Alta Wind I Owner Lessor C, et al. v. United States, Nos. 13-402, 13-917, 13-935, 13-972, 14-47, 14-93, 14-174, 14-175, 17-997 (Fed. Cl. July 8, 2026).

In the complex arena of renewable energy tax planning and compliance, determining the correct tax basis of tangible assets is critical, as it directly governs the availability of depreciation deductions and federal cash grants. The United States Court of Federal Claims, on remand from the Federal Circuit, addressed these core principles in the high-stakes retrial of the Alta Wind Energy Center Section 1603 litigation. This landmark case centers on six wind farm facilities located in the wind-rich Tehachapi Region of California, representing the largest wind energy center in North America. At its core, the dispute highlights a fundamental clash between tax valuation methodologies under Internal Revenue Code (IRC) Section 1060: the taxpayers' reliance on an income-based Discounted Cash Flow (DCF) method versus the government's insistence on a reproduction cost approach.

As CPAs and Enrolled Agents representing sophisticated corporate clients, understanding the court's highly technical findings is essential. This article analyzes the transactional facts, the taxpayers' requests for relief, the statutory framework of the residual method, and the Court of Claims' meticulous parsing of indirect construction costs, turn-key premiums, and developer profit markups under a modified cost approach.

Factual Background and Transactional Architecture

The wind farms at the center of this litigation—referred to as Alta I through VI (with Alta VI later renamed Mustang Hills)—were developed in two phases. Initially, Oak Creek Energy Systems partnered with Allco Wind Energy Management to perform pre-construction development. In July 2008, Terra-Gen Power LLC acquired Allco’s assets for approximately $394 million and completed the extensive, high-risk work of permitting, negotiating turbine and construction contracts, securing land rights, and completing construction of the facilities. Terra-Gen's total investment for the entire Alta Wind Energy Center exceeded $4 billion, of which more than $2 billion was directly associated with Altas I through VI.

Crucially, Oak Creek/Allco and Southern California Edison (SCE) had entered into a long-term Master Power Purchase and Wind Project Development Agreement (the Master PPA) in December 2006. The Master PPA obligated the developer to sell the entire electricity output of the wind facilities to SCE for approximately 24 years, with pricing set by a contractually specified formula.

Despite the immense value of this integrated wind center, Terra-Gen faced a fatal financing bottleneck under Section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA). Section 1603 created a cash grant program designed to stimulate the economy by reimbursing renewable energy developers for 30 percent of the basis of "specified energy property". However, ARRA Section 1603(g)(4) explicitly barred "pass-thru" entities from receiving cash grants if any equity or profits interest holder was a tax-exempt/non-profit organization. Because Terra-Gen had approximately 10 percent non-profit equity ownership, it was ineligible to claim the Section 1603 grants directly.

To monetize the valuable Section 1603 grants before the facilities were placed in service, Terra-Gen was forced to sell the facilities to grant-eligible owners. Between 2010 and 2012, Terra-Gen structured sale-leaseback transactions for Altas I-V with major financial institutions (including Citibank, General Electric Capital Corporation, and Union Bank of California) and sold Alta VI outright to EverPower Wind Holdings.

Following the acquisitions, the plaintiff-purchasers timely placed the wind farms into service and applied to the Department of the Treasury for Section 1603 cash grants totaling over $703 million. To calculate their cost basis, the taxpayers utilized the "unallocated method," claiming their eligible basis was equal to the full purchase prices paid to Terra-Gen, minus de minimis allocations for ineligible land. The Treasury Department, however, rejected this purchase-price basis. Instead, Treasury paid cash grants of approximately $495 million, calculating the basis solely from Terra-Gen's underlying construction and development costs.

The Taxpayers' Claims and the Judicial Mandate on Remand

Following Treasury's underpayment, the taxpayers filed consolidated claims seeking over $206 million in additional Section 1603 grants. Although the Court of Federal Claims originally ruled in the taxpayers' favor and awarded $206,833,364 in damages, the Court of Appeals for the Federal Circuit vacated the judgment and remanded the case. The Federal Circuit held that the acquisitions were "applicable asset acquisitions" under IRC Section 1060, meaning that the purchase prices must be allocated among the wind farms' individual constituent assets using the residual method. On remand, the trial court was tasked with a clear directive: "In applying the § 1060 residual method, the Claims Court must distinguish between turn-key value and goodwill and other intangibles".

At the retrial before Judge Ryan T. Holte, the dispute crystallized into a profound disagreement over valuation methodologies. To satisfy their burden of proof, the taxpayers put forward an income-based Discounted Cash Flow (DCF) model. They argued that the wind farms are complex, integrated, income-generating assets, and that "the value of the tangible assets is most appropriately measured based on the amount of cash that those assets are expected to generate, discounted to present value through application of an appropriate discount rate". Conversely, the government advocated a replacement cost approach, asserting that the wind farms' tangible components (such as standard manufactured wind turbines and foundations) are readily replaceable and should be valued based on their reproduction costs plus a reasonable return on capital to represent developer profit.

Under their updated DCF approach, the taxpayers claimed additional grants of $191,227,748 under a conservative scenario and $205,774,148 under a realistic scenario. Under its cost approach, the government contended that Treasury had actually overpaid the taxpayers by $58,884,366.

Statutory Framework: Internal Revenue Code Section 1060 and the Residual Method

To understand the court's technical analysis, it is necessary to examine the statutory machinery of IRC Section 1060. Section 1060 applies to any "applicable asset acquisition," which is defined as "any transfer... of assets which constitute a trade or business, and with respect to which the transferee's basis in such assets is determined wholly by reference to the consideration paid for such assets". Under the Section 1060 regulations (incorporating the rules under IRC Section 338(b)(5)), purchase price must be allocated sequentially among seven distinct asset classes in a "waterfall" fashion:

Class I: Cash and general deposit accounts;
Class II: Actively traded personal property, certificates of deposit, and U.S. government securities;
Class III: Debt instruments;
Class IV: Inventory and property held for sale to customers;
Class V: Assets that do not fit in any other class, including tangible personal property and equipment (where Section 1603 grant-eligible property resides);
Class VI: IRC Section 197 intangibles, including contract rights, licenses, and permits, but excluding goodwill and going concern value; and
Class VII: Goodwill and going concern value.

Under this sequential framework, consideration is distributed to each class in ascending order according to each asset's fair market value. If any purchase price remains after fully satisfying the fair market value of assets in Class VI, that residual value falls entirely into Class VII (goodwill and going concern value). In this litigation, because Classes I through IV were not present (with minor exceptions), the allocation battle occurred over Classes V, VI, and VII. The taxpayers' eligible basis for Section 1603 purposes is strictly confined to Class V, as Section 1603 grants can only be paid on the basis of tangible personal property.

Judicial Analysis of the Income Approach and Rejection of the Discounted Cash Flow Model

The court conducted an intensive review of the taxpayers' DCF model and ultimately rejected it as a viable method for establishing the cost basis of the Class V eligible assets. The court's primary objection rested on the taxpayers' treatment of the anticipated Section 1603 cash grant as a cash inflow within their DCF revenue streams, which effectively allocated over 98% of the anticipated cash grant's value directly into the basis of the Class V tangible assets.

The court reaffirmed its prior summary judgment order, noting that treating the future cash grant as a component of the Class V basis to calculate the grant itself was a circular mathematical calculation that "defies logic, mathematics, ARRA Section 1603, IRC Section 48, Treasury Regulation Section 1.48–1(c), and IRS Notice 2014–39". In a highly technical legal analysis, the court parsed the plain meaning of "cash grant" and concluded that it cannot constitute a Class V tangible asset:

"The relevant regulations provide a definition of 'tangible personal property' which includes 'tangible property except land and improvements thereto, such as buildings or other inherently permanent structures,' 'all property (other than structural components) which is contained in or attached to a building,' and 'all property which is in the nature of machinery...' Treas. Reg. § 1.48–1(c). Black’s Law Dictionary defines 'cash' as '[m]oney or its equivalent' and 'grant' as '[a]n agreement that creates a right or interest...' The plain meaning of 'cash grant' is then '[a]n agreement that creates a right or interest in favor of a person' for '[m]oney or its equivalent.' A cash grant cannot fit into the plain meaning of any of these categories of tangible personal property—an agreement creating a right for money is not: a 'building[]'; 'property... contained in or attached to a building'; or 'property which is in the nature of machinery...'"

The court further emphasized that under IRC Section 197(d)(1)(D), an intangible is defined to include "any license, permit, or other right granted by a governmental unit". Taken together, the plain meaning of a cash grant as a "right" and Section 197's definition of intangibles "suggest the anticipated cash grant value is not strictly attributable to tax benefits flowing from the eligible assets, but instead akin to a Class VI intangible".

Furthermore, the court highlighted that the taxpayers' real-world behavior directly contradicted their litigation position. On the change-in-ownership forms filed with the State of California, the taxpayers themselves had explicitly declared:

"[t]he amount shown above that was paid for the Cash Grant represents a discre[te] sum paid for revenue unrelated to the operations of the Alta Wind V Project."

This contemporaneous reporting "belies plaintiffs’ argument the anticipated value of the cash grant cannot be separated from the value of the eligible assets".

Finally, the court pointed to empirical market data that completely undermined the economic theory behind the taxpayers' DCF model. While the taxpayers' experts argued that the tax incentive should increase the fair market value of the eligible tangible property (due to increased demand), the government introduced Bloomberg database wind turbine pricing index charts showing that wind turbine prices actually declined significantly between 2009 and 2011, which was the period when the cash grant program was fully active. This downward trend in turbine prices "undermines plaintiffs' theory increased demand from the cash grant correspondingly increased the fair market value of the turbines".

Consequently, because the taxpayers' DCF model allocated more than 98% of the anticipated cash grant to the Class V assets without supporting evidence, and because the cash grant entitlement represents a separate Class VI intangible "right," the court concluded that the taxpayers' income-based allocation lacked a reliable evidentiary basis.

Valuation of Class V Tangible Assets: The Cost Approach Baseline

Upon rejecting the taxpayers' income approach, the court declared that the government's cost approach provided a more reliable framework to determine the fair market value of the Class V tangible assets. The court noted that "the cost approach (with the inclusion of certain costs the government improperly excluded—namely, Interest During Construction and the Oak Creek Development Fee and a markup for developer profits) best calculates the grant-eligible assets classified under Class V of Section 1060, pursuant to the Federal Circuit’s Remand Opinion".

To construct a proper cost approach calculation, the court ruled that the baseline must start with the cost numbers recorded in the KPMG cost segregation reports submitted to Treasury. KPMG's reports were highly reliable, representing over 1,000 hours of independent auditing and comprehensive "vouching" of approximately 80 percent or more of the construction and development costs incurred by Terra-Gen.

However, the government's expert, Dr. John Parsons, had attempted to recreate the reproduction costs by subtracting three major indirect cost items from the KPMG baseline: (1) Development Rights, (2) Interest During Construction (IDC), and (3) the Oak Creek Development Fee. The court analyzed each disputed cost item to determine whether it should be capitalized into the Class V tangible assets under standard tax principles or excluded as separate intangible or profit-related assets.

Resolution of Indirect Construction Costs Under Section 263A

The taxpayers invoked IRC Section 263A to argue that all indirect development and construction costs must be capitalized into the tax basis of the tangible assets. While the court noted that Section 263A did not apply directly to the taxpayers as a matter of law—since they did not produce the wind farms or hold them for resale—the court agreed that "IRC 263A is still relevant to a factual inquiry into Terra-Gen’s costs under the cost approach," because the cost approach must determine what it actually cost to construct and develop the physical assets.

The court parsed each of the three disputed indirect cost categories as follows:

Development Rights

Dr. Parsons excluded approximately $157 million across Alta I–VI representing "Development Rights," arguing that these costs were explicitly labeled "intangible assets" in the contemporaneous Duff & Phelps appraisals. The court upheld this exclusion. Although the taxpayers argued that permitting work and wind data are capitalizable under Section 263A, they failed to present any evidentiary basis or quantitative data to break down what portion of the $157 million was associated with each specific activity. Because the "Development Rights" category also contained non-capitalizable assets like the Master PPA and general development risk reduction, and because the taxpayers failed to establish the precise capitalizable amounts of the constituent parts, the court held that "the Court lacks sufficient evidentiary basis to conclude Development Rights are properly deemed costs to reproduce the eligible assets on the record".

Interest During Construction

Dr. Parsons excluded $48.1 million in Interest During Construction (IDC), characterizing interest as a "return to the lender that is paid out of the total profit of the Project" rather than a real construction cost. The court emphatically rejected this characterization and restored IDC to the cost basis. The court observed that "interest is a profit to the bank—not Terra-Gen, plaintiffs, or any entity developing and constructing the facilities". Because IDC represents an actual out-of-pocket cash expense paid to lenders in order to construct the physical facilities, it is a classic indirect cost. Under IRC Section 263A(f), interest incurred during the production period of property with a long useful life or a production period exceeding one year and costing more than $1,000,000 must be capitalized. The court cited long-standing Court of Claims precedent in Miami Valley Broadcasting Corp. v. United States, which held that reproduction cost "would in all probability have included... increments covering construction interest...".

Oak Creek Development Fee

Dr. Parsons also excluded $100.5 million representing the Oak Creek Development Fee, characterizing it as "development profit" paid to Oak Creek. The court rejected the government's position and restored this fee to the cost basis. The transactional history revealed that in 2006, Oak Creek partnered with Allco to perform pre-construction development through AIPC. The joint development agreement contractually obligated the project companies to pay a success-based development fee to AIPC, which Terra-Gen inherited as a binding transaction cost when it bought out Allco's interest. The court found that this fee was a real-world, out-of-pocket development cost that Terra-Gen had to pay. In allocating this fee to the basis, the court drew on the Tax Court's decision in Corbin West Limited v. Commissioner, which held that "acquisition fees" and "developer fees" incident to property acquisition (including evaluating zoning and environmental compliance) must be capitalized. Furthermore, the court noted that KPMG had carefully allocated the Oak Creek Fee between eligible and ineligible assets pro rata, and the government had introduced no evidence to dispute those specific allocations.

Reconstructing Turn-Key Value and Allocating Risk

A central mandate of the Federal Circuit's remand was to isolate the wind farms' turn-key value, which is a Class V tangible asset and therefore grant-eligible, and distinguish it from separate intangibles. Under Court of Claims precedent in Miami Valley, turn-key value represents:

"the increased value of the individual tangible assets because they were assembled, installed, integrated, tested, coordinated, and in operating order..."

It is the premium a buyer is willing to pay to ensure that a fully coordinated plant functions perfectly without need of costly adjustments.

The taxpayers argued for an independent 15 percent turn-key premium on top of their out-of-pocket development and construction costs, relying on the DAI appraisal reports. The court rejected this additional premium. Judge Holte analyzed the underlying transactional agreements and concluded that the turn-key risk had already been contractually shifted to, and borne by, third-party contractors.

Under the balance of plant (BOP) contracts with Blattner and WEC, the contractors were contractually obligated to supervise, construct, and "deliver to [Terra-Gen] the fully integrated and operational Project". The contractors assumed all risk of construction delays and excessive winds, backed by liquidated damages "on the higher end of the industry standard" and a 24-month warranty against defects. Similarly, the turbine supply agreements with Vestas and GE contractually required the manufacturers to deliver, assemble, commission, and start up the turbines.

Citing the Federal Circuit's opinion in Hawaiian Independent Refinery, Inc. v. United States, which defines a turn-key contract as one in which "the contractor agrees to complete the work... to the point of readiness for operation... [and] assumes all risks," the court concluded that the actual payments made to Blattner, WEC, Vestas, and GE already fully incorporated the turn-key premium. The court ruled:

"Based on Terra-Gen’s contracts with its contractors and Hawaiian Independent Refinery, the short answer to Mr. Pagano’s question is: the contractors, not Terra-Gen, bore the turn-key risk."

Therefore, because the actual installed costs in the KPMG cost segregation reports already fully reflected the payments made to contractors to deliver fully tested, operational, and integrated wind farms, the court held that no independent turn-key premium should be added to the baseline cost basis.

Quantifying Developer Profit Markups: Rejecting CAPM for Market Appraisals

To complete the cost approach, the court had to calculate the appropriate rate of return to represent developer profit (or entrepreneurial profit). Developer profit represents the risk inherent in developing the facility generally and provides the necessary incentive for a developer to undertake a project.

The government's expert, Dr. Parsons, utilized the Capital Asset Pricing Model (CAPM) to derive a capital rate of return on costs of 9.03%, which he rounded to 9 percent and applied to the construction schedules. The court rejected this methodology. The taxpayers' expert, Dr. Osborn, testified that he was "personally not aware of any" precedent for using a discount rate like CAPM to determine an appropriate developer profit on costs.

The court agreed with the taxpayers, finding Dr. Parsons' use of CAPM to calculate developer profit "idiosyncratic" and "unsubstantiated in market practice". The court highlighted a similar analysis in the Tax Court's Utilicorp decision, which rejected the use of a company's weighted-average cost of capital (WACC) to calculate entrepreneurial profit because the expert had performed no market analysis or interviews with developers to determine actual market expectations of profit. Furthermore, Dr. Parsons had reduced the standard historical market risk premium from 7.1% to 5.0% based on his own unpublished 2006 presentation, which was not in evidence. The court concluded that "The dearth of supporting record evidence and CAPM being unsuitable for calculating developer profits in this case results in the Court finding Dr. Parsons’ calculation of developer profits lacks credibility".

Instead of the idiosyncratic CAPM model, the court turned to the contemporaneous appraisals prepared by DAI. Unlike Dr. Parsons, DAI had conducted a thorough market-based analysis, examining seven comparable wind farm transactions in California between 2008 and 2010 to determine actual developer profit expectations. DAI's empirical analysis established that typical developer profits for California wind projects ranged from 15% to 30% of actual project construction costs.

Specifically, DAI concluded that a developer profit of 10% to 15% was appropriate for the Alta I facility, 15% to 30% was appropriate for Altas II-V, and 20% was appropriate for Alta VI. Drawing upon these market-validated ranges, the court adopted a developer profit markup of 15% for Alta I and 20% for Altas II–VI.

Final Judicial Parameters and Conclusion

In its final trial order, the United States Court of Federal Claims rejected the taxpayers' DCF-based unallocated purchase price method and instructed the parties to apply the court's modified cost approach to value the Class V tangible eligible property. The court outlined a precise, six-step directive for the parties to calculate the final cost basis and the resulting Section 1603 cash grants:

Start with the eligible cost numbers recorded in the KPMG cost segregation reports for each Alta facility;
Exclude the $157 million of "Development Rights" from the cost basis of each facility;
Include and capitalize the $48.1 million in "Interest During Construction" and the $100.5 million "Oak Creek Development Fee" into the direct tangible costs as capitalizable indirect costs;
Apply the grant-eligibility ratios reflected in the KPMG cost segregation reports to separate eligible Class V assets from ineligible Class V assets;
Apply no independent turn-key premium, as turn-key values and risks were already fully incorporated into the baseline construction and turbine contracts; and
Apply a developer profit markup directly to each facility's cost basis, utilizing 15% for Alta I and 20% for Altas II–VI.

For tax practitioners (CPAs and EAs) advising clients on large-scale infrastructure acquisitions, the Alta Wind retrial yields critical planning takeaways. First, purchase-price basis is highly vulnerable to reallocation under the IRC Section 1060 residual method, and taxpayers must be prepared to rigorously substantiate the values of Class V tangible assets versus Class VI and VII intangibles. Second, while the income method (DCF) remains an industry-standard tool for valuing entire businesses, its use under Section 1060 to isolate Class V tangible basis is fatally flawed if it seeks to incorporate governmental grant entitlements or tax credits directly into the cash flows of the physical property. Finally, indirect costs such as IDC and third-party development fees can be successfully capitalized into tangible cost basis, provided they represent real out-of-pocket construction expenditures and are supported by robust, contemporaneous cost segregation audits.

Prepared with assistance from NotebookLM.