District Court Vacates IRS Beginning of Construction Notice

Public Law 119-21 (commonly known as the One, Big, Beautiful Bill Act) (the “OBBBA”) included a number of changes to the PTC under IRC § 45Y and the ITC under IRC § 48E.  Among other changes, the OBBBA included a provision that disallows the PTC or ITC with respect to a solar or wind facility the construction of which begins after July 4, 2026 unless the facility is placed in service on or before December 31, 2027.  Shortly after the passage of the OBBBA, the White House issued an executive order directing the Secretary of the Treasury to issue “new and revised guidance” related to the beginning of construction rules.  In response to the Executive Order, the IRS issued Notice 2025-42, 2025-36 IRB 351 (the “Notice”), which provided modified beginning-of-construction rules for the limited purpose of determining whether construction of a wind or solar facility begins before July 4, 2026 to avoid the December 31, 2027 placed-in-service deadline.  The Notice, which applies to any facility with respect to which construction did not begin prior to September 2, 2025 based on the previously existing beginning-of-construction rules, disallows the use of the 5% safe harbor for any facility other than a solar facility with a nameplate capacity of not greater than 1.5MWac.  Thus, under the Notice, it was not possible to rely on the 5% safe harbor between September 2, 2025 and July 4, 2026 to begin construction for purposes of avoiding the December 31, 2027 cutoff date for wind or solar.  A client alert regarding the Notice can be found here:  IRS Issues Guidance Regarding Beginning of Construction Requirement for PTC and ITC.

On June 6, the U.S. District Court for the District of Columbia in Oregon Environmental Council, et al. v. Internal Revenue Service, et al., vacated IRS Notice 2025-42 in full, on a universal basis, based on a determination that the Notice was arbitrary and capricious.  The Court remanded the Notice to the IRS for further administrative action, which may include more thorough reasoned analysis for the changes.  At present, however, under the Court’s order the Notice is vacated and of no effect.  That means that, for now, the IRS guidance that existed prior to Notice 2025-42 governs “beginning of construction” for all purposes, including for purposes of the 2027 cutoff date applicable to wind and solar and the availability of the 5% safe harbor for projects other than solar facilities with a nameplate capacity of not greater than 1.5MWac that began construction after September 2, 2025, unless the IRS remedies the defects in Notice 2025-42 or the District Court’s order is overturned on appeal. 

We expect the Treasury Department to appeal this decision (and perhaps seek a stay of the District Court’s ruling), which will likely continue beyond the July 4, 2026, beginning-of-construction deadline.  Due to the uncertainty this will create, the conservative approach would be to begin construction using the physical work test prior to July 4, 2026 to avoid the 2027 cutoff applicable to wind and solar facilities.