A federal judge has set aside an Internal Revenue Service rule adopted last year that made it more difficult for wind and solar developers to claim federal tax subsidies, saying the agency did not provide an adequate rationale for eliminating an established construction test.
The ruling, issued on Saturday by Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia, demands that the Treasury Department's IRS reconsider its August rule change. The decision restores legal scrutiny over the agency's removal of a key provision that for years allowed project sponsors to preserve eligibility for clean energy tax credits.
What the rule did
Under existing federal law, qualifying clean energy projects must begin construction by July 4 of this year or be placed into service by the end of 2027 in order to be eligible for a 30% investment tax credit, with additional bonuses available that can further increase the subsidy. For roughly a decade, project developers could meet the construction requirement through two alternative demonstrations: either substantial and continuous physical work or by incurring at least 5% of total project costs within a defined period - a safe-harbor path that allowed developers to secure tax credits while continuing to advance permitting, financing, and contracting.
In rules published last August, the IRS removed the 5% safe-harbor option for all but the smallest projects, narrowing the methods developers could use to establish that construction had begun.
Court finding and immediate effect
Judge Kollar-Kotelly concluded the IRS had not given an adequate explanation for abandoning the longstanding 5% standard, and she sent the rule back to the agency for further consideration. The court's action effectively pauses enforcement of that element of the rule while the IRS addresses the legal deficiency identified by the judge.
Litigation and plaintiffs
The challenge to the IRS rule was brought last year by a coalition that includes environmental organizations such as the Oregon Environmental Council and the Natural Resources Defense Council, the consumer advocacy group Public Citizen, the city of San Francisco, and a clean energy consulting firm, Woven Energy. Their complaint asserted the rule change would raise electricity costs and prevent clean energy projects from moving forward.
"This decision puts an important check on the administration's actions, which are driving up energy prices for everyday Americans in cities and towns across the country," said San Francisco City Attorney David Chiu in a statement. "We will continue to fight for the market fairness and predictability that allow clean energy providers to build projects that benefit us all."
An IRS spokesperson declined to comment on pending litigation.
Implications and next steps
The court's ruling requires the IRS to revisit its rationale and proceedings. The agency must decide whether to provide a fuller explanation for the change, to revise the rule, or to reinstate aspects of the prior construction test. In the meantime, the decision preserves the legal basis used by the plaintiffs to challenge the removal of the 5% safe-harbor and maintains uncertainty about how developers will demonstrate eligibility for tax credits until the agency responds.
How the IRS proceeds will determine whether the more restrictive standard remains in force or whether developers will retain access to the previously established safe-harbor methods for securing federal clean energy incentives.