Energy Tax Law Alert: Treasury Makes Announcement Regarding Impact of Sequestration on Section 1603 Grant

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The U.S. Department of the Treasury yesterday issued a message regarding the impact of sequestration on the Section 1603 Grant. In the message, the Treasury Department announced that awards of Section 1603 Grants made on or after March 1, 2013 and before the end of the current fiscal year (September 30, 2013) will be reduced by 8.7 percent. An "award" for this purpose means the final decision by the Treasury Department to pay a claim as evidenced by a Section 1603 Award Letter. The reduction will be applied to each grant based on the date of the award regardless of when the project was placed in service or when the application was submitted. The rate of reduction is subject to change for awards made after September 30, 2013.

For a full copy of the message see: 1603 Program: Payments for Specified Energy Property in Lieu of Tax Credits

By way of background, the Budget Control Act of 2011 required that Congress enact by the end of 2012 a plan to reduce the federal budget deficit by $1.2 trillion. If the requisite plan was not enacted by the deadline, the Budget Control Act called for automatic federal spending cuts, known as "sequestration," beginning in fiscal year 2013. On January 2, 2013, the President signed the American Taxpayer Relief Act of 2012, which delayed sequestration until March 1, 2013. Because Congress did not enact the requisite budget deficit plan by the extended deadline, sequestration became effective as of March 1. Anticipating that this might happen, Congress late last year passed the Sequestration Transparency Act of 2012, which required the Office of Management and Budget (OMB) to submit a report to Congress outlining the specific spending cuts that would occur under sequestration. The OMB submitted a report in late 2012 indicating that the Section 1603 Grant would be reduced by 7.6 percent, resulting in a total spending reduction of $279 million.

The Treasury Department's recent announcement indicates a larger reduction than the OMB report due to the fact that the effective date was delayed and the period for accomplishing the requisite reduction in spending was reduced. The announcement does, however, answer some of the other questions raised by the OMB report, which were addressed in our prior alert on the topic.

If you have questions regarding the OMB report, the Section 1603 Grant in general, or related issues, please contact a key contributor.

IRS Circular 230 notice: The information contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.



Key Contributors

Kevin T. Pearson
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