to challenge any position described herein, there can be no assurance that a court would agree with our conclusions.
B. Reliance on Facts and Assumptions
We have relied upon the accuracy and completeness of the representations, warranties, and certifications contained in the TCPA, the Closing Certificate, the Tax Indemnity Agreement, the Domestic Content Certifications, the PWA Certifications, the IE Reports, the ITC Workpapers, and the other Reviewed Materials. We have not independently verified any factual matter set forth therein or described in Section V of this Opinion, including without limitation the placed-in-service dates of the Projects, the eligible basis of the Projects, the compliance of the Projects with prevailing wage and apprenticeship requirements, the satisfaction of the domestic content requirements, the accuracy of the ITC computations, or the absence of related-party relationships between Pinehurst and CBR.
If any of the facts upon which we have relied, or any of the assumptions set forth in Section VI of this Opinion, prove to be inaccurate, incomplete, or materially different from those represented to us, the opinions expressed herein could be materially and adversely affected. We express no opinion as to the accuracy or completeness of any representation, warranty, certification, or factual matter upon which we have relied.
C. Scope Limitations
The opinions expressed in this letter are subject to the following specific limitations:
(i) This Opinion does not address any state, local, or non-United States tax consequences of the transactions described herein, and we express no opinion with respect to the tax laws of any state, locality, or foreign jurisdiction.
(ii) This Opinion does not address the tax consequences of the transactions described herein to any party other than Pinehurst Insurance Group, Inc., including without limitation any tax consequences to CBR, Solstice Holdings, LLC, Ridgeline Capital Partners, LLC, or any of their respective partners, members, owners, or affiliates.
(iii) This Opinion does not address the application of the general business credit limitations of Section 38 of the Code, the alternative minimum tax provisions of the Code, or the ability of Pinehurst to utilize the Transferred Credits against its actual federal income tax liability in any particular taxable year or over multiple taxable years. The question of whether Pinehurst can claim the full $60,000,000 in Transferred Credits in any given taxable year depends on factors specific to Pinehurst's overall tax position, which are outside the scope of this Opinion.
(iv) This Opinion does not address the computation of the ITCs or the underlying eligible basis of the Projects, except to the extent necessary to opine on the eligibility of the Project Companies and the validity of the Section 6418 transfer elections. The computation and availability of the ITCs, including whether each Project constitutes energy property and whether the eligible basis has been correctly determined, is addressed in a separate opinion delivered to Ridgeline Capital Partners, LLC.
(v) This Opinion does not address the ITC recapture consequences under Section 50(a) of the Code or the application of the excessive credit transfer penalty under Section 6418(g) of the Code, except as described in Section VII.F above. In particular, we express no opinion as to the consequences that would result if any Project were to undergo a recapture event during the five-year recapture period, or as to the enforceability or tax treatment of the Tax Indemnity Agreement.
(vi) This Opinion does not address any aspect of the partnership-flip structure documented in the LLCA between CBR Solstice Manager, LLC and Ridgeline Capital Partners, LLC, including without limitation the allocation of ITCs, income, deductions, losses, or other tax items between the partners of Solstice Holdings, LLC.
D. No Obligation to Update
We undertake no obligation to update, revise, supplement, or withdraw this Opinion for any changes in law, regulations, IRS guidance, judicial decisions, or facts occurring after the date hereof, including without limitation the issuance of final Treasury Regulations under Section 6418 of the Code, the issuance of additional IRS guidance, or changes in the factual circumstances of the transactions described herein. If Pinehurst desires an updated or supplemental opinion following any such change, Pinehurst should contact us to discuss the scope and terms of such engagement.
X. Reliance and Use
This Opinion is furnished to Pinehurst Insurance Group, Inc. solely in connection with the transactions described herein and the closing of the TCPA on the Closing Date. This Opinion is rendered as of the date hereof and speaks only as of such date.
This Opinion may be relied upon by Pinehurst Insurance Group, Inc. and its outside legal counsel, Thornberry Mack LLP, in connection with the transactions described herein. This Opinion may not be disclosed to, relied upon by, quoted by, or used by any other person or entity without our prior written consent, except as set forth in the following sentence. Notwithstanding the foregoing restriction, this Opinion may be disclosed to the IRS or other taxing authorities (i) to the extent required by applicable law, regulation, or legal process, (ii) in connection with an audit, examination, or administrative or judicial proceeding relating to the transactions described herein, or (iii) as required by subpoena or other compulsory process issued by a court or administrative tribunal of competent jurisdiction.
This Opinion may not be quoted, cited, or referred to in any public filing, offering document, prospectus, registration statement, press release, or other document intended for distribution to third parties without our prior written consent. Any consent to such use, if given, may be subject to conditions specified by us at the time of such consent.
XI. Conclusion
We appreciate the opportunity to assist Pinehurst Insurance Group, Inc. in connection with the transactions described herein. If you have any questions regarding this Opinion or wish to discuss any of the matters addressed herein, please do not hesitate to contact the undersigned.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner
By: ________
Sylvia Hartwell Partner
Enclosures: None
cc (with copy of this Opinion):
Calloway-Briggs Renewables Inc. 2700 Post Oak Boulevard, Suite 1450 Houston, Texas 77056
Attention: Theo Vasquez, Chief Financial Officer