Title: Navigating the Inflation Reduction Act: Insights on Brownfield Energy Community Credits
Speakers: Karlie Webb and Ben Cowan
Ben Cowan (00:07):
So, Karlie, it’s great to see you. It’s great to be here in Atlanta with one of my new environmental partners.
Karlie Webb (00:08):
I agree. Thanks for coming to visit.
Ben Cowan (00:13):
So, I wanted to talk today a little bit about the Inflation Reduction Act. As you know, it provides a number of bonus credits for various kinds of projects — prevailing wage and apprenticeship bonus credits, domestic content bonus credits, and then energy communities. There are several categories of energy communities, but one of those is the Brownfields Energy Community category. That’s an interesting mix of tax and environmental. Tell us a little bit about the Brownfields Energy Community credit.
Karlie Webb (00:46):
Yeah, absolutely. In order to qualify for the Brownfields Energy Community credit, there are a couple of different options. You can qualify by meeting CERCLA’s definition of a Brownfield site, or you could also satisfy the IRS Safe Harbor. We have really been digging deep to help clients understand whether they may qualify.
It sometimes looks easy initially, or sounds like it should be easy, to see if we meet the statutory definition or the safe harbor. But as we really get into it, it looks a bit more complicated. We see definitions that aren’t always defined. We see the IRS use language that doesn’t necessarily always reflect language that EPA has used. So we’re having to dive deep to help clients understand whether they may qualify.
Ben Cowan (01:39):
And how is the Brownfields Energy Community category defined? What is a brownfield for purposes of this credit?
Karlie Webb (01:45):
Sure. From the statutory side, CERCLA defines a Brownfield site as real property the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. From the safe harbor side, the IRS has said that if you meet the safe harbor, then you would qualify as a Brownfield site. There are a couple of different categories, but I’ll give an example. If the project is over five megawatts, the project would be eligible for the safe harbor if it is located within a site where the site has an ASTM-compliant Phase Two — that’s sampling that identifies the presence of a CERCLA-listed hazardous substance or pollutant at that development project.
So we’ve been looking very closely at both the safe harbor and the actual statutory definition to see if projects can qualify.
Ben Cowan (02:52):
So the definition sounds fairly simple and straightforward, but I know it’s not nearly as simple as it sounds. What are some of the issues that you all have encountered and are grappling with as you’re evaluating sites for energy communities eligibility?
Karlie Webb (03:05):
Yeah, absolutely. I agree that it initially sounds fairly straightforward, but as we get into each word used in the definition, we’ve found that it’s not so straightforward. A couple of examples: the statutory definition of Brownfield site uses the term “complicated by” — and what does that mean? We’ve been digging deep on that. It is not specifically defined by CERCLA, so we of course look to guidance from EPA, we look to legislative intent, and just standard definitions. That’s an issue we’ve been diving deep on.
We’ve also been thinking through what amount of a hazardous substance is sufficient — can it be any level, any detection, even if it’s below all applicable standards or thresholds? And then what about background concentration? Sometimes we may have high levels of certain metals, for example, but they’re actually just there naturally. So can that be adequate?
How about you, with legacy Locke Lord — you have great experience on this, especially with your renewable energy practice. I’d love to hear what you’ve been wrestling with.
Ben Cowan (04:20):
Yeah, well, certainly some of the same issues that you mentioned — how “complicated” is “complicated,” what’s the threshold there. Like you, we’ve been finding that there’s not really much guidance on that issue, so there’s a lot of room for interpretation. And the question of how much of a hazardous substance is enough: if you’ve got enough that a laboratory test can detect it, but it’s at levels below the applicable cleanup standards, does that qualify or not? Again, no guidance on that point.
Some of the other issues that we’ve been spending a lot of time on are the parcel-by-parcel approach. In the IRS notices and their Q&As, they’ve said that no minimum amount of a parcel needs to be impacted for the whole parcel to qualify. But renewable energy projects typically consist of several, if not dozens, of parcels. There’s some indication in the rules about nameplate capacity tests, but it’s really not clear how that applies, how many parcels need to be impacted, and if some are and some aren’t, how you deal with it. So there are a lot of interesting things to unpack, and we’re having to do it without a lot of guidance.
Karlie Webb (05:25):
Absolutely. Well, I look forward to comparing notes more on this. It’s not always straightforward, and it’s great to compare notes. Ben, you mentioned that you’ve actually spoken with the administration about these issues. I’d love to hear more about that.
Ben Cowan (05:47):
Yeah. We spoke with folks in the White House about their views on these issues and how they interpret them. As we’ve said, the IRS notices and their Q&As aren’t terribly specific on a lot of these issues. Their view is that the IRS really defers to EPA on these interpretations — which is not as helpful an answer as we were hoping for, because as you know, EPA doesn’t really decide what is or isn’t a brownfield. They’ve got a definition for it, but there’s no mechanism by which you can go to EPA and get clarification or a determination from them.
So where that really leaves us is that it’s up to us as the lawyers to come up with what we think the best interpretation is, and be able to provide a reasoned argument in favor of that and where we think it comes out for a particular site.
Karlie Webb (06:43):
Right. Great.
Ben Cowan (06:45):
So Karlie, I know Troutman has been doing quite a bit of work on the energy communities issue. Tell me about the process that Troutman has been using to evaluate sites for energy communities eligibility.
Karlie Webb (06:59):
Yeah, absolutely. I will say my involvement usually begins once our tax team is already working on the issue — they’re working on the energy community issue more broadly, and then I am pulled in for the discrete issue related to Brownfields. It has been a true team effort. We definitely work very closely with tax, and within the environmental section we’ve formed a team. These are really new issues — not a lot of case law is relevant. The stakes are high, as far as potential clawback if we don’t get this right. So we really have a team and we think through these issues. It’s been a great exercise in working with others across the firm. I’ve really enjoyed this process.
Ben Cowan (07:52):
That’s great. The legacy Troutman Environmental Group is large and has a lot of great expertise, and so we’re excited about being able to join forces as a combined firm and bring our expertise together with yours.
Karlie Webb (08:07):
Likewise. And how about on the Locke Lord side — tell me about the deliverables that clients are asking you to provide?
Ben Cowan (08:15):
Yeah. When we get a call — and in my practice I work specifically with a lot of renewable energy developers — they’ll call and ask us to evaluate a site for energy communities eligibility. The first thing we tell them is that the first step is that initial analysis. Send us the environmental reports you have, whatever data you’ve got, so we can determine whether you qualify for a safe harbor and whether it looks like it meets that definition.
Once we provide that initial assessment, if it looks like a site is eligible or maybe eligible, then the discussion is about what level of certainty and support they need. There are options: we may provide just a legal memo for their internal use to get them through investment committee or to make investment decisions. If they have an imminent project financing and need something firmer, then we may discuss doing a legal opinion — which typically for energy communities is going to be a “should” level legal opinion. It’s rare that we would do a “will” level legal opinion unless it’s a very clear-cut case, such as mines or guard land or something of that nature.
We’ve also had discussions with a few clients who have been interested in obtaining private letter rulings from the IRS, but to date none of those have been issued. So it tends to be “should” level opinions when needed, or legal memos otherwise.
Karlie Webb (09:49):
Got it. Well, great. Ben, it was so nice to collaborate on this, and I really look forward to working together.
Ben Cowan (09:57):
Likewise. We’re excited.
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