1. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London Tax Update Keith Martin kmartin@chadbourne.com

2. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London

3. The main challenge for most developers of renewable energy projects is how to get value for the large tax subsidies that the US government offers for such projects. The government pays 60% to 63% of the capital cost of a typical solar or wind project. Most solar projects are being structured as leases. Most wind farms are being structured as partnership flip transactions. 3-month window

4. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The IRS has placed a hold on any further private rulings in partnership flip deals and is working on a set of guidelines for such transactions that it hopes to release late in the year. This schedule seems optimistic. The hold has had no effect on the market. revenue procedure sharing ratio residual interest contingent payments

5. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The first wind project using a new service contract structure should have closed by now, but has hit a snag. The structure is for projects that a municipal utility would like to own, but cannot do so and claim the tax subsidies. Under the structure, it signs a long-term power contract and prepays for a portion of the electricity. soft debt risk allocation

6. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The number of tax equity investors is subject to ebb and flow. This has led to renewed interest in guaranteed-return structures. Equity returns are in the 7% to 8% range after tax and unleveraged. There has also been a resurgence of leveraged deals. equity squeeze stay tuned

7. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London Production tax credits for wind and biomass projects and a 30% investment credit for solar projects can only be claimed on projects put into service by December 2007. These deadlines will not be extended this year by Congress. While the odds of an extension next year remain high, it is not a sure thing. Thomas turbine prices

8. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The IRS issued a notice last week about production tax credits for biomass projects. The good news is that plants can still claim production tax credits even if a mix of fuels is used. Any non-biomass cannot include fossil fuels. The bad news is production tax credits can only be claimed on the net amount of electricity supplied to the grid. arbitrage transactions no rulings gasify?

9. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The drop in oil prices is breathing new life into synfuel plants and landfill gas projects. It looked early in the year like section 29 tax credits of $1.17 an mmBtu would disappear this year due to high oil prices. The latest projections suggest there will be only a partial phase out of the credits on the order of 32% to 36%. lobbying effort $53.20

10. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The IRS is telling utilities that they must report the value of any upgrades to their grids as income if the upgrades are paid for by another utility or independent transmission company. Upgrades paid for by independent generators do not normally have to be reported as income. EEI policy at risk? gas interties

11. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The IRS is expected to allocate $800 million in clean renewable energy bonds this fall. It received more than 700 applications for the money. Borrowers using the bonds do not have to pay interest. The lenders will receive tax credits instead. 5.3% 16 years no risk adjustment?

12. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The IRS may not allocate the full $350 million in investment credits for gasification projects. That would be good news for companies whose projects were not far enough along to apply for credits this year. The US government offers a 20% investment tax credit for turning coal, biomass and other materials into a synthesis gas for use in one of seven industries. DOE certification seven years

13. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The IRS may have opened the door slightly to use of “master limited partnerships” in biofuels projects. A private letter ruling in late September said income that a refinery earns from mixing ethanol or biodiesel with vehicle fuel is “good income.” 90% rule minerals or natural resources

14. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London Many project pro formas fail to take into account a new deduction for US companies as an inducement to manufacture at home. Generating electricity is considered domestic manufacturing. The deduction is 6% of income from domestic manufacturing. It will increase to 9% after 2009. W-2 wage cap consolidated basis tolling agreements

15. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London A new tax bill that President Bush signed in May will require every federal, state and local government entity in the United States making payments for “property or services” to withhold 3% of the gross amount of such payments starting in 2011. An example is a payment by a municipal utility to buy electricity. less than $100 million annually $7 billion

16. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London A tax credit of $5.679 a ton for making “refined coal” is proving hard to use. Discussions are underway with Congress and the Treasury. Refined coal is coal that has been processed to reduce two of three pollutants by at least 20%. The problem is the market value must increase by at least 50%. moving target fix in time?

17. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The IRS is taking the position that all wind farms must be registered as potential corporate tax shelters — even deals without any tax play. That’s because of a rule that requires registration of transactions where assets are held for 45 days or less and the owner will receive at least $250,000 in tax credits. electricity relief? confidential?

18. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London The US Patent Office has issued 40 patents on tax planning ideas and has another 60 applications pending. A House subcommittee held a hearing in July on whether it makes sense to allow such patents. At least one patent infringement lawsuit is pending against the former chairman of Aetna for using an estate planning tool that a small firm in Florida says it patented. computer software concerns

19. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London FIN 48 will require public companies to indicate in their financial statements which of their tax positions may be challenged on audit. The new rules take effect in corporate fiscal years starting after December 15, 2006. Critics charge that it will provide a roadmap to the IRS about where to probe on audit. two-step dance more opinions?

20. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London Percentage of Americans who say they support air strikes against Iran “if diplomacy fails”: 51%

21. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London A Harvard student had to complete a paper addressing four great topics — religion, royalty, sex and mystery. He was to be graded on brevity. He got an A+.

22. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London “Oh, my God,” the queen exclaimed. “I’m pregnant. I wonder whose baby it is.”

23. New York Washington Houston Los Angeles Beijing Almaty Tashkent Moscow St. Petersburg Kiev Warsaw London Tax Update Keith Martin kmartin@chadbourne.com