North Carolina Business Court Vindicates Taxpayers in Renewable Energy Tax Credits Case
A North Carolina Business Court judge has ruled in favor of North Carolina Farm Bureau Mutual Insurance Company, reversing an approximately $24 million assessment by the North Carolina Department of Revenue (DOR) related to the Farm Bureau’s investments in renewable energy projects in 2014-2016.
The North Carolina General Assembly had offered tax credits to encourage private investment in renewable energy projects, making North Carolina a leading producer of renewable energy, Bloomberg Tax and Insurance Journal report. But after the tax credit program expired in 2017, the DOR attempted to claw back hundreds of millions of dollars of credits claimed by investors in syndicated projects.
Smith Anderson represented the Farm Bureau, the first taxpayer to have its dispute with the Department heard by the Business Court. The court’s decision could have significant consequences for all investors fighting the DOR’s assessments. In a separate ruling issued the same day as the Farm Bureau decision, Judge Adam Conrad ruled against the DOR in a similar case, McCabe v. N.C. Dept. of Revenue. Smith Anderson attorney Bill Nelson wrote about the cases in Tax Notes State December 2022 edition.
Under the tax credit program, taxpayers who construct, purchase or lease renewable energy property are eligible for credits to offset their income, franchise or gross premiums taxes for a five-year period after the project is placed in service. If a partnership earns the credit, the credit is passed through to the partners, Bloomberg notes. The credit is equal to 35 percent of the cost of the property up to a cost of $2.5 million per installation.
The Farm Bureau invested in various qualifying projects from 2014 to 2016 through Monarch Tax Credits LLC, a syndicator that works with project operators to market their unused tax credits to investors. Over the three years, Farm Bureau invested almost $27 million in annual funds created by Monarch and received tax-credit allocations of $37.8 million that it used to offset its gross premiums tax liability, Bloomberg says.
The DOR had argued that the Farm Bureau was not entitled to its credits because it was not a bona fide partner of the syndicated partnership in which it invested. Even if it was a bona fide partner, the DOR argued that it had not received the credits through a partnership allocation, as the law requires, but through an improper "disguised sale." The DOR relied on federal tax law in asserting both theories.
In his decision for the Farm Bureau, Judge Conrad ruled that the DOR was wrong to rely on federal tax provisions that the North Carolina General Assembly had never incorporated into North Carolina law. He also ruled that the syndicated partnership structures the Farm Bureau invested in should be respected. "The transactions at issue were real, not fictitious, and they involved exactly the kind of economic activity that the General Assembly deemed socially desirable and sought to encourage with tax credits," the decision says. "Farm Bureau contributed millions of dollars to support renewable energy properties—properties that were, in fact, placed in service and that did, in fact, qualify to receive tax credits."
"Farm Bureau always believed that in making these investments that helped build solar facilities in North Carolina that Farm Bureau was doing exactly as the North Carolina General Assembly intended and is gratified that this ruling confirms that," Smith Anderson attorney Chris Smith told Law360.
Chris and Bill were joined by their colleagues John Jo and Robert Shaw in representing the Farm Bureau in the lawsuit. Chris is co-chair of the firm's Litigation group and is a trial and appellate lawyer who counsels clients on business strategy and crisis management.
Bill’s practice focuses on transactional tax planning, tax controversies and litigation, dealing with state and federal tax authorities as administrative agencies and representing taxpayers before the North Carolina General Assembly.
Robert has extensive experience in solving health care and tax challenges important to clients, regularly managing complex restructuring, M&A work on the buyer side and seller side, Medicare and Medicaid audits, value-based care projects, tax planning and controversy.
John counsels and advocates for clients in a variety of business disputes, such as breach of contract matters, insurance coverage disputes, tortious interference claims, intellectual property matters and other business-related litigation.
About North Carolina Farm Bureau Mutual Insurance
North Carolina Farm Bureau Mutual Insurance is a private insurance company based in Raleigh, North Carolina and is owned and controlled by policyholders through an elected Board of Directors. It provides insurance for farm and non-farm policyholders in all 100 counties of North Carolina and writes more than $1 billion in premiums each year.