MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
TO: Leonard Cross, Partner, Tax Sylvia Hartwell, Partner, Tax
FROM: Leila Nazari, Associate, Tax
DATE: September 15, 2023
RE: Section 6418 Transfer Election Mechanics and Filing Requirements — Solstice Portfolio Transferable Credit Sale to Pinehurst Insurance Group, Inc.
MATTER NO.: 1015-00005
BILLING NO.: 78204-001
CLIENT: Calloway-Briggs Renewables Inc.
I. Executive Summary
This memorandum analyzes the mechanics, eligibility requirements, filing procedures, and buyer protections associated with a transfer election under Section 6418 of the Internal Revenue Code (as enacted by the Inflation Reduction Act of 2022, Pub. L. 117-169 (the "IRA")) in connection with the proposed sale of transferable Investment Tax Credits generated by the Solstice Portfolio. This memorandum is intended to serve as a comprehensive reference for the deal team in structuring, documenting, and closing the transferable-credit sale to Pinehurst Insurance Group, Inc. and in managing the post-closing tax compliance obligations that arise thereunder.
Transaction Overview. Calloway-Briggs Renewables Inc. ("CBR"), through its seven project-level special purpose entities (each a Delaware limited liability company classified as a disregarded entity for federal income tax purposes), intends to sell $60,000,000 in face-value Investment Tax Credits ("ITCs") under Section 48 of the Code to Pinehurst Insurance Group, Inc. ("Pinehurst"), a Connecticut corporation and diversified property and casualty and life insurance holding company (EIN 06-1938274), at a purchase price of $0.92 per dollar of credit, for aggregate cash consideration of $55,200,000. The sale will be effected through a transfer election under Section 6418 of the Code, and the terms of the sale are governed by the Tax Credit Purchase Agreement dated September 21, 2023 (the "TCPA"), between CBR, Solstice Holdings, LLC, and Pinehurst.
Credit Generation. The transferred ITCs represent a portion of the total $153,840,000 in ITCs generated by the Solstice Portfolio, which comprises approximately 420 MW(dc) of utility-scale solar photovoltaic capacity across seven projects located in Texas and New Mexico. The ITCs are computed on $384,600,000 of eligible basis at a combined 40% ITC rate (consisting of a 30% base rate, reflecting the application of the prevailing wage and apprenticeship multiplier, plus a 10% domestic content bonus adder under Section 48(a)(12) of the Code).
Credit Allocation. Of the total $153,840,000 in ITCs generated by the Solstice Portfolio, $64,800,000 has been designated for the Section 6418 transfer election. Of that $64,800,000, $60,000,000 is being sold to Pinehurst and $4,800,000 is being retained by CBR for application against its own federal income tax liability. The remaining $89,040,000 in ITCs is being allocated within the Solstice Holdings, LLC partnership-flip tax-equity structure with Ridgeline Capital Partners, LLC ("Ridgeline"), in accordance with the allocation provisions of the Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC dated September 21, 2023 (the "LLCA").
Key Conclusion. Based on the analysis set forth in this memorandum, the proposed transfer election should be valid and effective under Section 6418 of the Code, subject to compliance with the procedural requirements analyzed herein — including pre-filing registration with the IRS, the timely filing of a transfer election statement with the eligible taxpayer's tax return, and satisfaction of the various documentation and notification requirements under the proposed Treasury regulations. Furthermore, the statutory good-faith protections under Section 6418(g)(2) should be available to Pinehurst as transferee taxpayer, provided Pinehurst maintains the diligence file and supporting documentation described in Part VII of this memorandum. We recommend proceeding with the transaction as currently structured, subject to the specific action items and risk factors identified below.
II. Background
A. The Solstice Portfolio
The Solstice Portfolio consists of seven utility-scale solar photovoltaic projects with a combined nameplate capacity of approximately 420 MW(dc), located across multiple counties in Texas and New Mexico. Each project is developed, owned, and operated through a separate Delaware limited liability company that is classified as a disregarded entity for federal income tax purposes. Each of these project-level entities is wholly owned by Solstice Holdings, LLC, a Delaware limited liability company classified as a partnership for federal income tax purposes (EIN 88-4071523). The following table sets forth the key characteristics of each project in the Solstice Portfolio:
The aggregate engineering, procurement, and construction ("EPC") cost across all seven projects is $384,600,000. Each project is being constructed under a separate fixed-price, lump-sum, date-certain EPC contract with Vasquez Brothers Construction, Inc. ("VBC"), a Texas corporation (EIN 75-2648103). VBC is an experienced EPC contractor with a track record of constructing utility-scale solar projects in the southwestern United States, and has agreed to provide prevailing wage and apprenticeship compliance certifications in connection with the IRA requirements, as well as domestic content certifications with respect to the solar modules, trackers, and inverters used in each project.
Each project company is a Delaware limited liability company classified as a disregarded entity for federal income tax purposes, meaning that for tax purposes its assets, liabilities, income, deductions, and credits are treated as those of its sole owner, Solstice Holdings, LLC. Solstice Holdings is itself a Delaware limited liability company classified as a partnership for federal income tax purposes. Solstice Holdings is jointly owned by two members:
(a) CBR Solstice Manager, LLC (the "Managing Member"), a Delaware limited liability company classified as a disregarded entity (EIN 88-4071597), whose sole member is Calloway-Briggs Renewables Inc. ("CBR"), a Delaware corporation (the ultimate sponsor and developer of the Solstice Portfolio); and
(b) Ridgeline Capital Partners, LLC (the "Tax-Equity Member"), a Delaware limited liability company (EIN 13-4827651), an affiliate of Ridgeline Capital Management, LP, a New York-based investment management firm that serves as tax-equity investor in the partnership-flip structure.
The ownership structure thus consists of seven disregarded-entity project companies flowing up into a tax partnership (Solstice Holdings), which in turn is owned by the sponsor-affiliated managing member (CBR Solstice Manager, a disregarded entity of CBR) and the tax-equity investor (Ridgeline). This structure is typical of modern utility-scale solar development and is designed to accommodate both a partnership-flip tax-equity investment and a Section 6418 transferable-credit sale, as described below.
B. The Dual-Tranche Financing Structure
The monetization of the Solstice Portfolio's tax attributes is being effected through a dual-tranche financing structure with a total deal value of approximately $180,000,000 in tax-equity and credit-sale proceeds. The two tranches are as follows:
Tranche 1 — Partnership-Flip Tax-Equity Investment. Ridgeline Capital Partners, LLC has committed to make aggregate capital contributions of $120,000,000 to Solstice Holdings, LLC in exchange for membership interests carrying a 99% allocation of tax items (including ITCs allocated at the partnership level, MACRS depreciation deductions, and allocable taxable income or loss) and a 30% share of cash distributions during the pre-flip period. The partnership-flip structure is designed to deliver a 7.25% after-tax internal rate of return to Ridgeline, with the flip projected to occur in the fourth quarter of 2028. Upon the occurrence of the flip, Ridgeline's allocable share of all tax items and cash distributions will be reduced to 5%, and CBR Solstice Manager's share will increase correspondingly to 95%. The partnership-flip structure is documented in the LLCA and is the subject of a separate Calderwood & Harkness tax opinion letter to be delivered at closing.
Tranche 2 — Section 6418 Transferable-Credit Sale. CBR (acting through Solstice Holdings, LLC) will sell $60,000,000 in face-value ITCs to Pinehurst Insurance Group, Inc. at a purchase price of $0.92 per $1.00 of credit, for aggregate cash consideration of $55,200,000. The sale will be effected through a transfer election under Section 6418 of the Code. CBR will retain $4,800,000 in face-value ITCs for application against its own federal income tax liability. The terms of the credit sale are governed by the TCPA, the Tax Indemnity Agreement, and the Escrow Agreement, each dated September 21, 2023.
This memorandum focuses exclusively on Tranche 2 and the interaction between the two tranches. The partnership-flip structure (Tranche 1) is the subject of separate analysis, and the interaction between the Section 6418 transfer and the partnership allocation provisions is addressed in Part VIII below.
C. ITC Computation Summary
The total ITCs generated by the Solstice Portfolio are computed as follows:
Total eligible basis: $384,600,000 (aggregate EPC cost across all seven projects, representing the cost of Section 48 energy property placed in service during the 2023 taxable year)
Base ITC rate: 30%. The base ITC rate under Section 48(a) of the Code is 6% for energy property that does not satisfy the prevailing wage and apprenticeship requirements of Section 48(a)(10). However, because CBR has committed to satisfy (and VBC has certified compliance with) the prevailing wage and registered apprenticeship requirements applicable to each project, the 5× multiplier applies, resulting in a base rate of 30% (6% × 5 = 30%).
Domestic content bonus adder: 10%. Under Section 48(a)(12) of the Code, an additional 10% bonus credit is available for projects that satisfy the domestic content requirements (i.e., that the steel, iron, and manufactured products used in the construction of the facility are produced in the United States, subject to applicable percentage thresholds). VBC has certified that each project satisfies the applicable domestic content requirements, and Greystone Worthington, LLC has independently verified compliance as part of its appraisal engagement.
Energy community bonus adder: 0%. Although the IRA provides for an additional 10% bonus credit under Section 48(a)(14) for projects located in "energy communities" (as defined in Section 45(b)(11)(B)), the seven Solstice Portfolio projects do not satisfy the applicable requirements. None of the project sites is located in a census tract (or an adjoining census tract) in which a coal mine has closed after December 31, 1999, or a coal-fired electric generating unit has been retired after December 31, 2009, and none qualifies under the brownfield-site or statistical-area unemployment criteria.
Total ITC rate: 40% (30% base + 10% domestic content + 0% energy community)
Total ITCs: $384,600,000 × 40% = $153,840,000
The total ITCs are allocated between the two tranches as follows:
The methodology for determining which projects' credits are allocated to the Section 6418 transfer and which are retained in the partnership is discussed in Part III.E below. The ITC Allocation Schedule, which is attached as an exhibit to the TCPA, sets forth the project-level detail.
III. Section 6418 — Statutory Framework
A. Overview of Section 6418
Section 6418 of the Internal Revenue Code was enacted by Section 13801 of the Inflation Reduction Act of 2022 (Pub. L. 117-169, 136 Stat. 1818, enacted August 16, 2022). The provision is effective for taxable years beginning after December 31, 2022, and represents a significant structural innovation in the monetization of federal clean energy tax credits. Prior to the enactment of Section 6418, the tax credits available under Sections 45, 48, and related provisions could be used only by the taxpayer that generated the credits (or, in the case of partnership or S corporation structures, by the partners or shareholders to whom the credits were allocated), or through a refundability mechanism in limited circumstances. There was no general mechanism for the direct sale of tax credits from the credit-generating taxpayer to an unrelated purchaser.
Section 6418 permits an "eligible taxpayer" to elect to transfer all or a portion of certain "eligible credits" to an unrelated "transferee taxpayer" in exchange for cash consideration. The transfer election has the following core features:
(i) Transfer Mechanism. The eligible taxpayer may elect to transfer all or any portion of an eligible credit determined with respect to the eligible taxpayer for a taxable year to a transferee taxpayer in exchange for cash consideration. I.R.C. § 6418(a).
(ii) Treatment of Transferred Credit. The transferred credit is treated as a tax credit allowed to the transferee taxpayer (and not to the eligible taxpayer) for the taxable year specified in the election. The transferee claims the credit on its own federal income tax return. I.R.C. § 6418(a).
(iii) Exclusion from Income. The cash consideration received by the eligible taxpayer in connection with the transfer is not includible in the gross income of the eligible taxpayer. I.R.C. § 6418(b). This exclusion from income is a critical feature of the provision, as it ensures that the seller does not incur a federal income tax cost on the credit-sale proceeds.
(iv) Non-Deductibility of Purchase Price. The cash consideration paid by the transferee taxpayer is not deductible by the transferee. I.R.C. § 6418(b). This non-deductibility is the corollary to the income exclusion and ensures that the transferee's benefit is limited to the face value of the credit itself.
(v) Irrevocability. The transfer election, once made, is irrevocable. I.R.C. § 6418(a). Neither the eligible taxpayer nor the transferee may rescind or modify the election after it has been filed.
(vi) Cash Consideration Requirement. The consideration for the transfer must be paid in cash. I.R.C. § 6418(a). Non-cash consideration, notes, equity interests, or other in-kind payments do not satisfy this requirement.
The credits eligible for transfer under Section 6418 include the Section 48 Investment Tax Credit for solar energy property, which is the credit at issue in this transaction. The full list of eligible credits is set forth in Section 6418(a)(2) and includes credits under Sections 30C, 45, 45Q, 45V, 45X, 45Y, 45Z, 48, 48C, and 48E, among others.
B. Eligible Credits Under § 6418(a)
Section 6418(a)(2) defines the credits eligible for transfer by cross-referencing two categories: "applicable entity credits" (as defined in Section 6417(b)) and certain additional credits. The Section 48 ITC is listed as an "applicable entity credit" under Section 6417(b) and is also an "eligible credit" under Section 6418(a)(2). Accordingly, ITCs generated with respect to solar energy property placed in service after December 31, 2022 are eligible for transfer under Section 6418.
All seven projects in the Solstice Portfolio have target commercial operation dates ("CODs") in the 2023 calendar year, ranging from September 30, 2023 (Cimarron Solar) through November 18, 2023 (Amistad Solar). Assuming each project is placed in service on or before December 31, 2023, as currently projected, the ITCs will be determined for the 2023 taxable year — the first taxable year beginning after December 31, 2022, and thus the first year for which Section 6418 transfer elections are available. This timing is favorable, as it means the Solstice Portfolio will be among the first generation of projects to utilize the new transferable-credit mechanism.
We further note that the domestic content bonus adder (10% of eligible basis) is itself an integral component of the Section 48 ITC and is therefore transferable as part of the credit under Section 6418. The proposed Treasury regulations confirm that the bonus credits (including the domestic content adder and the prevailing wage/apprenticeship multiplier) are not treated as separate credits for purposes of Section 6418, but rather as components of the Section 48 ITC. Accordingly, the full 40% ITC rate (30% base + 10% domestic content) applies to the transferred credits, and the per-dollar pricing ($0.92/$1.00) is computed with reference to the full credit amount.
C. Definition of "Eligible Taxpayer"
Under Section 6418(a), the "eligible taxpayer" is the taxpayer that would otherwise be allowed the eligible credit — that is, the taxpayer that generated the credit with respect to the eligible credit property. For purposes of the Solstice Portfolio, the analysis of which entity constitutes the "eligible taxpayer" requires careful consideration of the multi-tiered ownership structure, including the disregarded entity project companies, the tax partnership (Solstice Holdings), and the sponsor entity (CBR).
Disregarded Entities. Each of 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) is a Delaware limited liability company that has not elected to be classified as a corporation for federal income tax purposes and that has a single owner (Solstice Holdings, LLC). As a result, each project company is classified as a disregarded entity under Treasury Regulation § 301.7701-3(b)(1)(ii). The assets, liabilities, income, deductions, and credits of each disregarded entity project company are treated for federal income tax purposes as the assets, liabilities, income, deductions, and credits of its regarded owner, Solstice Holdings, LLC.
Partnership as Tax Owner. Because each project company is disregarded, Solstice Holdings, LLC (a partnership for federal income tax purposes) is the tax owner of all seven solar energy projects. Solstice Holdings is therefore the taxpayer with respect to which the Section 48 ITCs are determined, and absent a Section 6418 transfer election, the credits would be allocated to the partners of Solstice Holdings under Section 704(b) and the allocation provisions of the LLCA.
Partnership Transfer Elections Under Proposed Regulations. The proposed Treasury regulations (REG-101610-23), published in the Federal Register on June 14, 2023, address the treatment of partnerships and S corporations in the context of Section 6418 transfer elections. Under the proposed regulations, a partnership may make a transfer election with respect to eligible credits determined at the partnership level. When a partnership makes a transfer election, the transferred credits are excluded from the credits allocated to partners under Section 704(b). In other words, the transfer election is made at the partnership level, before the credits flow through to the partners, and only the remaining (non-transferred) credits are subject to the partnership allocation rules.
This treatment is critical to the dual-tranche structure. The transfer election must be made at the Solstice Holdings level (as the tax partnership and regarded owner of the disregarded entity project companies), and the $64,800,000 in transferred credits must be separated from the $89,040,000 in partnership-retained credits before the Section 704(b) allocation to Ridgeline and CBR Solstice Manager takes effect.
Conclusion. Solstice Holdings, LLC, as the tax owner of the disregarded entity project companies and the partnership within which the Section 48 ITCs are determined, is the eligible taxpayer for purposes of the Section 6418 transfer election. The election is made at the partnership level, and the Managing Member (CBR Solstice Manager, LLC, acting through authorized personnel of CBR) executes the election on behalf of the partnership. We have also considered whether CBR (as indirect owner through CBR Solstice Manager, itself a disregarded entity) could be treated as the proper electing entity, but we believe the proposed regulations clearly contemplate that the partnership makes the election when the credit property is held at the partnership level. This conclusion is consistent with the general principle that a partnership is a separate entity for purposes of computing partnership-level tax items, and that the transfer election reduces the credits available for allocation to partners.
D. Definition of "Transferee Taxpayer"
Under Section 6418(a), the transferee taxpayer may be any taxpayer, provided that the transferee is not related to the eligible taxpayer within the meaning of Section 267(b) or Section 707(b)(1) of the Code. The relatedness test under Section 267(b) encompasses, among other relationships, members of the same controlled group of corporations (using a greater-than-50% ownership threshold), entities owned by the same individual or group, and grantor trusts of the same grantor. The relatedness test under Section 707(b)(1) applies to transactions between a partnership and a person owning, directly or indirectly, more than 50% of the capital interest or profits interest in the partnership.
Pinehurst's Qualification. Pinehurst Insurance Group, Inc. is a Connecticut corporation (EIN 06-1938274), headquartered at 175 Constitution Plaza, Hartford, Connecticut 06103. Pinehurst is a diversified property and casualty and life insurance holding company with total assets of approximately $18.3 billion and an average annual federal income tax liability of approximately $310 million. Pinehurst is publicly traded on the New York Stock Exchange and has no common ownership, overlapping directors or officers, or other relationship with CBR, Solstice Holdings, Ridgeline, or any of their respective affiliates.
Arm's-Length Negotiation. The purchase price of $0.92 per $1.00 of credit was the result of arm's-length negotiation between CBR and Pinehurst, conducted over a period of approximately three months. Pinehurst's initial bid was $0.89 per dollar, CBR countered at $0.94 per dollar, and the parties ultimately agreed on a final price of $0.92 per dollar after several rounds of negotiation and diligence. The negotiation history is documented in correspondence between the parties and is available in the diligence files maintained by Calderwood & Harkness. This pricing is consistent with market-rate transactions for Section 48 ITCs in the second half of 2023, which have generally been reported in the range of $0.88 to $0.95 per dollar of credit depending on credit quality, counterparty risk, and deal size.
Conclusion. Pinehurst Insurance Group, Inc. is not related to Solstice Holdings, LLC or CBR within the meaning of Section 267(b) or Section 707(b)(1) and therefore qualifies as a transferee taxpayer under Section 6418(a).
E. Partial Transfer Elections
Section 6418(a) provides that an eligible taxpayer may elect to transfer "all (or any portion of)" an eligible credit determined with respect to such taxpayer. This language expressly contemplates partial transfer elections, under which the eligible taxpayer transfers less than the full amount of credits generated. The Solstice Portfolio generates $153,840,000 in total ITCs, of which only $64,800,000 is subject to the transfer election, and of that amount, only $60,000,000 is being sold to Pinehurst.
The ability to bifurcate credits at the project level is a key structural feature of the transaction. The proposed Treasury regulations permit the eligible taxpayer to specify the portion of eligible credits to be transferred on a property-by-property basis. This means that Solstice Holdings can designate specific project companies' credits for transfer under Section 6418 while retaining other project companies' credits for allocation within the partnership-flip structure. For example, the ITCs generated by Cimarron Solar, LLC and Sandoval Ridge Solar, LLC (the two New Mexico projects) might be designated for transfer, while the ITCs generated by the remaining Texas projects might be allocated within the partnership, subject to adjustment to achieve the desired dollar amounts.
Recommended Approach. We recommend that the ITC Allocation Schedule (to be attached as an exhibit to the TCPA) identify specific projects whose ITCs will be subject to the Section 6418 transfer election and specific projects whose ITCs will be retained within the partnership structure for allocation to Ridgeline and CBR Solstice Manager. The allocation should be designed to minimize complexity and ensure that the credit amounts assigned to each tranche are clearly traceable to identified items of energy property. Robert Jansen is preparing the detailed project-level allocation schedule, which will be finalized in consultation with Larchmont & Associates prior to closing.
To the extent that a particular project's ITCs must be split between the two tranches (i.e., a portion transferred and a portion retained), the proposed regulations permit such a split, though we recommend avoiding fractional allocations where possible in order to simplify the election statements and reduce the risk of administrative error. Our preliminary analysis suggests that the credit amounts can be allocated on a whole-project basis without the need to split any individual project's credits, but this will be confirmed upon finalization of the allocation schedule.
IV. Pre-Filing Registration Requirements
A. IRS Registration Portal
Under the proposed Treasury regulations (REG-101610-23), both the eligible taxpayer and the transferee taxpayer must complete a pre-filing registration process through an IRS electronic portal before making the transfer election on the eligible taxpayer's tax return. This pre-filing registration requirement is designed to allow the IRS to track and verify transferable-credit transactions and to reduce the risk of fraud or duplication. The registration must be completed for each tax year in which a transfer occurs, and the IRS will issue a unique registration number upon successful completion of the registration process.
The proposed regulations describe the registration process in general terms but do not provide detailed operational guidance on the mechanics of the electronic portal, as the portal had not yet been launched as of the date of the proposed regulations. The IRS has indicated that additional guidance will be forthcoming, and we understand that the registration portal is expected to become available in late 2023 or early 2024. The timing and operational status of the portal is a key risk factor in the transaction, as discussed further in Part X.B below.
B. Information Required for Registration
Based on the proposed regulations, the following information will be required from each party in connection with the pre-filing registration process:
Eligible Taxpayer (Solstice Holdings, LLC / Project Companies):
• Legal name: Solstice Holdings, LLC
• Employer Identification Number: 88-4071523 (plus individual EINs for each project-level LLC, if required)
• Address: c/o Calloway-Briggs Renewables Inc., 2200 Post Oak Boulevard, Suite 3400, Houston, Texas 77056
• Type of eligible credit: Section 48 Investment Tax Credit (solar energy property)
• Amount of credit to be transferred (aggregate and by project)
• Taxable year in which the credit is determined: 2023
• Description of the eligible credit property: utility-scale solar photovoltaic energy property placed in service at seven project sites in Texas and New Mexico
• Placed-in-service date for each project (as certified by the EPC contractor and independently verified by the independent engineer)
Transferee Taxpayer (Pinehurst Insurance Group, Inc.):
• Legal name: Pinehurst Insurance Group, Inc.
• Employer Identification Number: 06-1938274
• Address: 175 Constitution Plaza, Hartford, Connecticut 06103
• Taxable year in which the credit will be claimed: 2023
• Amount of credit to be received: $60,000,000
Each party must attest to the accuracy of the information provided in the registration under penalties of perjury. The registration must be completed and the registration number must be obtained before the transfer election statement is filed with the eligible taxpayer's tax return.
C. Timing Considerations
The pre-filing registration must be completed before the transfer election statement is filed — that is, before the due date (including extensions) of the eligible taxpayer's tax return for the taxable year in which the eligible credit is determined. For Solstice Holdings, LLC (a calendar-year partnership), the 2023 Form 1065 (U.S. Return of Partnership Income) is due on March 15, 2024, with a possible six-month extension to September 15, 2024.
Given the target closing date of December 8, 2023, the registration should be completed as promptly as practicable after closing and, in any event, well before the filing of Form 1065. We recommend that the registration process be initiated immediately upon the opening of the IRS electronic portal and that responsibility for monitoring the portal's availability be assigned to a specific member of the deal team.
Coordination with Larchmont & Associates, PLLC (Martin Larchmont, Managing Partner; Susan Kaplan, Tax Partner), which serves as CBR's tax return preparer, will be essential to ensure that the registration is completed in time and that the registration number is available for inclusion on the transfer election statement. We recommend scheduling a planning call with Susan Kaplan promptly after closing to establish the compliance calendar and assign responsibilities.
D. Registration Number
The registration number received from the IRS upon completion of the pre-filing registration process must be included on the transfer election statement attached to the eligible taxpayer's tax return. The proposed regulations make clear that a valid registration number is a prerequisite to a valid transfer election. Without a valid registration number, the transfer election may be treated as invalid, and the credits may not be treated as transferred to the transferee taxpayer.
In light of the critical importance of the registration number, we recommend that completion of the pre-filing registration be built into the post-closing compliance checklist as a high-priority action item. The TCPA requires CBR / Solstice Holdings to use commercially reasonable efforts to complete the registration process, and Pinehurst has a corresponding obligation to cooperate and provide information necessary for Pinehurst's own registration. We further recommend that the deal team establish a tickler system to track the status of the registration process and escalate any delays to the attention of Leonard Cross and Sylvia Hartwell.
V. Transfer Election Statement — Form and Filing Requirements
A. Form of Election
The transfer election under Section 6418 is made on the eligible taxpayer's federal income tax return for the taxable year in which the eligible credit is determined. For Solstice Holdings, LLC (as the tax partnership that is the regarded owner of the disregarded entity project companies), the transfer election statement must be attached to Form 1065 (U.S. Return of Partnership Income) for the 2023 taxable year. We note that if the IRS were to take the position that the election should be made at a different entity level (e.g., at the CBR level on Form 1120, U.S. Corporation Income Tax Return), the election statement would need to be attached to that entity's return instead. However, as discussed in Part III.C above, we believe the proposed regulations clearly contemplate that the election is made at the partnership level.
In addition to the transfer election statement, the eligible taxpayer's return should include the following supporting forms:
• Form 3800 (General Business Credit), reporting the total general business credits determined at the partnership level (both transferred and retained)
• Form 3468 (Investment Credit), computing the Section 48 ITC for each item of energy property
Calderwood & Harkness has prepared template Transfer Election Statements for each of the seven project companies. These templates have been drafted in accordance with the requirements of the proposed regulations and will be finalized upon receipt of the IRS pre-filing registration number and confirmation of the placed-in-service dates for each project. Robert Jansen has primary responsibility for the preparation and finalization of these templates.
B. Required Content of the Transfer Election Statement
Based on the proposed Treasury regulations, the transfer election statement must include the following information:
(i) The name, address, and Employer Identification Number of the eligible taxpayer: Solstice Holdings, LLC, c/o Calloway-Briggs Renewables Inc., 2200 Post Oak Boulevard, Suite 3400, Houston, Texas 77056, EIN 88-4071523;
(ii) The name, address, and Employer Identification Number of the transferee taxpayer: Pinehurst Insurance Group, Inc., 175 Constitution Plaza, Hartford, Connecticut 06103, EIN 06-1938274;
(iii) The type of eligible credit being transferred: Section 48 Investment Tax Credit (solar energy property);
(iv) The amount of credit transferred: $60,000,000 in aggregate, broken down by project as set forth in the ITC Allocation Schedule;
(v) The amount of cash consideration received for the transfer: $55,200,000 in aggregate (representing $0.92 per $1.00 of credit);
(vi) The IRS pre-filing registration number issued in connection with the registration process described in Part IV above (to be obtained post-closing);
(vii) The taxable year of the eligible taxpayer in which the eligible credit was determined: 2023 (calendar year ending December 31, 2023); and
(viii) A statement that the transfer election is irrevocable.
We recommend that the transfer election statement also include, as an attachment, a schedule identifying each item of energy property (by project name, location, capacity, placed-in-service date, eligible basis, and ITC amount) with respect to which the credit is being transferred. This level of detail, while not expressly required by the proposed regulations, will facilitate IRS review and provide a clear audit trail linking the transferred credits to specific items of energy property.
C. Filing Deadline
The transfer election must be filed with the eligible taxpayer's timely filed (including extensions) tax return for the taxable year in which the eligible credit is determined. For Solstice Holdings, LLC (a calendar-year partnership), the filing deadlines are as follows:
• Original due date: March 15, 2024 (Form 1065 for the 2023 taxable year)
• Extended due date: September 15, 2024 (if a six-month extension is obtained by filing Form 7004)
It is critically important that the transfer election be filed on a timely basis. The proposed regulations provide that the election cannot be made on an amended return. If the eligible taxpayer fails to file the election statement with its original (or extended) return, the election will be treated as invalid, and the credits will not be treated as transferred to the transferee. This would result in a failure of the transaction and trigger the indemnification obligations under the TCPA.
We strongly recommend that the deal team coordinate closely with Larchmont & Associates (Susan Kaplan, Tax Partner) to ensure that (a) the Form 1065 is prepared and filed on a timely basis, (b) the transfer election statements are properly attached, and (c) the pre-filing registration number is obtained and included on the statements before filing. A preliminary timeline and responsibility matrix should be established promptly after closing.
D. Notification to Transferee
The proposed regulations require the eligible taxpayer to notify the transferee in writing of the transfer election, providing copies of the election statement and the registration number. This notification is necessary to enable the transferee to claim the transferred credits on its own federal income tax return.
In the case of Pinehurst, the transferred credits will be claimed on Pinehurst's Form 1120 (U.S. Corporation Income Tax Return, or applicable insurance company form) for the 2023 taxable year, accompanied by Form 3800 (General Business Credit). Pinehurst will need the information from the transfer election statement — including the registration number, the amount of credit transferred, and the type of credit — in order to properly report the credits on its own return.
The TCPA obligates CBR / Solstice Holdings to provide copies of the filed transfer election statements and the registration number to Pinehurst within ten (10) business days of the filing of the Form 1065. This contractual obligation is consistent with the regulatory notification requirement and should be monitored as part of the post-closing compliance calendar. We recommend that the notification be delivered in writing (by email and overnight courier) to Pinehurst's tax department, with a copy to Thornberry Mack LLP (Roland Thornberry, Partner) as Pinehurst's outside counsel, and that a confirmation of receipt be obtained and maintained in the diligence files.
VI. Treatment of the Transferred Credits — Tax Consequences
A. Treatment for the Eligible Taxpayer (Solstice Holdings / CBR)
The tax consequences of the Section 6418 transfer for the eligible taxpayer are as follows:
Credit Computation. The $60,000,000 in transferred ITCs are excluded from the eligible taxpayer's Section 38 general business credit computation. The eligible taxpayer determines the full amount of the Section 48 ITC ($153,840,000 across all seven projects) but includes only the non-transferred portion ($89,040,000 allocated within the partnership, plus $4,800,000 retained by CBR) in its general business credit for the 2023 taxable year. The transferred credits are instead claimed by the transferee (Pinehurst) on its own return.
Income Exclusion. The $55,200,000 in cash consideration received by CBR (through Solstice Holdings) in connection with the transfer is not includible in gross income. Section 6418(b) expressly provides that the amount paid as consideration for the transfer is not treated as gross income of the eligible taxpayer. This exclusion applies regardless of whether the consideration is paid before, at, or after closing, and regardless of whether the consideration is deposited into escrow pending satisfaction of conditions. The income exclusion is a fundamental economic benefit of the Section 6418 transfer mechanism, as it permits the eligible taxpayer to monetize the credits without incurring a federal income tax liability on the sale proceeds.
No Additional Basis Reduction. The eligible basis of the solar energy property is not reduced by the amount of consideration received in connection with the transfer. The standard 50% ITC basis reduction under Section 50(c) of the Code applies, but this reduction is computed with reference to the total ITC determined (i.e., $153,840,000), not the amount of consideration received or the amount of credits transferred.
Depreciable Basis Computation. The depreciable basis of the solar energy property for purposes of MACRS depreciation is computed as follows:
Total eligible basis (EPC cost): $384,600,000
Less: 50% of total ITCs determined ($153,840,000 × 50%): ($76,920,000)
Depreciable basis: $307,680,000
It is important to note that the Section 50(c) basis reduction applies to all ITCs determined with respect to the property, including the credits that are transferred under Section 6418. The basis reduction is not limited to the credits retained by the eligible taxpayer or allocated within the partnership. This means that the full $153,840,000 in ITCs (not just the $89,040,000 allocated within the partnership) triggers a basis reduction, notwithstanding that $60,000,000 of those credits are being sold to Pinehurst. The result is a depreciable basis of $307,680,000, which is approximately $76,920,000 less than the total EPC cost. This depreciable basis is allocated among the seven projects for purposes of computing 5-year MACRS depreciation (using the half-year convention and 200% declining balance method), and the resulting depreciation deductions flow through the partnership for allocation between Ridgeline (99% pre-flip) and CBR Solstice Manager (1% pre-flip).
B. Treatment for the Transferee Taxpayer (Pinehurst)
The tax consequences of the Section 6418 transfer for the transferee taxpayer are as follows:
Credit Entitlement. The $60,000,000 in transferred ITCs is treated as a tax credit allowed to Pinehurst Insurance Group, Inc. for the 2023 taxable year (or such other taxable year as specified in the transfer election statement). The credit is applied dollar-for-dollar against Pinehurst's federal income tax liability. Given Pinehurst's average annual federal income tax liability of approximately $310,000,000, Pinehurst has ample capacity to absorb the full $60,000,000 in transferred credits in the year of transfer without the need for carryforward.
Non-Deductibility of Purchase Price. The $55,200,000 purchase price paid by Pinehurst is not deductible by Pinehurst under Section 6418(b). The purchase price is treated as a non-deductible expenditure that is neither capitalizable nor amortizable. From an economic perspective, Pinehurst's benefit is the spread between the purchase price ($55,200,000) and the face value of the credits ($60,000,000), representing a net economic gain of $4,800,000, plus the time-value benefit of converting a cash outlay into a dollar-for-dollar tax reduction.
General Business Credit Limitations. The transferred credit is treated as an ITC for purposes of the Section 38 general business credit limitation rules. Under Section 38(c), the general business credit for any taxable year may not exceed the excess of the taxpayer's net income tax over the greater of (i) the tentative minimum tax or (ii) 25% of the taxpayer's net regular tax liability in excess of $25,000. Given Pinehurst's size and tax profile, the Section 38 limitation is not expected to be a binding constraint. However, Pinehurst's tax advisors should confirm this analysis based on Pinehurst's actual tax return data for the 2023 taxable year.
No Carryback; Carryforward Rules. Under the proposed regulations, transferred credits are not eligible for carryback to a prior taxable year of the transferee. If Pinehurst is unable to use the full $60,000,000 in transferred credits in the 2023 taxable year (which is not expected based on Pinehurst's tax profile), the unused credits would be subject to the general business credit carryforward rules under Section 39, allowing carryforward for up to 20 taxable years.
C. Recapture Implications for Transferred Credits
Recapture Responsibility. Under Section 6418(g)(1), the recapture rules of Section 50(a) apply to the eligible taxpayer (Solstice Holdings, LLC / CBR), not to the transferee taxpayer (Pinehurst). This means that if a recapture event occurs during the five-year recapture period following the placed-in-service date of any project (i.e., through approximately 2028–2029, depending on the specific placed-in-service date), it is the eligible taxpayer that is responsible for the recapture tax — not Pinehurst.
Recapture events under Section 50(a) include, among other things, a disposition of the energy property, a cessation of qualified use of the property, or a change in the ownership or use of the property that causes the property to cease to be investment credit property before the close of the five-year recapture period. The recapture amount is generally a percentage of the original credit, declining ratably over the five-year period (100% in year one, 80% in year two, 60% in year three, 40% in year four, and 20% in year five).
Contractual Indemnification. Notwithstanding the statutory allocation of recapture risk to the eligible taxpayer, the Tax Indemnity Agreement (dated September 21, 2023, between CBR and Pinehurst) provides that CBR has indemnified Pinehurst for any recapture or disallowance of the transferred credits. The indemnification covers 100% of the credit amount that is recaptured or disallowed, plus a gross-up for Pinehurst's incremental tax cost (including any interest and penalties), subject to an aggregate cap of 125% of the purchase price ($55,200,000 × 1.25 = $69,000,000). The Tax Indemnity Agreement is designed to provide Pinehurst with assurance that, even in the event of a recapture event, Pinehurst will be made whole (up to the cap) for the economic loss resulting from the recapture or disallowance.
We have prepared a separate ITC Recapture Risk Memorandum analyzing the specific recapture triggers applicable to the Solstice Portfolio projects and the contractual protections in the Tax Indemnity Agreement, and we cross-reference that memorandum here for detailed analysis.
VII. Buyer Protections — Statutory Good-Faith Standard
A. Section 6418(g)(2) — "Excessive Credit Transfer" Safe Harbor
Section 6418(g)(2) addresses the situation in which the amount of credit transferred exceeds the amount that should have been allowed — i.e., an "excessive credit transfer." If the IRS determines that the eligible taxpayer transferred a credit amount that exceeds the correct amount (for example, because the eligible basis was overstated, the placed-in-service date was incorrect, or the domestic content requirements were not in fact satisfied), the transferee taxpayer is generally subject to a tax increase equal to the excess credit amount, plus a 20% penalty on the excess.
However, Section 6418(g)(2)(B) provides a critical safe harbor: if the transferee taxpayer demonstrates that it acquired the credits in "good faith" and made reasonable efforts to determine the correct amount of the credit, the transferee's liability for the excess amount and the 20% penalty is eliminated (or, at a minimum, substantially mitigated), and the recapture of the excess credit falls on the eligible taxpayer instead. This good-faith safe harbor is a cornerstone of the buyer-protection framework under Section 6418 and is a key element of Pinehurst's risk analysis in the transaction.
B. Factors Indicating Good Faith
The proposed Treasury regulations do not provide an exhaustive list of factors that demonstrate "good faith" on the part of the transferee, but the legislative history and regulatory guidance suggest that the following factors will be relevant. In the case of the Pinehurst transaction, each of these factors is present:
(i) Representations and Warranties of the Eligible Taxpayer. The TCPA contains extensive representations and warranties by CBR and Solstice Holdings regarding the eligibility of the solar energy property for the Section 48 ITC, including representations as to placed-in-service dates, eligible basis, prevailing wage and apprenticeship compliance, domestic content compliance, absence of recapture events, proper election mechanics, and the accuracy of the information provided in connection with the pre-filing registration. Pinehurst's reliance on these representations is a strong indicator of good faith.
(ii) Independent Tax Opinion. Calderwood & Harkness LLP will deliver a tax opinion letter to Pinehurst at closing (December 8, 2023) opining on the validity of the transfer election under Section 6418, the eligibility of the credits for transfer, and the availability of the credits to Pinehurst as transferee. The opinion will be rendered at the "should" confidence level, meaning that Calderwood & Harkness will opine that each covered tax position "should" be sustained on its merits if challenged by the IRS. Pinehurst's receipt of and reliance on this independent tax opinion is a significant indicator of good faith.
(iii) Independent Appraisal. Greystone Worthington, LLC (Helen Farber, Managing Director), a nationally recognized appraisal firm, has been engaged to prepare an independent appraisal confirming the fair market value of the solar energy property and the ITC-eligible basis of each project. The Greystone Worthington appraisal provides an independent check on the eligible basis figures underlying the ITC computation and is an important element of Pinehurst's diligence program.
(iv) Independent Engineering Report. Meridian Technical Advisors, LLC (Dr. Rajan Mehta, Principal), an independent engineering firm, has been engaged to prepare an engineering report confirming the energy property characteristics of each project (including that each project constitutes "solar energy property" within the meaning of Section 48(a)(3)), verifying the placed-in-service dates, and assessing the physical condition and operational status of the projects. The engineering report provides Pinehurst with third-party confirmation of the factual predicates underlying the ITC eligibility determination.
(v) Prevailing Wage and Domestic Content Certifications. Vasquez Brothers Construction, Inc. (VBC), the EPC contractor for all seven projects, has provided prevailing wage compliance certifications and domestic content certifications in connection with the IRA requirements. These certifications have been reviewed by Calderwood & Harkness and are available in the diligence files.
(vi) Pinehurst's Own Independent Diligence. Pinehurst, through its outside counsel Thornberry Mack LLP (Roland Thornberry, Partner), has conducted its own independent diligence on the Solstice Portfolio, including review of the EPC contracts, project permits and entitlements, interconnection agreements, off-take agreements, ITC eligibility analysis, and the representations and warranties in the TCPA. Pinehurst's active engagement in the diligence process is a further indicator of good faith.
(vii) Arm's-Length Pricing. The purchase price of $0.92 per $1.00 of credit was the result of arm's-length negotiation between unrelated parties, with documented bid-and-counter exchange (initial bid $0.89, counter $0.94, final $0.92). The pricing is within the range of market transactions for comparable Section 48 ITC transfers and does not suggest that Pinehurst was seeking to acquire credits at an unreasonably low price (which might indicate awareness of credit-quality issues) or at an unreasonably high price (which might indicate a non-arm's-length relationship).
C. Documentation Best Practices
To ensure that Pinehurst can demonstrate good faith in the event of an IRS challenge to the transferred credits, we recommend that Pinehurst maintain a comprehensive diligence file containing the following documentation:
• Copies of all representations and warranties in the TCPA, Tax Indemnity Agreement, and related transaction documents
• The Calderwood & Harkness tax opinion letter to Pinehurst (to be delivered at closing)
• The Greystone Worthington appraisal report
• The Meridian Technical Advisors independent engineering report
• Prevailing wage compliance certifications from VBC
• Domestic content compliance certifications from VBC and component manufacturers
• Records of the pricing negotiation, including all written communications, term sheets, and bid/counter documentation
• Copies of the transfer election statements filed by Solstice Holdings
• The IRS pre-filing registration number and confirmation of registration
• CBR officer's closing certificate and any bring-down certificates
• Annual compliance certifications provided by CBR under the TCPA covenants
• Any correspondence with the IRS relating to the transferred credits
This documentation should be maintained in a secure, organized file (both physical and electronic) and should be readily accessible in the event of an IRS audit or inquiry. We recommend that Thornberry Mack LLP, as Pinehurst's outside counsel, take responsibility for assembling and maintaining the diligence file, with input from Calderwood & Harkness and the CBR deal team.
VIII. Interaction with the Partnership-Flip Structure
A. Allocation of Credits Between Tranches
The bifurcation of the Solstice Portfolio's ITCs between the Section 6418 transfer tranche and the partnership-flip tranche is a fundamental structural feature of the transaction. The total ITCs generated by the portfolio are $153,840,000, allocated as follows:
The transfer election must be made at the partnership level before the credits are allocated to partners under Section 704(b) of the Code and the allocation provisions of the LLCA. This sequencing is critical: the Section 6418 transfer removes $64,800,000 from the pool of credits available for allocation to Ridgeline and CBR Solstice Manager, ensuring that Ridgeline's 99% allocation applies only to the remaining $89,040,000. If the transfer election were not made (or were invalid), the full $153,840,000 would be subject to partnership-level allocation, which would alter Ridgeline's credit allocation, after-tax IRR, and projected flip date.
B. Impact on Partnership Allocations Under the LLCA
The Amended and Restated Limited Liability Company Agreement of Solstice Holdings, LLC (dated September 21, 2023) was specifically drafted to accommodate the dual-tranche structure. The LLCA contains the following key provisions relevant to the Section 6418 transfer:
(i) Exclusion of Transferred Credits from Partnership Allocations. Section 4.3(d) of the LLCA provides that any ITCs subject to a transfer election under Section 6418 are excluded from the tax items allocated between the Managing Member and the Tax-Equity Member under the partnership allocation provisions. This ensures that the $64,800,000 in transferred credits does not enter the Section 704(b) allocation waterfall and that Ridgeline's 99% allocation applies only to the $89,040,000 in partnership-retained ITCs.
(ii) Managing Member Authority to Make Election. Section 7.2(g) of the LLCA authorizes the Managing Member (CBR Solstice Manager, LLC) to execute the Section 6418 transfer election on behalf of the partnership, subject to the prior written consent of the Tax-Equity Member (Ridgeline). This consent requirement is a governance safeguard that protects Ridgeline's economic interests by ensuring that the transfer election cannot be made without Ridgeline's approval.
(iii) Ridgeline Consent. Ridgeline's consent to the Section 6418 transfer election was provided in connection with the execution of the LLCA on September 21, 2023, and is memorialized in a written consent letter attached as Exhibit G to the LLCA. The consent is specific to the transfer of $64,800,000 in ITCs (of which $60,000,000 is to be sold to Pinehurst and $4,800,000 is to be retained by CBR) and may not be construed to authorize additional transfers without Ridgeline's further consent.
The bifurcation is critical to Ridgeline's 7.25% after-tax internal rate of return model, which was sized based on the assumption that Ridgeline would receive 99% of the $89,040,000 in partnership-allocated ITCs (i.e., $88,149,600), together with 99% of the MACRS depreciation deductions and allocable taxable losses during the pre-flip period. Any change to the credit allocation (for example, if the transfer election were invalid and the full $153,840,000 were allocated within the partnership) would materially affect Ridgeline's economics and could accelerate or delay the projected Q4 2028 flip date.
C. Who Makes the Election — Entity-Level Analysis
As discussed in Part III.C above, the transfer election is made at the partnership level by Solstice Holdings, LLC, acting through its Managing Member (CBR Solstice Manager, LLC). The entity-level analysis is summarized as follows:
(i) Each of the seven project companies is a Delaware LLC classified as a disregarded entity. The disregarded entity is not a separate taxpayer for federal income tax purposes and cannot itself make a transfer election.
(ii) Solstice Holdings, LLC (the partnership) is the regarded owner of each project company and is the tax owner of the energy property. The partnership is the entity with respect to which the Section 48 ITCs are determined.
(iii) Under the proposed Treasury regulations, a partnership may make the transfer election with respect to eligible credits determined at the partnership level. The election is made on the partnership's Form 1065.
(iv) The Managing Member (CBR Solstice Manager, LLC, a disregarded entity whose sole member is CBR) is authorized under the LLCA to execute the election on behalf of the partnership. In practice, the election will be signed by an authorized officer of CBR (Theo Vasquez, CFO) in his capacity as the authorized signatory for CBR Solstice Manager, LLC, as Managing Member of Solstice Holdings, LLC.
(v) Ridgeline's prior written consent to the election has been obtained, as required by Section 7.2(g) of the LLCA.
For a more detailed analysis of the entity-level considerations and the interaction between Section 6418 and the partnership-flip structure, we cross-reference the Research Memorandum titled "Interaction of § 6418 Transfer and Partnership-Flip Structures" prepared by Robert Jansen (dated August 28, 2023), which addresses additional technical issues including the treatment of the transfer election under Subchapter K, the effect on partner capital accounts, and the implications for the partnership's Section 704(c) allocations.
D. Coordination with Ridgeline's Tax Opinion
Calderwood & Harkness's tax opinion letter to Ridgeline (to be delivered at closing on December 8, 2023) will address, among other things, the impact of the Section 6418 transfer on the partnership-level ITC allocations. Specifically, the opinion will address whether the exclusion of $64,800,000 in transferred credits from the partnership allocation is consistent with Section 704(b) and the proposed regulations, and whether the remaining $89,040,000 in credits is properly allocable 99% to Ridgeline and 1% to CBR Solstice Manager under the LLCA allocation provisions.
Ridgeline's outside counsel, Whitfield & Ayers LLP (Patricia Whitfield, Partner; Nathan Ayers, Partner; Kenji Watanabe, Senior Associate), has reviewed the bifurcated credit allocation approach and has confirmed, on behalf of Ridgeline, that it is acceptable from a tax-structuring perspective. Whitfield & Ayers has also reviewed the relevant provisions of the LLCA (including Section 4.3(d) and Section 7.2(g)) and the proposed Treasury regulations, and has not raised any objections to the structure.
The capital contribution model underlying the partnership-flip structure was sized with reference to the $89,040,000 in partnership-allocated ITCs, not the full $153,840,000 in total ITCs. Ridgeline's $120,000,000 capital contribution, together with CBR Solstice Manager's $2,400,000 capital contribution (for total partnership capital of $122,400,000), was determined based on a financial model that assumes Ridgeline receives 99% of $89,040,000 in ITCs ($88,149,600), 99% of the MACRS depreciation deductions on the $307,680,000 depreciable basis, and 30% of distributable cash during the pre-flip period. Any material change to the credit allocation (whether resulting from an invalid transfer election, a disallowance of credits, or a regulatory change) could require an adjustment to Ridgeline's capital commitment or the partnership economics.
IX. Conditions Precedent and Closing Mechanics