Excessive Energy Property Grant Is Includible in Gross Income

By Andrew J. Miller, CPA, St. Louis, MO, and Noah S. Baer, J.D., LL.M., Washington, DC

Editor: Michael Dell, CPA

Gross Income

An IRS associate chief counsel memorandum (AM2011-004) advises that grant applicants must include in gross income any amounts they received but were not entitled to under a grant program of Section 1603 of the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA).


ARRA Section 1603 created a Treasury grant for investment in certain new energy property that is placed in service during 2009, 2010, or 2011, or after 2011 if construction began on the property during 2009, 2010, or 2011 and the property is placed in service before the end of its eligibility period. The grant is in lieu of claiming an investment tax credit for the property under Sec. 48.

Sec. 48(d)(3) states that the grant is not included in the recipient’s gross income and that the basis in the grant-qualifying property must be reduced by one-half of the amount received (Sec. 50(c)(3)).

Chief Counsel’s Analysis

The memorandum advised that, if the IRS determines upon examination that a taxpayer was not entitled to some or all of the grant payment received, the excessive payment must be included in gross income under Sec. 61(a). That section defines gross income as including income from whatever source derived. Because gross income includes payments under government programs unless a specific statutory exception applies, there is no support for excluding the excessive payment from gross income. The associate chief counsel considered and rejected various arguments for excluding the excessive payment from gross income, such as the exclusion for general welfare payments under legislatively provided social benefits, property acquired by gift, or contributions to corporate capital under Sec. 118.

Based on this analysis, the associate chief counsel concluded that the excessive payments must be included in the taxpayer’s gross income in the year received, for both cash-basis and accrual-basis taxpayers (economic performance occurring upon receipt). The taxpayer may deduct the amount repaid to Treasury in the tax year in which it is repaid. If the overpayment and repayment occur in the same year, the taxpayer is not required to report the offsetting amounts. In addition, the associate chief counsel concluded that a taxpayer should not reduce the basis of its qualified property by 50% of the overpayment amount.


Since a taxpayer receiving a grant payment for ineligible property is not entitled to the payment, the conclusion in the memorandum is not surprising. However, the premise of the request for advice is itself notable. It is not clear whether this issue arose during an audit or if it was merely a request for advice in a hypothetical situation. Nonetheless, it does point toward an IRS review of asset eligibility. Presumably, the IRS anticipates at least occasionally reviewing property eligibility for the ARRA grant and determining whether ineligible property was the subject of a grant payment. The legal basis for this review would not be the payment of the grant per se but whether any portion of the grant represents gross income. The IRS’s authority is limited to including the ineligible amount in the taxpayer’s gross income; it cannot demand a refund of the ineligible amount.

Since Treasury’s Section 1603 guidance on eligible property is more extensive in many instances than Sec. 48 guidance, it remains to be seen what grant rules will be applied on audit and whether IRS audit teams will be required to interpret Treasury guidance in uncertain situations.

Once the IRS determines that all or a portion of the grant was received for ineligible property, it might notify Treasury of its conclusions. In that instance, Treasury would probably demand a refund of the ineligible amount. There currently is no administrative procedure in Treasury for contesting a conclusion of ineligibility. The following statement appears in the Treasury guidance for the payment of recapture amounts and would appear to apply equally to grant refund demands:

[F]unds that must be repaid to the Treasury under these rules are considered debts owed to the United States and if not paid when due, will be collected by all available means against any assets of the applicant, including enforcement by the United States Department of Justice. Debts arising under these rules are not considered tax liabilities. [Treasury Dep’t, Payments for Specified Energy Property in Lieu of Tax Credits Under the American Recovery and Reinvestment Act of 2009, p. 20 (July 2009, rev. March 2010 and April 2011)]



Michael Dell is a partner at Ernst & Young LLP in Washington, DC.

For additional information about these items, contact Mr. Dell at (202) 327-8788 or michael.dell@ey.com.

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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