PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Tax Department
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work-product doctrine. It is intended solely for the use of the addressees and persons copied hereon in connection with the representation of Calloway-Briggs Renewables Inc. and its affiliates. Do not distribute, copy, or disclose this memorandum or any portion hereof to any person not authorized to receive it without the prior written consent of Calderwood & Harkness LLP.
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
This memorandum analyzes the novel interaction between Section 6418 of the Internal Revenue Code of 1986, as amended (the "Code"), which was added by the Inflation Reduction Act of 2022 (Pub. L. No. 117-169, 136 Stat. 1818) (the "IRA"), and the traditional partnership-flip tax-equity structure being utilized for the financing of the Solstice Portfolio. This analysis is being prepared in advance of the anticipated transaction signing date of September 21, 2023, and is intended to inform the drafting and negotiation of the definitive transaction documents, including the Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC (the "LLCA"), the Tax Credit Purchase Agreement with Pinehurst Insurance Group, Inc. (the "TCPA"), and the related ancillary documentation.
The Solstice Portfolio consists of seven utility-scale solar photovoltaic ("PV") projects with an aggregate nameplate capacity of 420 megawatts direct current ("MW(dc)"), located across six counties in Texas and one county in New Mexico. These projects are expected to generate total investment tax credits ("ITCs") under Section 48(a) of the Code of $153,840,000, computed on an aggregate eligible basis of $384,600,000 at a combined ITC rate of 40%, reflecting the 30% base ITC rate (with prevailing wage and apprenticeship requirements satisfied under Section 48(a)(10)) plus the 10% domestic content bonus adder available under Section 48(a)(12). All seven projects are expected to achieve commercial operation during the fourth quarter of 2023.
The proposed financing employs a dual-tranche structure that is, to our knowledge, among the first transactions in the marketplace to combine the traditional partnership-flip tax-equity model with the newly available Section 6418 transferable credit mechanism. The two tranches are as follows:
First Tranche — Partnership-Flip Tax Equity: A $120,000,000 partnership-flip tax-equity investment by Ridgeline Capital Partners, LLC ("Ridgeline") into Solstice Holdings, LLC ("Solstice Holdings" or the "Partnership"), a Delaware limited liability company taxed as a partnership for federal income tax purposes. Under this tranche, Ridgeline is allocated 99% of the Partnership's tax items (including ITCs, MACRS depreciation deductions, and taxable income or loss) during the pre-flip period, with Calloway-Briggs Renewables Inc. ("CBR"), through its managing member entity CBR Solstice Manager, LLC ("CBR Manager"), receiving 1% of tax items and 70% of cash distributions.
Second Tranche — Section 6418 Transferable Credit Sale: A $55,200,000 cash sale (representing $0.92 per $1.00 of credit face value) of $60,000,000 in face-value ITCs to Pinehurst Insurance Group, Inc. ("Pinehurst"), a Connecticut corporation, pursuant to an irrevocable transfer election under Section 6418 of the Code. An additional $4,800,000 in ITCs are retained by CBR for its own use.
This memorandum addresses the following key questions raised by this dual-tranche structure:
(a) Which entity is the "eligible taxpayer" authorized to make the Section 6418 transfer election — the individual project companies (which are disregarded entities for federal income tax purposes) or Solstice Holdings (the partnership)?
(b) How does the Section 6418 transfer election interact with the partnership-level allocation of ITCs under Sections 704(b) and 46 of the Code?
(c) Whether credits transferred under Section 6418 reduce the Partnership's depreciable basis under Section 50(c) of the Code, and if so, whether the reduction applies to the full amount of credits determined or only to the credits allocated through the partnership.
(d) Whether a single portfolio of projects may lawfully generate ITCs that are partially allocated through a partnership-flip structure and partially transferred to a third party under Section 6418, and if so, what structural and documentation mechanics are required.
Summary of Conclusions. Based on our analysis of the statutory text, the proposed Treasury regulations published on June 14, 2023 (REG-101610-23), IRS Notice 2023-44, and the broader partnership tax framework, we reach the following principal conclusions:
1. The Section 6418 transfer election should be made at the partnership level by Solstice Holdings, LLC, on its 2023 Form 1065. The seven project-company SPEs are disregarded entities whose assets are treated as owned by the Partnership for federal income tax purposes. Accordingly, the Partnership is the "eligible taxpayer" under Section 6418.
2. The transferred credits ($64,800,000 in total, of which $60,000,000 are sold to Pinehurst and $4,800,000 are retained by CBR for its own use) should be segregated from the credits allocated through the partnership flip ($89,040,000 allocated to the partners, of which 99%, or $88,149,600, is allocated to Ridgeline). The proposed regulations support a partial-election approach under which specified credits are elected for transfer while the remainder are allocated to partners under Sections 46(d) and 704(b).
3. The basis reduction under Section 50(c) applies to all ITCs determined with respect to the energy property, including those transferred under Section 6418. Accordingly, the full $153,840,000 in ITCs triggers a basis reduction of $76,920,000 (50% of $153,840,000), yielding a post-ITC depreciable basis for MACRS purposes of $307,680,000. This result obtains regardless of the bifurcation between the partnership-allocated and transferred credit tranches.
4. The dual-tranche structure is permissible under the statute and proposed regulations, but requires careful documentation in the LLCA, TCPA, and related agreements to ensure proper ordering, avoid double-counting, and protect the expectations of both Ridgeline and Pinehurst.
5. Because the proposed regulations have not yet been finalized, and because the IRS has acknowledged the novelty of the interaction between Section 6418 and partnership-flip structures, the transaction documents should include appropriate regulatory-change provisions, renegotiation rights, and indemnification mechanics.
Each of these conclusions is discussed in detail in the analysis that follows.
II. FACTUAL BACKGROUND
A. The Solstice Portfolio
The Solstice Portfolio comprises seven utility-scale solar PV projects with an aggregate nameplate capacity of 420 MW(dc), located in Texas and New Mexico. Each project is held by a separate Delaware limited liability company that is currently treated as a disregarded entity for federal income tax purposes, with CBR as the sole regarded owner. The following table summarizes the key attributes of each project:
All seven project entities are organized as limited liability companies under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.). Each entity is currently classified as a disregarded entity for federal income tax purposes under Treas. Reg. § 301.7701-3, with CBR as the sole member and regarded owner. As discussed below, upon contribution of the membership interests to Solstice Holdings, the project entities will become disregarded entities owned by the Partnership, and the Partnership will be treated as the owner of the underlying energy property for purposes of the ITC and the Section 6418 election.
The engineering, procurement, and construction ("EPC") work for all seven projects is being performed by Vasquez Brothers Construction, Inc. ("VBC") under fixed-price, date-certain EPC agreements. VBC has committed to compliance with the prevailing wage and apprenticeship requirements of IRA Section 48(a)(10), as documented in the Prevailing Wage and Apprenticeship Compliance Certificates that will be delivered at closing. VBC has also provided documentation supporting compliance with the domestic content requirements of Section 48(a)(12), including certifications regarding the domestic sourcing of steel, iron, and manufactured products incorporated into the solar facilities, which are being reviewed separately by Calderwood & Harkness in connection with the domestic content opinion.
The aggregate EPC cost of $384,600,000 constitutes the eligible basis for purposes of computing the Section 48 ITC. The weighted-average commercial operation date ("COD") for financial modeling purposes is October 25, 2023, with the first project (Cimarron Solar) expected to achieve COD on September 30, 2023, and the final project (Amistad Solar) expected to achieve COD on November 18, 2023.
We note that none of the seven project sites qualify for the energy community bonus credit adder under Section 48(a)(14), as confirmed by CBR's analysis of the applicable census tracts and metropolitan statistical areas. Accordingly, the energy community adder is not reflected in the ITC computation.
B. Transaction Structure
The transaction is structured as follows:
Formation of the Partnership. Solstice Holdings, LLC (EIN 88-4071523) was formed as a Delaware limited liability company on August 14, 2023. Solstice Holdings has elected to be classified as a partnership for federal income tax purposes under Treas. Reg. § 301.7701-3. CBR Solstice Manager, LLC (EIN 88-4071597), a Delaware limited liability company that is a disregarded entity with CBR as its sole member, serves as the Managing Member of Solstice Holdings.
Contribution of Project Companies. CBR contributes 100% of the membership interests in each of the seven project companies to Solstice Holdings in exchange for membership interests in the Partnership. Following the contribution, each project company becomes a disregarded entity owned by the Partnership, and the Partnership is treated for federal income tax purposes as the owner of the underlying solar energy property.
Tax-Equity Investment — Ridgeline. Ridgeline Capital Partners, LLC (EIN 13-4827651), a Delaware limited liability company, is admitted to the Partnership as the Tax-Equity Member. Ridgeline commits to aggregate capital contributions of $120,000,000, structured in two tranches:
• First Tranche: $96,000,000 payable at closing (anticipated November 30, 2023, with a possible extension to December 8, 2023);
• Second Tranche: $24,000,000 payable within sixty (60) days following the achievement of final COD across all seven projects (Amistad Solar, target November 18, 2023), with an outside date of February 6, 2024.
CBR Manager Contribution. CBR Manager contributes $2,400,000 in cash to the Partnership, representing 2% of Ridgeline's aggregate capital commitment. This contribution exceeds the minimum 1% sponsor contribution requirement established by Revenue Procedure 2007-65 for partnership-flip safe-harbor compliance.
Partnership-Flip Economics. The LLCA provides for the following allocation of economic items between the Managing Member (CBR Manager) and the Tax-Equity Member (Ridgeline):
Pre-Flip Period:
• Tax items (ITCs, MACRS depreciation, taxable income/loss): 99% to Ridgeline; 1% to CBR Manager
• Cash distributions: 30% to Ridgeline; 70% to CBR Manager
Post-Flip Period (projected Q4 2028):
• All items (tax and cash): 5% to Ridgeline; 95% to CBR Manager
The "flip" is triggered when Ridgeline achieves its target after-tax internal rate of return of 7.25%, which is projected to occur in the fourth quarter of 2028 based on the current financial model. The flip is an economic event-based trigger, consistent with the requirements of Revenue Procedure 2007-65.
Purchase Option. CBR holds an option to purchase Ridgeline's post-flip 5% interest in Solstice Holdings at fair market value (with a floor of $1.00), exercisable within 180 days following the flip date. The purchase option is structured to comply with the safe-harbor requirements and is not exercisable at a fixed or predetermined price.
Section 6418 Credit Transfer. Simultaneously with the partnership-flip tax-equity investment, CBR (acting through the Partnership) elects to transfer $64,800,000 in face-value ITCs under Section 6418. Of this amount, $60,000,000 in credits are sold to Pinehurst Insurance Group, Inc. (EIN 06-1938274), a Connecticut corporation, at a price of $0.92 per $1.00 of credit face value, generating cash proceeds of $55,200,000. The remaining $4,800,000 in ITCs are retained by CBR for use against its own federal income tax liability. The TCPA between CBR (as sponsor and designated agent of the Partnership) and Pinehurst governs the terms of the credit transfer, including representations, warranties, indemnification, and the mechanics of the Section 6418 election.
C. ITC Computation
The total ITCs generated by the Solstice Portfolio are computed as follows:
The total ITCs of $153,840,000 are allocated between the two financing tranches as follows:
The depreciable basis of the energy property following the Section 50(c) basis reduction is calculated as follows:
Eligible basis: $384,600,000 Less: Section 50(c) reduction (50% × $153,840,000): ($76,920,000) Depreciable basis (5-year MACRS): $307,680,000
D. Questions Presented
This memorandum addresses the following questions, which have been identified in the course of structuring and documenting the Solstice Portfolio financing:
1. Which entity is the "eligible taxpayer" that makes the Section 6418 transfer election — the individual project companies (currently disregarded entities) or Solstice Holdings, LLC (the partnership)?
2. How does a Section 6418 transfer election interact with the partnership-level allocation of ITCs under Sections 704(b) and 46 of the Code?
3. Does the transfer of credits under Section 6418 reduce the Partnership's depreciable basis under Section 50(c)?
4. Can a single portfolio of projects generate ITCs that are partially allocated through a partnership-flip structure and partially transferred under Section 6418, and if so, what structural and documentation mechanics are required to effectuate such a dual-tranche approach?
5. What IRS guidance (proposed regulations, notices, revenue procedures) is available as of September 2023 to support this analysis, and what are the risks associated with reliance on proposed regulations that have not yet been finalized?
III. APPLICABLE LEGAL FRAMEWORK
A. Section 48 Investment Tax Credit — Overview
Section 48(a) of the Code provides an investment tax credit for "energy property," which includes solar energy property as defined in Section 48(a)(3)(A)(i). The ITC is determined for the taxable year in which the energy property is "placed in service," a term that generally means the date on which the property is placed in a condition or state of readiness and availability for a specifically assigned function. See Treas. Reg. § 1.46-3(d)(1)(ii); Sealy Power, Ltd. v. Commissioner, 46 F.3d 382 (5th Cir. 1995). For solar energy property, the placed-in-service date typically corresponds to the achievement of commercial operation, including interconnection to the electric grid and satisfaction of all conditions precedent to power delivery under the applicable power purchase agreement.
Under the IRA, the base ITC rate for energy property placed in service after December 31, 2022, is 6%, but this rate is increased by a factor of five — to 30% — if the prevailing wage and apprenticeship requirements of Section 48(a)(10) are satisfied. The prevailing wage requirement mandates that laborers and mechanics employed in the construction, alteration, or repair of the facility be paid wages at rates not less than the prevailing rates determined by the Secretary of Labor under 40 U.S.C. § 3142 (the Davis-Bacon Act). The apprenticeship requirement mandates that a specified percentage of total labor hours be performed by qualified apprentices, with exceptions for good-faith efforts to comply when qualified apprentices are unavailable.
In addition to the base credit, the IRA introduced several "adder" provisions that increase the ITC rate for projects meeting specified criteria:
• Domestic Content Bonus (§ 48(a)(12)): An additional 10 percentage points of ITC (bringing the total to 40% when combined with the 30% base rate) for energy property that satisfies the domestic content requirements. Under Section 48(a)(12) and IRS Notice 2023-38, the domestic content requirements are met if the steel, iron, and manufactured products used in the construction of the facility satisfy specified domestic sourcing thresholds. For the Solstice Portfolio, VBC has provided certifications supporting compliance with the domestic content requirements, and CBR has engaged Greystone Worthington to perform an independent verification of compliance.
• Energy Community Bonus (§ 48(a)(14)): An additional 10 percentage points of ITC for energy property located in an "energy community," as defined in Section 45(b)(11)(B). As noted above, the Solstice Portfolio projects do not qualify for the energy community adder based on the applicable census tract and metropolitan statistical area analyses.
The ITC is claimed by the taxpayer that "places in service" the energy property and has the benefits and burdens of ownership of such property. For property held through a partnership, the credit is determined at the partnership level under Section 46 and allocated among the partners in accordance with the partnership agreement, subject to the rules of Sections 46(d) and 704(b).
B. Section 6418 — Elective Transfer of Applicable Credits
Section 6418 was added to the Code by Section 13801(a) of the IRA, effective for taxable years beginning after December 31, 2022. It represents a fundamental innovation in the monetization of federal tax credits by permitting, for the first time, the direct transfer of specified tax credits for cash consideration outside of the traditional partnership or sale-leaseback structures that have historically dominated the renewable energy tax-equity market.
The key operative provisions of Section 6418 are as follows:
Section 6418(a) — Elective Transfer. Section 6418(a) provides that an "eligible taxpayer" may, with respect to any "applicable credit" determined with respect to such taxpayer, elect to transfer all or any portion of such credit to an unrelated "transferee taxpayer" in exchange for cash consideration. The transferee taxpayer is then treated as the taxpayer that originally determined the credit for all purposes of the Code, except that certain provisions (including recapture under Section 50(a)) remain with the eligible taxpayer. The election is irrevocable and must be made on the eligible taxpayer's federal income tax return (or, in the case of a partnership, the partnership's Form 1065) for the taxable year in which the applicable credit is determined.
Section 6418(b) — Treatment of Cash Consideration. Under Section 6418(b), cash consideration paid by the transferee taxpayer for the transferred credit is not includible in the gross income of the eligible taxpayer and is not deductible by the transferee taxpayer. This symmetrical treatment ensures that the credit transfer is, in effect, tax-neutral — the eligible taxpayer receives cash without an income inclusion, and the transferee taxpayer pays cash without a deduction, but receives a dollar-for-dollar credit against its federal income tax liability.
Section 6418(c) — Applicable Credits. The term "applicable credit" includes, among others, the energy credit determined under Section 48(a), which is the credit at issue in the Solstice Portfolio transaction.
Section 6418(d) — Related-Party Limitation. Section 6418(d) prohibits the transfer of credits between the eligible taxpayer and a transferee taxpayer that are "related" within the meaning of Section 267(b) or Section 707(b)(1). This limitation is designed to prevent artificial credit transfers within commonly controlled groups.
Section 6418(g) — Special Rules. Section 6418(g) provides additional rules, including: (1) a pre-filing registration requirement, under which the eligible taxpayer must complete a registration process with the IRS and obtain a registration number before making the transfer election; (2) rules addressing "excessive credit transfers," including penalties and the transferee's good-faith reliance protections; and (3) the rule that recapture liability under Section 50(a) remains with the eligible taxpayer and does not pass to the transferee taxpayer.
"Eligible Taxpayer" — Partnerships. A critical interpretive question under Section 6418 is whether, for energy property held through a partnership, the "eligible taxpayer" that makes the transfer election is the partnership itself or the individual partners. The statutory text defines "eligible taxpayer" as the taxpayer that "determines" the applicable credit. For partnership-owned property, the credit is determined at the partnership level under Section 46, suggesting that the partnership is the eligible taxpayer. The proposed Treasury regulations (discussed below in Part V) confirm this interpretation.
C. Partnership Allocation Rules — Sections 704(b), 46, and 704(c)
Under Section 46(d) and the regulations thereunder, the ITC for energy property owned by a partnership is determined at the partnership level and allocated among the partners. The allocation is governed by the partnership agreement, subject to the requirement that allocations have "substantial economic effect" under Section 704(b) and the regulations thereunder.
It is important to note that the ITC is technically not a "tax item" that is allocated under Section 704(b) in the same manner as income, gain, loss, or deduction. Rather, Section 46(d) and Treas. Reg. § 1.46-3(f) provide separate rules for the sharing of the ITC among partners. Under Treas. Reg. § 1.46-3(f)(2), the credit is shared among partners in accordance with their respective interests in the partnership, unless the partnership agreement provides otherwise and such allocation has substantial economic effect. In practice, the ITC allocation in a partnership-flip structure follows the same percentage allocation as other tax items (e.g., 99%/1% in the pre-flip period), and this allocation is tested under the economic-effect analysis of Treas. Reg. § 1.704-1(b)(2).
In a typical partnership-flip structure, the tax-equity investor (here, Ridgeline) receives a disproportionately large share of the ITC — typically 99% — in the pre-flip period, consistent with its disproportionately large capital contribution and its economic interest in the tax benefits of the projects. The capital accounts of the partners are maintained in accordance with Treas. Reg. § 1.704-1(b)(2)(iv), and the LLCA includes the required provisions for capital-account maintenance, deficit restoration obligations (or, more commonly, a qualified income offset), and minimum gain chargeback allocations.
Section 704(c) is also relevant to the extent that energy property is contributed by CBR to the Partnership with built-in differences between tax basis and fair market value. The Section 704(c) allocation rules require that the contributing partner (CBR) be allocated any built-in gain or loss with respect to contributed property, which may affect the allocation of depreciation deductions but does not directly affect the ITC allocation.
D. Section 50(c) — Basis Reduction
Section 50(c)(1) of the Code provides that the basis of any property for which an ITC is determined under Section 46 shall be reduced by 50% of the amount of the credit determined. This basis reduction is mandatory and applies regardless of which taxpayer ultimately claims or receives the credit. The purpose of the basis reduction is to prevent a double benefit — the taxpayer should not receive both a full ITC and full depreciation deductions on the same investment.
The basis reduction applies at the property level, not at the partner level. For partnership-owned property, the reduction is applied to the partnership's depreciable basis in the energy property, and the reduced basis is then used to compute MACRS depreciation deductions that flow through to the partners.
A key question in the Solstice Portfolio transaction is whether the basis reduction under Section 50(c) applies to all credits "determined" with respect to the energy property — including credits transferred under Section 6418 — or only to credits that are actually claimed by the eligible taxpayer or allocated to its partners. As discussed in Part IV.C below, the proposed regulations confirm that the basis reduction applies to the full amount of credits determined, regardless of whether such credits are subsequently transferred.
E. Section 50(a) — ITC Recapture
Section 50(a) of the Code provides for the recapture of ITCs if, during the five-year period beginning on the date the energy property is placed in service, any of the following recapture events occurs: (i) the property is disposed of or otherwise ceases to be energy property; (ii) there is a change in the use of the property such that it no longer qualifies for the ITC; or (iii) the taxpayer undergoes certain ownership changes that affect its eligibility for the credit.
The recapture percentage decreases by 20 percentage points for each full year that elapses after the property is placed in service. Thus, if a recapture event occurs during the first year, 100% of the ITC is recaptured; during the second year, 80% is recaptured; and so on, with no recapture after the fifth year.
For credits transferred under Section 6418, Section 6418(g)(1) provides a critical rule: the recapture liability remains with the eligible taxpayer (i.e., Solstice Holdings and the project companies) and does not pass to the transferee taxpayer (Pinehurst). This statutory allocation of recapture risk is reflected contractually in the Tax Indemnity Agreement between CBR and Pinehurst, which provides Pinehurst with indemnification for any recapture or disallowance of transferred credits, subject to a cap of $69,000,000 (representing 125% of the $55,200,000 purchase price).
For credits allocated through the partnership flip, recapture liability attaches to the partner that received the credit allocation — principally Ridgeline, which receives 99% of the partnership-allocated ITCs. The LLCA should include appropriate provisions governing the allocation of recapture liability and the indemnification obligations of the parties in the event of a recapture event.
IV. ANALYSIS
A. Which Entity Makes the Section 6418 Transfer Election?
1. Statutory Text and Proposed Regulations
The threshold question for the Solstice Portfolio transaction is the identity of the "eligible taxpayer" authorized to make the Section 6418 transfer election. This question is central to the structural mechanics of the dual-tranche approach, because the answer determines which entity files the election, which entity's tax return reflects the transfer, and which entity bears the recapture risk for the transferred credits.
Section 6418(a) provides that an "eligible taxpayer" may elect to transfer applicable credits. The statute defines "eligible taxpayer" by reference to the taxpayer that "determines" the applicable credit. For the Section 48 ITC, the credit is "determined" by the taxpayer that places the energy property in service and has the benefits and burdens of ownership.
For energy property owned through a disregarded entity, the regarded owner — not the disregarded entity — is the relevant taxpayer for all federal income tax purposes. See Treas. Reg. § 301.7701-2(a). Thus, a disregarded entity cannot itself be the "eligible taxpayer" for purposes of Section 6418, because a disregarded entity is not a "taxpayer" at all.
In the case of energy property owned through a partnership, the credit is determined at the partnership level under Section 46. The proposed Treasury regulations issued under Section 6418, published as REG-101610-23 on June 14, 2023, directly address this issue and provide the following clarification:
Prop. Reg. § 1.6418-2(a)(1): A partnership that directly holds energy property (or that is treated as holding energy property through a disregarded entity) is the "eligible taxpayer" for purposes of Section 6418 and may make the transfer election at the partnership level.
The proposed regulations further provide that individual partners of the partnership are not eligible taxpayers with respect to credits determined at the partnership level and may not independently make a Section 6418 election with respect to their distributive shares of such credits. This rule is consistent with the general principle that partnership-level tax attributes are determined and reported at the entity level, with each partner's distributive share computed after the partnership-level determination.
The proposed regulations also address the specific scenario in which the partnership holds the energy property through a disregarded entity. In such a case, the partnership is treated as the owner of the energy property for all federal income tax purposes, including for purposes of determining and electing to transfer the ITC under Section 6418.
2. Application to the Solstice Portfolio Structure
Applying these rules to the Solstice Portfolio, the analysis is straightforward:
• The seven project companies (Pecos Sun Solar, LLC; Red Mesa Solar, LLC; Coyote Flats Solar, LLC; Llano Verde Solar, LLC; Cimarron Solar, LLC; Sandoval Ridge Solar, LLC; and Amistad Solar, LLC) are all Delaware limited liability companies classified as disregarded entities for federal income tax purposes.
• Prior to the transaction, these entities are disregarded entities owned by CBR. CBR contributes 100% of the membership interests in each project company to Solstice Holdings, LLC. Following the contribution, the project companies become disregarded entities owned by the Partnership.
• Because the project companies are disregarded entities, Solstice Holdings (the Partnership) is treated as the owner of the underlying solar energy property for all federal income tax purposes.
• Solstice Holdings is therefore the "eligible taxpayer" for purposes of Section 6418.
Accordingly, the Section 6418 transfer election must be made by Solstice Holdings on its partnership tax return (Form 1065) for the 2023 taxable year — the year in which the seven solar projects are placed in service. The election cannot be made by the individual project companies (which are not taxpayers), by CBR (which is a partner in the Partnership, not the entity that determines the credit at the partnership level), or by Ridgeline.
As a practical matter, CBR controls the making of the Section 6418 election because CBR Manager is the Managing Member of Solstice Holdings and is responsible for the preparation and filing of the Partnership's tax returns. However, Ridgeline's consent rights under the LLCA must be addressed. The current draft of the LLCA provides that any tax election that could reasonably be expected to materially affect Ridgeline's economic returns requires Ridgeline's prior written consent. We recommend that the LLCA include a specific carve-out authorizing the Section 6418 election for the $64,800,000 credit transfer contemplated by the transaction, so that Ridgeline's general consent right does not create ambiguity or delay.
3. Structural Consideration — Bifurcating Credits
A critical feature of the proposed regulations is the confirmation that a partnership may elect to transfer only a portion of its total applicable credits under Section 6418, retaining the balance for allocation to its partners under the normal partnership allocation rules.
Prop. Reg. § 1.6418-2(a)(3): The eligible taxpayer may specify the amount of each applicable credit to be transferred under Section 6418. The eligible taxpayer is not required to transfer all credits of a particular type; a partial election is permitted.
This provision is essential to the viability of the Solstice Portfolio's dual-tranche structure. It permits Solstice Holdings to transfer $64,800,000 of its total $153,840,000 in Section 48 ITCs under Section 6418 while allocating the remaining $89,040,000 to its partners (Ridgeline and CBR Manager) under Sections 46(d) and 704(b). Without the ability to make a partial election, the Partnership would be forced to choose between transferring all credits (which would eliminate the partnership-flip tranche) and allocating all credits to partners (which would eliminate the Section 6418 tranche).
The LLCA must clearly specify which credits are subject to the Section 6418 election and which are allocated to the members. We recommend that the LLCA include a schedule (cross-referenced to the ITC Claim Workpapers) identifying, for each project, the total ITC amount, the amount elected for Section 6418 transfer, and the amount allocated to the partners. This schedule should be prepared on a pro rata basis by eligible basis, as discussed in Part IV.D.3 below.
4. Pre-Filing Registration
Section 6418(g)(1) imposes a pre-filing registration requirement as a condition to making the transfer election. Both the eligible taxpayer (Solstice Holdings) and the transferee taxpayer (Pinehurst) must complete a registration process with the IRS and obtain registration numbers before the election can be made. The IRS issued guidance on this registration process in Notice 2023-44, published on June 14, 2023, which provides that the IRS will establish an electronic registration portal. As of the date of this memorandum (September 15, 2023), the registration portal has not yet been made publicly available, although the IRS has indicated it expects the portal to open in the fall of 2023.
Solstice Holdings (EIN 88-4071523) and Pinehurst (EIN 06-1938274) should each register as soon as the portal becomes available. Registration is a mechanical process requiring the submission of identifying information, credit type, estimated credit amount, and other data specified by the IRS. The failure to complete pre-filing registration would render the Section 6418 election invalid, and we accordingly recommend that the TCPA include a condition precedent requiring completion of registration by both parties prior to the release of escrow funds.
B. Impact on Partnership-Level ITC Allocations
1. Interaction Between Section 6418 and Section 46 Allocations
Having established that Solstice Holdings is the eligible taxpayer and may make a partial Section 6418 election, the next question is how the transfer election interacts with the partnership-level allocation of ITCs to the partners under Section 46(d).
Under the normal partnership allocation rules, the total ITCs determined at the partnership level are allocated among the partners in accordance with the partnership agreement (subject to the substantial-economic-effect requirements). In the absence of a Section 6418 election, the full $153,840,000 in ITCs would be allocated 99% to Ridgeline ($152,301,600) and 1% to CBR Manager ($1,538,400) during the pre-flip period.
The introduction of Section 6418 modifies this allocation by removing a specified amount of credits from the pool available for partner-level allocation. The proposed regulations establish an ordering rule under which the Section 6418 election is treated as occurring before the credits are allocated to partners under Section 46(d). That is, the credits elected for transfer under Section 6418 are first removed from the total pool, and only the remaining credits are then allocated to the partners.
Applying this ordering rule to the Solstice Portfolio:
Step 1: Total ITCs determined at the partnership level: $153,840,000.
Step 2: Credits elected for Section 6418 transfer: $64,800,000.
Step 3: Credits remaining for partnership allocation: $153,840,000 – $64,800,000 = $89,040,000.
Step 4: Partnership allocation of remaining credits:
• Ridgeline (99%): $89,040,000 × 99% = $88,149,600
• CBR Manager (1%): $89,040,000 × 1% = $890,400
This ordering rule is essential to the structural integrity of the dual-tranche approach, because it ensures that the same credit dollar is not both transferred to Pinehurst under Section 6418 and allocated to Ridgeline under Section 46(d). Without a clear ordering rule, there would be a risk of double-counting or, alternatively, a dispute between Ridgeline and Pinehurst over which party is entitled to a particular dollar of credits.
We note that the ordering rule in the proposed regulations is consistent with the economic logic of the transaction: the Partnership first determines its total ITC entitlement, then makes its Section 6418 election for the transfer tranche, and then allocates the remaining credits to its partners in accordance with the LLCA. This sequential approach mirrors the economic bargain between the parties — Ridgeline's investment is sized to the partnership-allocated credits ($89,040,000), not to the total credits ($153,840,000), and Pinehurst's purchase is sized to the transferred credits ($60,000,000), not to the total.
2. Cash Proceeds from Credit Sale
The $55,200,000 in cash consideration received from Pinehurst for the $60,000,000 in transferred credits raises a separate partnership allocation question: How should this cash be characterized and allocated for purposes of the partnership's capital accounts and the partners' tax consequences?
Under Section 6418(b), the cash consideration received by the eligible taxpayer for the transferred credits is not includible in the eligible taxpayer's gross income. The proposed regulations treat this non-taxable cash receipt as an item of "tax-exempt income" for purposes of the partnership allocation rules. Specifically:
• The $55,200,000 is received by Solstice Holdings as partnership-level income that is excluded from gross income under Section 6418(b).
• As tax-exempt income, the receipt increases the capital accounts of the partners to whom it is allocated under Treas. Reg. § 1.704-1(b)(2)(iv)(b).
• The allocation of tax-exempt income among the partners is governed by the partnership agreement, subject to the requirement that the allocation have substantial economic effect (or be in accordance with the partners' interests in the partnership).
• The corresponding increase in capital accounts also increases the partners' outside bases under Section 705(a)(1)(B) (which provides that a partner's basis is increased by the partner's distributive share of tax-exempt income of the partnership).
The question of how the $55,200,000 should be allocated among the partners is a matter of negotiation and documentation, not a matter of law. The proposed regulations do not dictate a particular allocation; they merely provide that the amount is treated as tax-exempt income of the partnership.
In the context of the Solstice Portfolio transaction, the Section 6418 credit sale was negotiated and structured by CBR as sponsor. The economic benefit of the credit sale — the $55,200,000 in cash proceeds — is intended to be a CBR benefit, separate from and in addition to Ridgeline's partnership-flip economics. Ridgeline's investment is priced based on the 99% allocation of $89,040,000 in ITCs and corresponding MACRS depreciation, not on any share of the credit-sale proceeds.
Accordingly, we recommend that the LLCA provide for the allocation of the $55,200,000 in tax-exempt income from the Section 6418 credit sale entirely to CBR Manager (or, alternatively, in the 70%/30% cash distribution ratio if the parties prefer to maintain consistency with the general cash distribution waterfall). The specific allocation should be documented in the tax allocation provisions of the LLCA and should be supported by an analysis of substantial economic effect under the Section 704(b) regulations.
Ridgeline's counsel at Whitfield & Ayers LLP (Samara Okonkwo and David Lim) may seek to have the credit-sale proceeds allocated in part to Ridgeline, on the theory that the proceeds reflect value attributable to the partnership's assets. We would expect, however, that Ridgeline will agree to the CBR-only allocation given that Ridgeline's pricing does not reflect any economic interest in the Section 6418 tranche.
3. Ridgeline's Protections
Ridgeline, as the tax-equity investor, has a significant economic interest in ensuring that the Section 6418 election does not impair its expected ITC allocation. Ridgeline's financial model and target after-tax IRR of 7.25% are premised on receiving its 99% share of the partnership-allocated ITCs ($88,149,600), together with its share of MACRS depreciation on the $307,680,000 post-reduction depreciable basis.
To protect Ridgeline's interest, we recommend that the LLCA include the following covenants and representations:
(a) Cap on Section 6418 Election: A covenant from CBR Manager that the Section 6418 transfer election for the 2023 taxable year shall not exceed $64,800,000 in aggregate ITCs without Ridgeline's prior written consent.
(b) Minimum Credit Allocation: A representation from CBR Manager that, after giving effect to the Section 6418 election, the ITCs available for allocation to the partners under Sections 46(d) and 704(b) shall not be less than $89,040,000.
(c) No Additional Elections: A negative covenant from CBR Manager that it will not make any additional Section 6418 election with respect to the Solstice Portfolio projects (including in subsequent taxable years, to the extent additional credits are determined) without Ridgeline's prior written consent.
(d) Indemnification: CBR's obligation to indemnify Ridgeline for any loss, reduction, disallowance, or recapture of ITCs allocable to Ridgeline arising from an improper or excessive Section 6418 election.
These protections are consistent with market practice in partnership-flip transactions and should be readily acceptable to CBR, given that the agreed credit allocation is fundamental to the economics of the deal.
C. Impact on Depreciable Basis — Section 50(c) Basis Reduction
1. Statutory Rule
Section 50(c)(1) provides, in pertinent part, that "the basis of any property for which a credit is determined under [Section 46] shall be reduced by the amount of the current year credit determined with respect to such property." For purposes of Section 50(c), the "current year credit" is defined as 50% of the ITC determined under Section 48(a). See IRC § 50(c)(3)(A)(i).
The basis reduction is mandatory and applies at the property level. It is not dependent on which taxpayer ultimately claims, receives, or is allocated the credit. The statute refers to the "amount of the credit determined" — not the amount claimed, allocated, or transferred. This distinction is critical for purposes of the Solstice Portfolio transaction.
2. Application to Transferred Credits
The proposed regulations under Section 6418 directly address the interaction between the transfer election and the Section 50(c) basis reduction:
Prop. Reg. § 1.6418-3(c): The basis reduction under Section 50(c) applies to the eligible taxpayer (i.e., the partnership or the owner of the energy property) with respect to all credits determined, including those transferred under Section 6418. The transfer of credits under Section 6418 does not reduce or eliminate the basis reduction that would otherwise apply.
This rule is a logical corollary of the anti-double-benefit principle underlying Section 50(c). If the basis reduction applied only to credits not transferred under Section 6418, the eligible taxpayer would receive the economic benefit of the credit sale (the $55,200,000 in cash proceeds) while also retaining a higher depreciable basis — effectively receiving a double benefit. The proposed regulations foreclose this result by applying the basis reduction to all credits determined, regardless of whether they are allocated to partners or transferred to a third party.
Applying this rule to the Solstice Portfolio:
Total ITCs determined: $153,840,000 Section 50(c) basis reduction: 50% × $153,840,000 = $76,920,000 Eligible basis: $384,600,000 Depreciable basis for MACRS: $384,600,000 – $76,920,000 = $307,680,000
This depreciable basis applies to the entire portfolio, regardless of the allocation between the partnership-flip tranche and the Section 6418 tranche. The $307,680,000 is the basis on which 5-year MACRS depreciation (with bonus depreciation, if applicable) is computed. During the pre-flip period, 99% of the resulting depreciation deductions are allocated to Ridgeline and 1% to CBR Manager.
3. Impact on Partnership Economics
The full basis reduction is an important input to Ridgeline's financial model. To the extent that Ridgeline's advisors at Whitfield & Ayers LLP have modeled only a partial basis reduction — for example, reducing basis only by 50% of the $89,040,000 in partnership-allocated credits ($44,520,000), rather than by 50% of the full $153,840,000 ($76,920,000) — the financial model is incorrect and should be revised.
The difference is significant. If only the partnership-allocated credits triggered a basis reduction, the depreciable basis would be $384,600,000 – $44,520,000 = $340,080,000 — approximately $32,400,000 higher than the correct depreciable basis of $307,680,000. Over a five-year MACRS depreciation schedule, this difference would result in materially higher depreciation deductions and a correspondingly faster achievement of Ridgeline's target IRR, which in turn would affect the projected flip date and the overall economics of the transaction.
We recommend that CBR's financial advisor (or, if appropriate, Calderwood & Harkness directly) confirm with Ridgeline's counsel and financial advisor that the correct depreciable basis of $307,680,000 has been used in the most recent financial model. Any discrepancy should be identified and corrected before the transaction documents are executed.
D. Can a Single Portfolio Generate Credits for Both Partnership Flip and Section 6418 Transfer?
1. Structural Permissibility
Based on our analysis of the statutory text and the proposed regulations, the answer is yes: a single portfolio of energy property may generate ITCs that are partially allocated to partners through a partnership-flip structure and partially transferred to a third party under Section 6418. Neither the statute nor the proposed regulations prohibit or restrict this dual-tranche approach.
The permissibility of the dual-tranche structure rests on the following foundations:
(a) Statutory Authority for Partial Elections: Section 6418(a) permits the eligible taxpayer to elect to transfer "all or any portion" of its applicable credits. This language expressly contemplates that the eligible taxpayer may retain a portion of the credits for its own use — or, in the partnership context, for allocation to its partners — while transferring the remainder.
(b) Proposed Regulations: Prop. Reg. § 1.6418-2(a)(3) confirms that the eligible taxpayer may "specify the amount of each applicable credit to be transferred," reinforcing the statutory authorization for partial elections.
(c) Ordering Rule: The proposed regulations establish the ordering rule described in Part IV.B.1 above, which provides a clear mechanism for separating the transferred credits from the partnership-allocated credits. The ordering rule eliminates any ambiguity about which credits are transferred and which are allocated.
(d) No Anti-Splitting Rule: Neither the statute nor the proposed regulations contain an "anti-splitting" rule that would prohibit the same portfolio from generating credits destined for two different monetization pathways. The IRS's request for comments in the preamble to the proposed regulations (discussed in Part V.E below) suggests that the IRS is aware of this dual-tranche possibility and has not concluded that it is impermissible.
The economic rationale for the dual-tranche structure is compelling. Different capital sources have different appetites for tax credits: tax-equity investors like Ridgeline seek a combination of ITCs, depreciation deductions, and cash flow, and are willing to accept the complexities of partnership tax accounting in exchange for a higher overall return. By contrast, credit purchasers like Pinehurst seek only tax credits — a simple, monetizable asset with minimal structural complexity. The dual-tranche structure allows the sponsor (CBR) to access both capital sources, thereby maximizing the proceeds from its tax credits and reducing its overall cost of capital.
2. Structural Mechanics Required
While the dual-tranche structure is permissible, it requires careful documentation and coordination to ensure proper implementation. The following structural mechanics are required:
LLCA Provisions. The Amended and Restated Limited Liability Company Agreement of Solstice Holdings must include an ITC allocation waterfall that clearly delineates the two tranches. Specifically, the LLCA should provide:
(a) A provision stating that the Managing Member is authorized (and directed) to make a Section 6418 transfer election with respect to $64,800,000 in ITCs for the 2023 taxable year, with Ridgeline's consent to this election being given at the time the LLCA is executed.
(b) A provision specifying that the Section 6418 election is made first (i.e., before the allocation of credits to partners), and that the remaining credits ($89,040,000) are allocated to the partners in the pre-flip ratio of 99% to Ridgeline and 1% to CBR Manager.
(c) A provision addressing the allocation of the $55,200,000 in tax-exempt income from the credit sale, as discussed in Part IV.B.2 above.
(d) Schedules identifying the per-project allocation of total ITCs, Section 6418 credits, and partnership-allocated credits.
Tax Credit Purchase Agreement. The TCPA between CBR (acting as sponsor and designated agent of the Partnership) and Pinehurst must be carefully coordinated with the LLCA. The TCPA should include:
(a) A description of the credits being purchased ($60,000,000 in ITCs generated by the Solstice Portfolio projects), with a reference to the specific project companies and the aggregate credit amount.
(b) A representation by CBR that the Partnership will make the Section 6418 transfer election for the specified credit amount ($64,800,000 total, of which $60,000,000 are transferred to Pinehurst) on its 2023 Form 1065.
(c) Pinehurst's obligation to pay $55,200,000 in cash consideration (deposited into escrow at Clearwater Escrow Services, Inc., Account No. CES-2023-80114, pending satisfaction of closing conditions).
(d) Tax indemnification and recapture provisions, including the $69,000,000 indemnity cap.
(e) Pre-filing registration requirements and closing conditions.
Capital Contribution Agreement. Ridgeline's Capital Contribution Agreement (or the applicable provisions of the LLCA) should include:
(a) A representation from CBR that the Section 6418 election will not exceed $64,800,000 and will not impair Ridgeline's credit allocation of $89,040,000 (of which 99%, or $88,149,600, is allocated to Ridgeline).
(b) A negative covenant from CBR that no additional Section 6418 elections will be made without Ridgeline's consent.
(c) An indemnification obligation from CBR for any reduction in Ridgeline's ITC allocation attributable to an improper or excessive Section 6418 election.
Transfer Election Statements. The Section 6418 transfer election is made by filing Transfer Election Statements with Solstice Holdings' Form 1065 for the 2023 taxable year. The proposed regulations require separate statements for each applicable credit, identifying: (i) the eligible taxpayer's name and EIN (Solstice Holdings, EIN 88-4071523); (ii) the transferee taxpayer's name and EIN (Pinehurst Insurance Group, Inc., EIN 06-1938274); (iii) the type of applicable credit (Section 48 ITC); (iv) the amount of credit transferred; (v) the cash consideration paid; and (vi) the taxable year. We recommend preparing separate Transfer Election Statements for each of the seven project companies' credits, to clearly identify the source and amount of the transferred credits on a project-by-project basis.
3. Credit Allocation by Project
The $64,800,000 in Section 6418 credits and $89,040,000 in partnership-allocated credits should be allocated among the seven projects on a reasonable and consistent basis. We recommend a pro rata allocation based on each project's EPC cost (eligible basis), which is the most straightforward and defensible methodology.
The following table sets forth the proposed allocation:
*Note: Amounts may vary slightly from stated totals due to rounding. Final allocation schedule to be reconciled to exactly $64,800,000 (§ 6418) and $89,040,000 (partnership allocation) in the executed schedules to the LLCA and TCPA.
This pro rata approach should be documented in schedules attached to both the LLCA and the TCPA, and should be cross-referenced to the ITC Claim Workpapers prepared by Larchmont & Associates, PLLC (Susan Kaplan, Tax Partner), which will be attached to Solstice Holdings' 2023 Form 1065.
E. Timing Considerations
1. Placed-in-Service Requirement
The Section 48 ITC is determined for the taxable year in which the energy property is placed in service. All seven projects must achieve COD and be placed in service during the 2023 taxable year of Solstice Holdings. The Partnership uses a calendar taxable year, so the placed-in-service requirement is met if COD occurs on or before December 31, 2023.
Based on the current project schedules, the first project (Cimarron Solar) is expected to achieve COD on September 30, 2023, and the final project (Amistad Solar) is expected to achieve COD on November 18, 2023. Assuming all projects achieve COD as currently scheduled, all ITCs will be determined for the 2023 taxable year, and the Section 6418 election and partnership-level ITC allocation will both relate to the 2023 taxable year.