Politics & Policy

Solyndra and the IRS

The government gave the solar company individualized tax breaks.

In November of 2009, in the midst of Solyndra’s downward financial spiral, the Internal Revenue Service issued a ruling that granted special tax favors to the firm and its customers.

The “private letter” ruling involving Solyndra, though widely discussed among tax lawyers, commented upon within the solar-power community, and even flaunted by Solyndra itself, has received little attention in the mainstream media. A former IRS official told National Review that the ruling raises a red flag about political interference in the tax system. The source, who was not directly involved in the case, says that politicians have increased their lobbying for private-letter rulings on behalf of individual taxpayers ever since the Democrats took over Congress in 2007. Congressional investigators of the Solyndra scandal say they are aware of the tax angle, but have not had time to delve into it, as they are too busy unsnarling the specifics of the controversial $535 million loan to the company, as well as billions in similar loans to other companies.

#ad#In a reversal of longtime policy, the IRS let a Solyndra client incorporate the cost of a new roof into the cost of its solar installation — provided it was a “cool roof” of a type long boosted by Energy Secretary Steven Chu, one of the key administration figures at the center of the scandal. The rationale was that because solar panels can pick up the light reflected off this kind of roof, the roof was legitimately part of the solar installation.

The client thus became eligible for a tax credit worth 30 percent of the cost of the roof, in addition to the state-level credits that were available. Then the client was eligible to take the entire tax deduction for the depreciation of the roof over five years, half of it in the first year — normally, roof depreciation is deducted over the course of 29 years, during which time its value declines because of inflation. (Credits are subtracted from taxes owed; deductions reduce the income on which taxes are levied.)

The ruling brought Solyndra’s costs more in line with those of its competition, and it could prove a bonanza for whatever emerges from the bankruptcy, particularly if the firm’s intellectual property is bought by a low-cost foreign manufacturer. More alarming, this and related rulings suggest the administration is abusing laws concerning tax shelters to promote solar power, which is far less efficient than other forms of electricity.

The names of companies that receive private-letter rulings, along with other identifying details, are redacted by the IRS when it publishes these decisions — although Solyndra has publicly touted these benefits to its clients. Private-letter rulings are not binding for anyone but the applying taxpayer, but they are used as guidelines by accountants for firms in similar situations, so it is worth considering what this ruling could do as a precedent.

A broad interpretation suggests that any company that puts in a new roof, or replaces an old one, can get about one-third of the tab picked up by the federal government — as long as solar panels are also installed and the roof is a “green” one. The Solyndra option is still more expensive than a normal roof coupled with standard electricity sources, but the roofing subsidy helps close the gap — and a better-run company with offshore production might well eliminate the gap completely.

It’s patently obvious that without favorable tax treatment, almost no one would opt for solar power. An article in Solar Today about a Solyndra installation for Choate Construction Company in Atlanta makes this clear enough: Federal and state tax incentives cut the cost nearly in half, from $575,000 to $295,000. Plus, thanks to the depreciation deduction, the company gets to subtract half of that $295,000 from its income in the first year of service and the balance over the next four years. And that’s before the installation generates a single watt of electricity — which, under other solar-promoting laws, utility companies often have to buy at top dollar regardless of whether they need it.

Among the U.S companies that have opted for Solyndra roofs are Frito-Lay, Anheuser-Busch, and Norkus. Solyndra has also been popular in Europe, where dual-use technology (a term that in this case refers to the fact that the device is both roofing and a light reflector) is particularly favored by tax laws.

#page#Historically, Congress and the IRS have zealously patrolled dual-use systems, tightly restricting credits and depreciation deductions to the part of the device that actually produces electricity. In an extreme example, passive conservation methods, such as south-facing windows and “super-insulation,” get no tax credits at all, even though, if properly implemented, they generally make a lot more economic sense than solar panels. Without this kind of supervision, dual use encourages vendors to build projects that harvest tax credits, not energy.

But since Obama took office, the IRS has also issued private-letter rulings that allow curtain walls, a key structural component of the ubiquitous glass-cube office building, to qualify for energy credits if the walls incorporate solar-power features. Another ruling gave a solar-panel manufacturer extended tax credits for unspecified components of a solar-power roofing system on its own factory. Because of the IRS’s redaction, just who got these rulings is unknown. “Clean coal” and aspects of nuclear power also have received private-letter rulings.

#ad#Given the amount of redacted information, it is unclear why the IRS chose to improve Solyndra’s tax prospects. The transaction may have been purely a technical issue between Solyndra and the agency. Alternatively, it may be that the IRS executed a decision by the Department of Energy and Secretary Chu, who are taking on a greater role in issues relating to solar credits. Investigators should not ignore this aspect of the case.

— Lou Dolinar is a retired reporter for Newsday who was born on the Right side of the tracks in a Pennsylvania coal-mining town. 

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