The Arizona Court of Appeals held that an investment tax credit (ITC)
deferred as a tax asset has “value” and therefore is properly excluded from the taxable original cost of renewable energy equipment for Arizona property tax purposes. In so holding, the court rejected the argument that an ITC has no monetary worth until its owner derives an actual economic benefit from the ITC, i.e., by using it to reduce a federal income tax liability.
Under Arizona law, the full cash value of taxable renewable energy and storage equipment is equal to twenty percent of the depreciated cost of the equipment. The depreciated cost of the equipment is determined by deducting depreciation from the equipment’s taxable original cost. Arizona law defines “taxable original cost” as “the original cost reduced by the value of any investment tax credits, production tax credits or cash grants in lieu of investment tax credits applicable to the taxable renewable energy and storage equipment.”
The taxpayer (ProjectCo), which was owned by a tax equity partnership from 2012 to 2015, operated a solar power generation facility in Arizona. ProjectCo received federal ITCs for building its facility, which the partnership claimed and passed through to its two corporate owners. The first partner (the Class A Partner) used its share of the ITCs to reduce its federal income tax liability from 2012 to 2015, whereas the second partner (the Class B Partner) carried forward its share of the ITCs as a deferred corporate tax asset because it had no taxable income. In valuing ProjectCo’s renewable energy equipment for subsequent years, the Department subtracted from the equipment’s original cost the value of the ITCs used by the Class A Partner; however, it refused to subtract the value of the ITCs carried forward by the Class B Partner on the grounds that ITCs have no value until they are used to reduce a federal income tax liability.
The Arizona Court of Appeals roundly rejected the Department’s position based on the plain meaning of the term “value.” Interpreting “value” to mean monetary worth, the court concluded that an ITC’s monetary worth is the full amount of the ITC when claimed—regardless of when it is used. The court noted that whether the Class B Partner derived any tax savings from the ITCs was irrelevant to the valuation of ProjectCo’s equipment, because “value” refers to the equipment and not to the upstream Class B Partner. The court thus determined that the Department was required to subtract the value of the ITCs claimed by the tax equity partnership from the original cost of the renewable energy equipment in question.
The case is Agua Caliente Solar, LLC v. Arizona Department of Revenue, 550 P.3d 185 (Ariz. Ct. App. 2024). A copy of the decision can be accessed here.