In a ruling with national implications, the US District Court for the District of Columbia found that the Internal Revenue Service (IRS) acted in an “arbitrary and capricious” manner when it dictated that wind and solar power facilities were no longer eligible to use the 5% safe harbor method to lock in the tax credit in Notice 2025-42 (the Notice). The court vacated the Notice nationwide and sent it back to the IRS.
The effect of the ruling may be small, though, especially among risk-averse solar developers. David Burton, partner at Norton Rose Fulbright, told pv magazine USA, “Given the risk of it being overturned on appeal, most developers will be disinclined to rely on it.” He noted that he thought the opinion was well reasoned, the practical possibility of reversal was enough that developers would avoid relying on it outright.
Burton does suggest the ruling does give a strong backup value though if a developer has already spent 5% of the project’s costs in the already ongoing, ordinary course of business.
Those who filed the case argued that the IRS “failed to articulate a reasoned basis for the major policy change,” that it “arbitrarily singles out wind and certain solar projects for disfavored treatment without justification,” and that the IRS “entirely failed to consider serious reliance interests or evaluate alternative policy options when adopting the Notice.”
In the filing, Oregon Environmental Council v. Internal Revenue Service, the judge stated:
Taken together, these factors lead the Court to conclude that the Notice’s cursory explanation is insufficient to show the “path” that led the IRS to eliminate the Five Percent Safe Harbor for wind and large-scale solar projects, while leaving the Safe Harbor in place for other clean energy projects. See State Farm, 463 U.S. at 43 (quoting Bowman Transp., 419 U.S. at 286). Because the Defendants failed to articulate a reasoned explanation for this consequential decision or give due consideration to the serious reliance interests engendered by its prior policy, Notice 2025-42 is arbitrary and capricious.
The court’s five factors that were “taken together”, on pages 50-53, are as follows:
First, there was no explanation of the core premise. The Notice never explained how projects using the 5% safe harbor were “circumventing” the statutory cutoff or engaging in “artificial manipulation of eligibility”.
Second, there was no explanation for rejecting narrower alternatives. The Notice didn’t say why the IRS eliminated the safe harbor outright rather than adopting the targeted anti-circumvention measures commenters proposed.
Third, there was no explanation for singling out wind and large solar. The credits are technology-neutral, yet the Notice treated wind and large-scale solar differently from other clean energy technologies without explaining why. In fact, the court noted that multiple commenters had warned about the resulting regulatory fragmentation.
Fourth, litigation reasoning didn’t fill the required logic gap. The “stockpiling” rationale the IRS pressed in its briefs wasn’t in the Notice or the record, and “outsiders’ informed speculations are not a substitute for reasoned explanation.”
Finally, the record of actions contradicts the stated rationale. “A thorough review of the record undercuts the conclusion that the Defendants made a reasoned decision to eliminate the Five Percent safe harbor…based on concerns about stockpiling.” The Notice never explained why stockpiling concerns applied to wind and large solar but not to similarly situated projects using other technologies.
While Burton said many developers would be disinclined to take such risks, he did see a subset who could make use of the ruling. He pointed to projects larger than 1.5 MW — the cutoff to use the 5% safe harbor under the Notice — that “don’t require a master power transformer and don’t have the necessary permits to undertake on-site work,” whose developers he sees, “are scrambling to begin construction without the 5% safe harbor.” The ruling, Burton said, “allows those developers to use the 5% safe harbor and roll the dice on the appeal.”
As of the end of the day on June 6, the government had yet to file an appeal.
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