On January 6, 2021, the Internal Revenue Service (the “IRS”) and the Department of the Treasury released highly anticipated final regulations (the “Final Regulations”) on the Internal Revenue Code Section 45Q carbon capture and sequestration (“CCS”) credit in order to implement changes made to the credit by the Bipartisan Budget Act of 2018 (the “BBA”) (available here). The release of the Final Regulations follows the release of a notice of proposed rulemaking on May 28, 2020 (the “Proposed Regulations”).

The Final Regulations are in addition to two other items of guidance under Section 45Q the IRS previously released on February 19, 2020: Notice 2020-12, which addresses the beginning of construction requirement for CCS projects (the “BOC Guidance”), and Revenue Procedure 2020-12, which addresses the allocation of Section 45Q credits in partnership flip structures (the “Partnership Guidance”).

The Final Regulations follow changes made in December 2020 to Section 45Q in the Taxpayer Certainty and Disaster Relief Act of 2020. That legislation extended the time period available to become eligible to qualify for the Section 45Q credit by two years by requiring that construction of CCS facilities must begin before January 1, 2026, rather than January 1, 2024, as provided under prior law.

This update provides background on the CCS credit and a description of key aspects of the Final Regulations, the BOC Guidance and the Partnership Guidance.

Background

Congress originally enacted Section 45Q in 2008 to provide a tax credit to taxpayers that capture and sequester carbon dioxide. However, the Section 45Q credit failed to achieve widespread utilization by carbon dioxide generating industries and their financing partners due to various deficiencies in the statute. Significant amendments were made by the BBA to address many of the shortcomings of Section 45Q, including:

• increasing the credit amount;
• providing for transferability of credits;
• expanding the credit to include not only carbon dioxide, but also other carbon oxides;
• decreasing the minimum carbon capture thresholds to qualify for the credit;
• permitting the credit for a 12-year credit period;
• eliminating an industry-wide cap on the credit (previously 75 million metric tons per year); and
• allowing the credit for a broader range of sequestration methods.

As amended, Section 45Q generally provides a tax credit to taxpayers that capture qualified carbon oxide using carbon capture equipment at a qualified facility, and that (i) dispose of it in secure geological storage (“disposal”), (ii) use it as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and dispose of it in secure geological storage (“injection”), or (iii) utilize it for certain other purposes as permitted by statute or regulation (“utilization”).

The amount of the Section 45Q credit depends on the year in which qualified carbon oxide is captured and sequestered, and whether such qualified carbon oxide is disposed, injected or utilized. The per metric ton amount of the credit is generally as follows:

Year	Injection and Utilization	Disposal
2017	$12.83	$22.66
2018	$15.29	$25.70
2019	$17.76	$28.75
2020	$20.22	$31.77
2021	$22.68	$34.81
2022	$25.15	$37.85
2023	$27.61	$40.89
2024	$30.07	$43.92
2025	$32.54	$46.96
2026	$35.00	$50.00

For taxable years after 2026, the 2026 amounts will be adjusted annually for inflation. The credit is available for the 12-year period beginning on the date that the carbon capture equipment is originally placed in service.

A Section 45Q Credit is only available for qualified carbon oxide captured with carbon capture equipment that is placed in service at a “qualified facility.” Under the statute, a “qualified facility” is any industrial facility or direct air capture facility, the construction of which begins before January 1, 2026, if (i) construction of carbon capture equipment begins before such date, or (ii) the original planning and design for such facility includes installation of carbon capture equipment. Additionally, the carbon capture equipment must meet certain minimum carbon oxide capture thresholds, which are dependent on the type of qualified facility and the carbon oxide emissions at such qualified facility.

To qualify for the Section 45Q Credit, an owner of carbon capture equipment can either physically sequester the relevant qualified carbon oxide itself or “contractually ensure” that the relevant qualified carbon oxide is sequestered, subject to recapture of the credits. Additionally, an owner of carbon capture equipment can elect to transfer its Section 45Q Credits to a party with whom the owner contracts for sequestration.

The Final Regulations

The Final Regulations provide clarity on several key issues for CCS developers, investors, and other stakeholders, including (i) the definitions of “qualified facility” and “carbon capture equipment”; (ii) how to “contractually ensure” sequestration, (iii) transferring Section 45Q credits, (iv) what constitutes “secure geological storage,” (v) “utilization” of carbon oxide, and (vi) recapture of Section 45Q credits.

The Final Regulations apply to taxable years beginning on or after the date they are published in the Federal Register. However, taxpayers may choose to apply the Final Regulations for taxable years beginning on or after February 9, 2018, the effective date of the BBA. Alternatively, taxpayers may rely on the Proposed Regulations for taxable years beginning on or after February 9, 2018, and before the date the Final Regulations are published, provided such taxpayers follow the Proposed Regulations in their entirety and in a consistent manner.

Qualified Facility

In General. As discussed above, a “qualified facility” is any industrial facility or direct air capture facility, the construction of which begins before January 1, 2026, and (i) the construction of carbon capture equipment begins before such date or (ii) the original planning and design for such facility includes installation of carbon capture equipment. In addition, qualified facilities must meet the following annual capture thresholds of qualified carbon oxide:

• a facility which emits not more than 500,000 metric tons of qualified carbon oxide into the atmosphere during the taxable year must capture at least 25,000 metric tons of qualified carbon oxide during the taxable year that is utilized;
• an electricity generating facility not described above must capture at least 500,000 metric tons of qualified carbon oxide during the taxable year; and
• a direct air capture facility, or any other facility not described above, must capture at least 100,000 metric tons of qualified carbon oxide during the taxable year.

The Final Regulations provide for an annualization of qualified carbon oxide emission and capture amounts in the year that carbon capture equipment is placed in service at a qualified facility. This is a welcome rule that prevents a taxpayer from having to delay placing equipment in service until the beginning of a new year solely for purposes of satisfying the minimum capture thresholds.

Applicable Facility Election. Section 45Q(f)(6)(A) provides that with respect to an “applicable facility” that captures at least 500,000 metric tons of qualified carbon oxide during a taxable year, the owner of the carbon capture equipment may elect to have such facility and any carbon capture equipment placed in service at such facility deemed as having been placed in service on February 9, 2018. Section 45Q(f) (6)(B) defines “applicable facility” as a qualified facility (i) which was placed in service before February 9, 2018, and (ii) for which no taxpayer claimed a credit under Section 45Q in regard to such facility for any taxable year ending before February 9, 2018.

As in the Proposed Regulations, the Final Regulations provide that a taxpayer may make the Section 45Q(f)(6) election by filing a statement of election with the taxpayer’s income tax return, in accordance with Form 8933, for each taxable year in which the credit arises. Taxpayers are not permitted to file amended federal income tax returns to revoke prior claims of Section 45Q credits to qualify to make the Section 45Q(f)(6) election. The Final Regulations clarify some potential ambiguity in the Proposed Regulations by specifically referring to the person that owns the carbon capture equipment and physically or contractually ensures the capture and sequestration as the person who can make the Section 45Q(f)(6) election.

For purposes of satisfying the minimum carbon capture thresholds, an applicable facility may utilize the single project rule (discussed immediately below).

Single Project Rule. For purposes of satisfying the minimum capture thresholds, the Final Regulations allow a taxpayer to apply the rules of section 8.01 of Notice 2020-12 to treat multiple facilities as a single facility. Notice 2020-12 provides a nonexclusive list of factors indicating that multiple qualified facilities or units of carbon capture equipment are operated as part of a single project, including (i) facilities or units owned by a single legal entity, (ii) facilities or units that are constructed in the same general geographic location or on adjacent or contiguous pieces of land, (iii) a single system of gathering lines or a single off-take operation is used to collect and deliver carbon oxide to a transportation pipeline, (iv) carbon oxide captured from the facilities is sequestered pursuant to a shared contract, (v) the facilities or units are described in one or more common environmental or other regulatory permits or are required to collectively report their activities, (vi) the facilities or units were constructed pursuant to a single contract providing Front-End Engineering and Design (“FEED”) or similar services covering the full scope of the single project, (vii) the facilities or units were constructed pursuant to a single master construction contract, and (viii) the construction of the facilities or units was financed pursuant to the same loan agreement.

The 80/20 Rule. The Final Regulations provide for an 80/20 rule such that a qualified facility or carbon capture equipment may qualify as originally placed in service even though it contains some used components of property, provided the fair market value of the used components of property is not more than 20% of the qualified facility or carbon capture equipment’s total value (the cost of the new components of property plus the value of the used components of property) (the “80/20 Rule”). For these purposes, the cost of a new qualified facility or carbon capture equipment includes all properly capitalized costs of the new qualified facility or carbon capture equipment. For purposes of the 80/20 Rule only, properly capitalized costs may, at the option of the taxpayer, include the cost of new equipment for a pipeline owned and used exclusively by that taxpayer to transport qualified carbon oxides captured from that taxpayer’s qualified facility that would otherwise be emitted into the atmosphere.

Industrial Facility. Section 45Q does not define industrial facility. The Final Regulations adopt the definition of industrial facility provided in section 3.03 of Notice 2020-12, such that an industrial facility is a facility that produces a qualified carbon oxide stream from a fuel combustion source or fuel cell, a manufacturing process or a fugitive qualified carbon oxide emission source that, absent capture and disposal, injection, or utilization, would otherwise be released into the atmosphere as industrial emission of greenhouse gas or lead to such release.

An industrial facility does not include a facility that produces carbon dioxide from carbon dioxide production wells at natural carbon dioxide-bearing formations or a naturally occurring subsurface spring. For purposes of determining whether a well is producing from a natural carbon dioxide-bearing formation or naturally occurring subsurface spring, the Final Regulations replace the facts and circumstances standard and 10% safe harbor provided in the Proposed Regulations and adopt a 90% test. Under this test, a carbon dioxide production well at natural carbon dioxide-bearing formations or a naturally occurring subsurface spring means a well that contains 90% or greater carbon dioxide by volume.

The Final Regulations also provide an exception for wells at natural carbon dioxide-bearing formations or naturally occurring subsurface springs that contain a product other than carbon dioxide. This exception provides that a well meeting the 90% test will not be treated as a carbon dioxide production well at a natural carbon dioxide-bearing formation or a naturally occurring subsurface spring if: (a) the gas stream contains a product, other than carbon oxide, that is commercially viable to extract and sell, without taking into account the availability of a commercial market for the carbon oxide that is extracted or any Section 45Q credit that might be available; (b) the taxpayer provides an attestation from an independent registered engineer with experience in feasibility studies for natural gas extraction that the gas stream contains a product, other than carbon oxide, that is commercially viable to extract and sell, without taking into account the availability of a commercial market for the carbon oxide that is extracted; (c) a direct air capture facility is not used to capture carbon oxide from the gas stream; and (d) any carbon oxide extracted from the deposit is used as tertiary injectant in an enhanced oil or natural gas recovery project or as feedstock of a utilization project (i.e., the cycling of the gas from the deposit to a processing facility and then back to the deposit will not be considered the capture and storage of carbon oxide for purposes of the Section 45Q credit).

Electricity Generating Facility. Section 45Q does not define electricity generating facility. Like the Proposed Regulations, the Final Regulations define an electricity generating facility as a facility that is subject to depreciation under MACRS Asset Class 49.11(Electric Utility Hydraulic Production Plant), 49.12 (Electric Utility Nuclear Production Plant), 49.13 (Electric Utility Steam Production Plant) or 49.15 (Electric Utility Combustion Turbine Production Plant).

Direct Air Capture Facility. The Final Regulations reiterate the definition of “direct air capture facility” provided in the statute of any facility which uses carbon capture equipment to capture carbon dioxide directly from the ambient air, except the term does not include any facility which captures carbon dioxide that is deliberately released from naturally occurring subsurface springs or using natural photosynthesis.

Carbon Capture Equipment

Section 45Q does not define carbon capture equipment. As in the Proposed Regulations, the Final Regulations define carbon capture equipment in terms of its functionality. However, based on comments to the Proposed Regulations that they would cause confusion in practice, the Final Regulations remove the list of qualifying carbon capture components and excluded components. The Final Regulations provide that carbon capture equipment includes all components of property that are used to capture or process qualified carbon oxide until the qualified carbon oxide is transported for disposal, injection or utilization, including equipment used for the purpose of:

• separating, purifying, drying, and/or capturing qualified carbon oxide that would otherwise be released into the atmosphere from an industrial facility;
• removing qualified carbon oxide from the atmosphere via direct air capture; or
• compressing or otherwise increasing the pressure of qualified carbon oxide.

Components of property related to the function of capturing qualified carbon oxides, such as components of property necessary to compress, treat, process, liquefy, or pump qualified carbon oxides, are included within the definition of carbon capture equipment. The Final Regulations also provide that carbon capture equipment generally does not include components of property used for transporting qualified carbon oxide for sequestration. However, the definition of carbon capture equipment does include a gathering and distribution system that collects qualified carbon oxide from one or more qualified facilities that constitute a single project to transport the qualified carbon oxide away from the qualified facility or project to a pipeline used by multiple taxpayers.

The Final Regulations clarify that all components that make up an independently functioning process train capable of capturing, processing and preparing carbon oxide for transport should be treated as one unit of carbon capture equipment. In addition, the Final Regulations clarify that carbon capture equipment that is originally placed in service at a qualified facility on or after February 9, 2019 may be owned by a taxpayer other than the taxpayer that owns the industrial facility at which the carbon capture equipment is placed.

Contractually Ensure Sequestration

In General. As discussed above, the Section 45Q credit is attributable to the person that owns the relevant carbon capture equipment and physically or “contractually ensures” the sequestration of qualified carbon oxide. Under the Final Regulations, a taxpayer contractually ensures the disposal, injection or utilization of qualified carbon oxide if the taxpayer enters into a “binding written contract” that requires the party that physically carries out the sequestration (the contractor) to do so in the manner required under Section 45Q and the Final Regulations. A “binding written contract” must be enforceable under state law against both the taxpayer and the contractor (or a predecessor or successor of either).

In addition, the Final Regulations provide that contracts ensuring the sequestration of qualified carbon oxide must include commercially reasonable terms, provide for enforcement of the contractor’s obligation to perform the sequestration of the qualified carbon oxide and obligate the contractor to comply with the relevant provisions of the Final Regulations.

The Final Regulations also provide that a taxpayer may enter into multiple contracts with multiple parties for the sequestration of qualified carbon oxide.

Liquidated Damages. The Proposed Regulations contained seemingly conflicting provisions regarding damages – one that prohibited a contract that limited damages “to a specified amount” and one that allowed liquidated damages. Consistent with Section 8.02(1) of Notice 2020-1, the Final Regulations harmonize these conflicting provisions by providing that a contract that limits damages to an amount equal to at least 5% of the total contract price will not be treated as limiting damages to a specified amount.

Subcontracts. Unlike the Proposed Regulations, the Final Regulations make clear that a taxpayer may enter into a binding written contract with a general contractor that hires subcontractors to physically carry out the sequestration of the qualified carbon oxide, provided that the contract binds the subcontractors to the requirements for a “binding written contract” set forth in the Final Regulations. However, as discussed below, the Section 45Q credit may not be transferred to the subcontractor.

Pre-Existing Contracts. If a taxpayer entered into a contract for the sequestration of qualified carbon oxide prior to the date the Final Regulations are published in the Federal Register that does not satisfy the requirements of the Final Regulations, the taxpayer must enter into new contracts or amend existing contracts that conform the Final Regulations within 180 days of their publication in the Federal Register.

Reporting. The existence of, and specific information regarding, each contract must be reported annually to the IRS by each party to the contract, regardless of the party claiming the credit.

Transferring Credits

Under Section 45Q, the owner of the carbon capture equipment (electing taxpayer) may elect to pass the credit to the person that disposes of, utilizes or injects the qualified carbon oxide (credit claimant). The Final Regulations provide that an electing taxpayer can allow the credit to be claimed by one or multiple allowable credit claimants, but if an electing taxpayer allows multiple credit claimants to claim Section 45Q credits, the maximum amount of credits allowable to each claimant is in proportion to the amount of qualified carbon oxide disposed of, utilized, or injected by the credit claimant.

Elections to allow the Section 45Q credit to another taxpayer must be filed annually with the electing taxpayer’s original tax return (but not an amended return). The ability to make the election on an annual basis and with respect to multiple contractors should allow potential electing taxpayers and contractors to make tax efficient elections on a year-by-year basis.

Both the electing taxpayer and credit claimant must file Form 8933 with their tax return, and the credit claimant must also attach the Form 8933 of the electing taxpayer. If the taxpayer claiming the Section 45Q credit fails to satisfy this reporting requirement, that taxpayer will not be able to claim the Section 45Q credit. However, the failure of one party (e.g., the electing taxpayer) to properly file its Form 8933 with the IRS will not impact the ability of the other party (e.g., the credit claimant) to claim the Section 45Q credit.

Secure Geological Storage

Both disposal and injection require that qualified carbon oxide be disposed of in secure geologic storage. Section 45Q(f)(2) provides that the Treasury Secretary, in consultation with the Administrator of the EPA, the Secretary of Energy and the Secretary of the Interior, shall establish regulations for determining adequate security measures for the geological storage of qualified carbon oxide under Section 45Q(a) such that the qualified carbon oxide does not escape into the atmosphere.

The Final Regulations for secure geological storage mostly follow EPA regulations and apply different rules depending on whether qualified carbon oxide is being disposed of in secure geological storage or is being used as an injectant in connection with a qualified enhanced oil or natural gas project and then disposed of by the taxpayer. Under EPA regulations, injection of qualified carbon oxide for geological sequestration beneath the lowermost formation containing an underground source of water requires a UIC Class VI permit. Operators that inject qualified carbon oxide underground are also subject to the EPA’s Greenhouse Gas Reporting Program (“GHGRP”) requirements in 40 CFR Part 98 subpart RR (“subpart RR”). Under subpart RR, operators of UIC Class VI wells are required to report basic information on carbon dioxide received for injection, and to develop and implement an EPA-approved site-specific Monitoring, Reporting, and Verification Plan (an “MRV Plan”).

Under EPA regulations, an MRV Plan is not required before injection operations begin. However, the Final Regulations make clear that the MRV Plan must be developed and implemented before Section 45Q credits may be claimed. Because an MRV Plan typically takes 12 to 18 months to develop and implement, and requires EPA approval, this requirement could significantly delay the development of CCS projects.

Under EPA regulations, injection of carbon dioxide in connection with enhanced oil recovery or natural gas recovery requires a UIC Class II permit. Operators that inject carbon dioxide for these purposes are subject to the EPA’s GHGRP requirements in 40 CFR Part 98 subpart UU (“subpart UU”). Under subpart UU, operators of UIC Class II wells are required to report basic information on carbon dioxide received for injection and are not required to develop and implement an MRV Plan.

The requirements of subpart RR, including the MRV Plan requirement, generally do not apply to the injection of qualified carbon oxide in connection with enhanced oil recovery or natural gas recovery, unless (i) the owner or operator opts into subpart RR, or (ii) the facility holds a UIC Class VI permit for the well used for enhanced oil recovery. While tax credits are available if injectors of qualified carbon oxide in connection with enhanced oil recovery or natural gas recovery report under subpart RR, the Final Regulations provide that, as an alternative to reporting under subpart RR, the operator may elect to report under a standard adopted by the International Organization of Standardization: CSA/ANSI ISO 27916:19 (Carbon Dioxide Capture, Transportation and Geological Storage – Carbon Dioxide Storage using Enhanced Oil Recovery (CO2-EOR)) (the “ISO Standard”). Reporting under the alternative ISO Standard provides relief for UIC Class II operators from the requirement to develop and implement an MRV Plan. However, if a taxpayer reports under the ISO Standard, the taxpayer must prepare and provide documentation to an independent engineer or geologist, who then must certify that the documentation is accurate and complete. The Final Regulations also provide that the certification must be accompanied by an affidavit from the engineer or geologist stating under penalties of perjury that the engineer or geologist is independent from the taxpayer, electing taxpayer, and/or credit claimants, as applicable. By contrast, self-certification is permitted for taxpayers that report in compliance with subpart RR. Unlike the alternative rule for UIC Class II operators to report under the ISO Standard, there is no such alternative rule for UIC Class VI operators to report under the ISO Standard instead of subpart RR.

Utilization

Section 45Q(f)(5) provides that “utilization of qualified carbon oxide” means (i) the fixation of such qualified carbon oxide through photosynthesis or chemosynthesis, such as through the growing of algae or bacteria; (ii) the chemical conversion of such qualified carbon oxide to a material or chemical compound in which such qualified carbon oxide is securely stored, or (iii) the use of such qualified carbon oxide for any other purpose for which a commercial market exists (with the exception of use as a tertiary injectant in a qualified enhanced oil or natural gas recovery project), as determined by the Secretary. In order for the Secretary to determine whether a commercial market exists, the Final Regulations require a taxpayer to submit a statement attached to its Form 8933 substantiating that a commercial market exists for its particular product, process or service.

Section 45Q(f)(5) further provides a methodology to determine the amount of qualified carbon oxide utilized by the taxpayer. Such amount is equal to the metric tons of qualified carbon oxide which the taxpayer demonstrates, based upon an analysis of lifecycle greenhouse gas emissions (“LCA”) and subject to such requirements as the Secretary, in consultation with the Secretary of Energy and the Administrator of the EPA, determines appropriate, were (i) captured and permanently isolated from the atmosphere, or (ii) displaced from being emitted into the atmosphere.

The Final Regulations provide that the LCA must be in writing and either performed or verified by a professionally licensed independent third party. The LCA must contain certain documents consistent with ISO 14044:2006, “Environmental Management- Life cycle assessment- Requirements and Guidelines” as well as a statement documenting the qualifications of the third-party.

The Final Regulations provide that the LCA must be submitted to the IRS and the Department of Energy (“DOE”). Based on commenters’ concerns about delays, the Final Regulations streamlined the LCA review and approval process by providing that the DOE will conduct a technical review of each LCA and the IRS will determine whether to approve the LCA. Addressing concerns that an LCA may not be approved before a taxpayer is barred from filing an amended return by the statute of limitations, the preamble states that priority in the LCA review process will be given to prior tax years. The preamble also provides that taxpayers may rely on the Final Regulations to submit an LCA, but the IRS will issue separate procedural guidance that provides additional details regarding the LCA submission and review process.

Recapture

Section 45Q(f)(4) directs the Treasury Secretary to provide regulations for recapturing the benefit of any Section 45Q credit allowable with respect to any qualified carbon oxide which ceases to be captured, disposed of or used as a tertiary injectant in a manner consistent with the requirements of Section 45Q.

Under the Proposed Regulations, the recapture period, which is the open period during which a recapture event may occur, begins on the date of the first injection of qualified carbon oxide for disposal in secure geological storage or use as a tertiary injectant and ends the earlier of 5 years after the last taxable year in which the taxpayer claimed a Section 45Q credit or the date monitoring ends under subpart RR or the alternative ISO Standard. Based on comments to the Proposed Regulations, the Final Regulations reduce the recapture period from 5 years to 3 years. In addition, the Final Regulations clarify that the recapture period ends 3 years after the last taxable year in which the taxpayer claimed a Section 45Q tax credit or was eligible to claim a credit that it elected to carry forward. Accordingly, the 3-year period begins in the year that the Section 45Q credit is generated, regardless of whether the taxpayer carries the credit forward and utilizes it in a later year.

The Final Regulations provide for a 3-year lookback period (reduced from 5 years in the Proposed Regulations) during which the IRS may recapture tax credits after a leakage event. The amount of leakage is first applied and offset against the amount of qualified carbon oxide captured and sequestered in the current year, then applied and offset against the amount of qualified carbon oxide captured in the prior five years under a last-in, first-out (“LIFO”) methodology, to the extent of such amounts. Under this approach, the amount of leaked qualified carbon oxide is recaptured at a tax credit rate for the year in which it is applied under this methodology. The amount of the recaptured tax credit must be added to the amount of tax due in the taxable year in which the recapture event occurs.

Although the IRS requested comments on how to apply the recapture provisions with respect to tax credits that are carried forward to future taxable years due to insufficient income tax liability in the current taxable year, the Final Regulations to do not address the application of the recapture provisions to credit carry forward. Rather, the preamble to the Final Regulations states that Section 45Q credit carryforwards should not be affected by any recapture of prior year credits, because the recapture is taken into account in the year in which the leakage occurs.

Where a recapture event occurs with respect to a secure geological storage location in which the stored qualified carbon oxide had been captured from more than one unit of carbon capture equipment that was not under common ownership, the recapture amount must be allocated among the taxpayers that own the multiple units of carbon capture equipment pro rata on the basis of the amount of qualified carbon oxide captured from each of the multiple units of carbon capture equipment. Similarly, a pro rata approach to the recapture of tax credits applies in the event of a recapture event where the leaked amount of qualified carbon oxide is deemed attributable to qualified carbon oxide with respect to which multiple taxpayers claimed tax credits.

A limited exception to recapture applies in the event of a leakage of qualified carbon oxide resulting from actions not related to the selection, operation or maintenance of the storage facility, such as volcanic activity or a terrorist attack. As provided in Rev. Proc. 2020-12, a taxpayer may obtain recapture insurance to protect against recapture. Such insurance may be particularly desirable for projects with tax equity investors that want to manage risks regarding investments in projects that claim Section 45Q credits.

Notice 2020-12: BOC Guidance

Although Section 45Q includes a December 31, 2025 deadline for beginning construction for entitlement to the Section 45Q credit, Congress did not define when construction would be treated as having begun, instead leaving that to the IRS to define. Notice 2020-12 provides that guidance and is largely consistent with the beginning of construction notices previously issued for other renewable energy facilities.

Notice 2020-12 provides two methods to establish that construction of a qualified facility or carbon capture equipment has begun for Section 45Q purposes – starting physical work of a significant nature (the “Physical Work Test”) or paying or incurring 5% or more of the total cost of the qualified facility or carbon capture equipment (the “5% Safe Harbor”). Construction will be deemed to begin on the first date that either method is satisfied, and both methods require continuous progress toward completion of construction (the “Continuity Requirement”).

Physical Work Test

The Notice states that construction has begun when the taxpayer begins physical work of a significant nature. The determination of whether physical work of a significant nature has begun is a facts and circumstances analysis. The Physical Work Test focuses on the nature of the work performed rather than the amount of work or the cost thereof, and the Notice confirms that there is “no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.”

Physical work can either be performed by the taxpayer directly or by other persons under a binding written contract, and the work may be performed on-site or off-site. Generally, off-site physical work of a significant nature may include the manufacture of mounting equipment, support structures such as racks, skids, and rails, components necessary for carbon capture processes, and components or equipment necessary for disposal of qualified carbon oxide in secure geological storage. If a manufacturer produces components of property for multiple qualified facilities or units of carbon capture equipment, a reasonable method must be used to associate individual components of property with a particular purchaser. On-site physical work of a significant nature for qualified facilities or carbon capture equipment may include the excavation for and installation of foundations for the project or for buildings to house equipment necessary to the project, the installation of gathering lines necessary to connect the industrial facility to the carbon capture or other necessary equipment before transportation away from the facility, the installation of components necessary for carbon capture processes, and the installation of equipment and other work necessary for the disposal of qualified carbon oxide in secure geological storage (which may be at a location different from the location of the qualified facility or carbon capture equipment).

Notice 2020-12 identifies two categories of activities that do not qualify as physical work of a significant nature: preliminary activities and inventory activities. The guidance provides examples of preliminary activities that would not qualify, including securing financing, exploring, researching, obtaining permits and licenses, conducting test drilling to determine soil condition (including to test the strength of a foundation), excavating to change the contour of land, clearing a site and removing existing foundations or any components that will not be used in the project. The guidance also states that physical work of a significant nature does not include work performed, either by the taxpayer or by another person under contract, to produce components of a qualified facility or carbon capture equipment that are in existing inventory or are normally held in inventory.

5% Safe Harbor

Construction of a qualified facility or carbon capture equipment will be considered to have begun if the taxpayer pays or incurs (depending on the taxpayer’s method of accounting) 5% or more of the total cost of the qualified facility or carbon capture equipment. The total cost of the qualified facility or carbon capture equipment includes all costs included in the depreciable basis of the qualified facility or carbon capture equipment. Costs associated with FEED activities or other approaches for front-end planning may be considered to determine whether the 5% Safe Harbor has been met. A taxpayer may look through to costs paid or incurred by another person with whom the taxpayer has entered into a binding, written contract with respect to the project construction.

Notice 2020-12 provides clarity on how cost overruns shall be treated for the purposes of the 5% Safe Harbor. For a single project comprised of multiple qualified facilities or units of carbon capture equipment, if the total cost exceeds the anticipated cost such that the amount a taxpayer paid or incurred is less than 5% of the actual total cost of the project when placed in service, the 5% Safe Harbor can be satisfied with respect to some, but not all, of the qualified facilities or units of carbon capture equipment comprising the project, as long as the total aggregate cost of those qualified facilities or units of carbon capture equipment is not more than 20 times greater than the amount paid or incurred. For a single qualified facility or unit of carbon capture equipment that cannot be separated into multiple properties, however, if the amount paid or incurred in a given year ultimately is less than 5% of the total cost when the qualified facility or unit of carbon capture equipment is placed in service, the 5% Safe Harbor will not be satisfied.

Continuity Requirement

Both the Physical Work Test and the 5% Safe Harbor have a Continuity Requirement, which requires the taxpayer to maintain a continuous program of construction, which involves continuing physical work of a significant nature. Where a taxpayer has satisfied the 5% Safe Harbor, the Continuity Requirement requires that the taxpayer make continuous efforts to advance toward completion of the qualified facility or carbon capture equipment. In each case, whether the Continuity Requirement is satisfied depends on the relevant facts and circumstances.

Certain disruptions in a taxpayer’s continuous construction or continuous efforts to advance toward completion of a qualified facility or carbon capture equipment that are beyond the taxpayer’s control will not be considered as indicating that a taxpayer has failed to satisfy the Continuity Requirement. Notice 2020-12 provides a non-exclusive list of these “excusable disruptions.” For a single project comprised of multiple qualified facilities or multiple units of carbon capture equipment, whether an excusable disruption has occurred must be determined in the calendar year in which the last of multiple qualified facilities or units of carbon capture equipment is placed in service.

Notice 2020-12 provides a safe harbor (the “Continuity Safe Harbor”) pursuant to which the Continuity Requirement is deemed to be satisfied if a taxpayer places a qualified facility or carbon capture equipment in service by the end of a calendar year that is no more than six calendar years after the calendar year during which construction of the qualified facility or carbon capture equipment began (the “Continuity Safe Harbor Deadline”). For example, if construction begins on a qualified facility or carbon capture equipment on January 15, 2021, and the qualified facility or carbon capture equipment is placed in service by December 31, 2027, the qualified facility or carbon capture equipment will satisfy the Continuity Safe Harbor. The excusable disruption rules do not apply for purposes of applying the Continuity Safe Harbor. The six-year Continuity Safe Harbor period is a welcome extension of the four-year period that applies to ITC and PTC projects and appears to be appropriate given the longer development and construction periods for carbon sequestration projects.

Taxpayers that began construction on a qualified facility or carbon capture equipment by satisfying either the Physical Work Test or the 5% Safe Harbor, or both, before the effective date of Notice 2020-12 (March 9, 2020), may use the effective date as the date that construction began. A taxpayer that began construction before March 9, 2020 under both the Physical Work Test and the 5% Safe Harbor may choose either method (but not both) for purposes of applying the rules of Notice 2020-12.

Furthermore, as noted above, a taxpayer that fails to satisfy the 5% Safe Harbor in one year because of cost overruns may use the Physical Work Test in a later year to establish the beginning of construction as long as that occurs before 2024.

Under the so-called “disaggregation rule”, multiple qualified facilities or units of carbon capture equipment that are treated as a single project may be disaggregated and treated as multiple separate qualified facilities or units of carbon capture equipment for purposes of the Continuity Safe Harbor. The disaggregated separate qualified facilities or units of carbon capture equipment that are placed in service before the Continuity Safe Harbor Deadline will be eligible for the Continuity Safe Harbor. The remaining disaggregated separate qualified facilities or units of carbon capture equipment may satisfy the Continuity Requirement under the facts and circumstances determination.

Transfers

There is no statutory requirement that the taxpayer that places a qualified facility in service also be the taxpayer that begins construction on the facility. As such, a transfer of a fully- or partially-developed facility does not necessarily disqualify the facility under the Physical Work Test or the 5% Safe Harbor. However, a transfer solely consisting of tangible personal property between unrelated parties does disqualify the property such that any work performed or amounts paid or incurred by the transferor with respect to the transferred property will not be taken into account in determining whether the transferee meets the Physical Work Test or the 5% Safe Harbor.

Retrofits

Notice 2020-12 applies the 80/20 Rule described above for purposes of determining whether retrofitted qualified facilities or carbon capture equipment qualify for the Section 45Q Credit. For purposes of the beginning of construction requirement, the Physical Work Test and the 5% Safe Harbor are applied only with respect to the work performed on, and amounts paid or incurred for, new components of property used to retrofit used components of property or an existing qualified facility or carbon capture equipment. For the 5% Safe Harbor, all costs properly capitalized in the basis of the qualified facility or carbon capture equipment are taken into account.

Single Project Rule

For purposes of establishing that construction of a qualified facility or carbon capture equipment has begun, multiple qualified facilities or units of carbon capture equipment that are operated as part of a single project (along with any components of property that serve some or all such facilities or units) may be treated as a single project. The factors used to determine with multiple qualified facilities or units of carbon capture equipment are operated as part of a single project are discussed above under the “Single Project Rule” heading in the discussion of the definition of a “qualified facility” in the Final Regulations. Whether multiple qualified facilities or units of carbon capture equipment are operated as part of a single project is determined in the calendar year during which the last of the multiple qualified facilities or units of carbon capture equipment is placed in service.

Revenue Procedure 2020-12: Partnership Guidance

The developer (or “sponsor”) of a project that generates tax credits often does not have sufficient taxable income to efficiently utilize such credits. A developer will thus frequently look for a “tax equity investor,” who can efficiently utilize such credits, to provide an equity investment in the project. The investment will be structured to allocate tax credits and certain other tax attributes generated by the project (such as depreciation) to the tax equity investor in an efficient manner.

A structure that has been widely used in other tax equity transactions is a “partnership flip,” where a developer and one or more tax equity investors form a “project company” that is treated as a partnership for tax purposes to own and operate the relevant tax credit-generating property. A tax partnership provides a developer and investors flexibility to allocate project company tax items in a manner that ensures the majority of tax credits and other relevant tax attributes are allocated to tax equity investors that can use them, while distributing cash generated by the project company in a different proportion than the tax allocations.

In a typical partnership flip transaction, a developer contributes the relevant property to the project company and one or more tax equity investors purchase interests in the project company from the developer or the project company. The majority of taxable income, losses and tax credits (and usually a smaller portion of cash distributions) are then allocated to the investors until the investors hit a target after-tax rate of return (or, in some transactions, until a specified date). Once the investors hit the target rate of return (or upon the specified date), the tax allocations “flip,” such that the majority of taxable income, losses and any remaining tax credits are allocated to the developer. A developer will often have a call option to purchase (and/or an investor will have a put option to sell to the developer) an investor’s project company interest for fair market value at some point following the flip (though as discussed below, a developer call option is not permitted for CCS partnership flips under the relevant IRS safe harbor).

Revenue Procedure 2020-12 provides a safe harbor under which an investor will be respected as a partner/owner in (rather than a lender to) a partnership that owns carbon capture equipment and thus will be entitled to an allocation of available Section 45Q tax credits.

Under Revenue Procedure 2020-12, an investor, together with the developer, will be respected as a partner of a project company partnership that owns the carbon capture equipment if all of the requirements described below are satisfied.

Project Developer’s Minimum Partnership Interest. The developer must have a minimum 1% interest in each material item of partnership income, gain, loss, deduction, and credit at all times during the existence of the partnership.

Investor’s Partnership Interest. Each investor must have an interest in each material item of partnership income, gain, loss, deduction, and credit at all times that is at least 5% of its largest interest percentage. In addition, the investor’s partnership interest must constitute a “bona fide equity investment” with a reasonably anticipated value commensurate with the investor’s overall percentage interest in the project company, separate from any federal, state, and local tax deductions, allowances, credits, and other tax attributes to be allocated by the project company to the investor (the “bona fide equity investment requirement”). An investor’s partnership interest is a bona fide equity investment only if that reasonably anticipated value is contingent upon the project company’s net income, gain, and loss, and is not substantially fixed in amount. Likewise, the investor must not be substantially protected from losses from the project company’s activities. The investor’s return from its investment in the project company must not be limited in a manner comparable to a preferred return representing a payment for capital. The bona fide equity investment requirement could be difficult to apply in practice and it ignores the reality that the tax benefits will comprise a significant portion of any investor’s return on its investment. It is also not consistent with the example provided in Revenue Procedure 2020-12, which notes that the investor “invests in carbon capture projects primarily to benefit from the Section 45Q Credit.”

Investor’s Minimum Unconditional Investment. At all times, an investor’s minimum investment must be at least 20% of the fixed capital investment plus any reasonably anticipated contingent investment required to be made by the investor. The investment amount may be reduced through cash distributions from the operation of the project. The investor must not be protected from loss of the minimum investment by the developer, other investors or certain other persons.

Contingent Consideration. More than 50% of an investor’s investment must be fixed and determinable, meaning that contingent consideration is limited to 50% of an investor’s investment. For this purpose, contributions for ongoing project expenses will not be treated as contingent payments by the investor.

Put and Call Rights. Neither project developers nor investors may have a call option to purchase the carbon capture equipment or a partnership interest at a future date. In addition, an investor may not hold a put option to require any person to purchase the partner’s partnership interest at a future date at a price that is more than its fair market value.

Guarantees and Loans. No party involved in the project company may directly or indirectly guarantee the investor’s ability to claim Section 45Q tax credits or a repayment of tax credits if challenged by the IRS, or distributions or other consideration. The developer may not lend any funds to the investor to acquire the investor’s interest in the project company or guarantee any indebtedness incurred in connection with that acquisition.

The following guarantees may be provided to the investor or the project company: (i) guarantees for the performance of any acts necessary to claim the Section 45Q credit (including ensuring proper secure geological storage of the qualified carbon oxide through disposal, or use as a tertiary injectant or utilization); and (ii) guarantees for the avoidance of any act (or omissions) that would cause the Project Company to fail to qualify for the Section 45Q credit or that would result in a recapture of the Section 45Q Credit. Examples of guarantees permitted under this section include completion guarantees, operating deficit guarantees, environmental indemnities, and financial covenants.

A long-term carbon oxide purchase agreement entered into on arm’s-length terms between the project company and an emitter, between the project company and an offtaker or between an emitter and an offtaker, does not constitute a guarantee even if the emitter or the offtaker is related to the project company, and even if such contracts contain “supply all,” “supply-or-pay,” “take all,” “take-or-pay” or “securely store-or-pay” provisions. A long-term contract between the project company and the emitter or the offtaker pursuant to which the project company leases the equipment to the emitter or the offtaker, or agrees to use the equipment to perform services for the emitter or the offtaker also does not constitute a guarantee even if the emitter or the offtaker is related to the project company.

Allocation of the Section 45Q Credit. Allocations under the partnership agreement must satisfy requirements under section 704(b). Tax credits and any recapture must be allocated in accordance with Treas. Reg. § 1.704-1(b)(4)(ii). If the project company generates receipts from its sequestration activities, an allocation of the Section 45Q credit in the same proportion as their respective distributive share of income is treated as being made in accordance with the partner’s interest in the partnership. If the project company does not receive payments from its sequestration activities, an allocation of the Section 45Q credit in the same proportion as the partners’ loss or deduction associated with the cost of capture and disposal will be treated as in accordance with the partners’ interest in the partnership.

Example. The Revenue Procedure provides an example in which the IRS applies these requirements to a typical tax equity “flip” partnership. The following chart describes the project company’s distributions of cash and allocations of gross income/loss and Section 45Q credits during three periods:

	Developer		Investor
	Cash	Gross Income/Loss & Section 45Q Credits	Cash	Gross Income/Loss & Section 45Q Credits
Period 1	100%	1%	0%	99%
Period 2	0%	1%	100%	99%
Period 3	95%	95%	5%	5%

Period 1 runs from the date of the investor’s investment until the earlier of (i) the date the developer receives an agreed cash return, which may be an amount equal to the aggregate contributions made by the developer, or (ii) a fixed outside date. When Period 1 ends, Period 2 begins.

Period 2 will continue until the investor achieves an agreed after-tax internal rate of return (the “Flip Point”). When Period 2 ends, Period 3 begins. If the Flip Point occurs before Period 1 ends, Period 1 ends at that time, and Period 3 begins.

Period 3 will continue for the remaining life of the project.

Under the facts provided in the example, the IRS will treat the investor as a partner in the project company and will treat the project company as properly allocating the Section 45Q credits in accordance with Section 704(b) of the Internal Revenue Code and the regulations thereunder.

If you have further questions, please contact Michael Snider, David Weil, or Peter Rose.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (H.R. 133) (“Appropriations Act”) became law. In addition to incentives for renewable energy projects, this densely-packed government spending bill and stimulus package contains provisions that extensively update federal policy regarding carbon capture, removal, use, and storage (“CCUS”), continue to limit the U.S. Department of the Interior (“Interior”) from listing certain species as threatened or endangered, and continue to limit oil and gas leasing on federal lands surrounding the Chaco Cultural National Historic Park in New Mexico.

Carbon Capture, Removal, Use, and Storage

The Appropriations Act commissions numerous research and development programs and directs the publication of reports and establishment of task forces focused on various aspects of CCUS. Notably, Section 102(d) of Division S (“Innovation for the Environment”) of the Appropriations Act directs the Council on Environmental Quality (“CEQ”) to develop a report on CCUS projects that focuses on streamlining the permitting process. The report should identify existing CCUS permitting frameworks, clarify the permitting responsibilities among federal agencies, and identify best practices and templates for permitting in an efficient, orderly, and responsible manner. Based on this report, the CEQ must develop guidance on how federal agencies should review CCUS projects and address the interplay between CCUS projects and various federal acts, including the National Environmental Policy Act, the Clean Air Act, the Safe Drinking Water Act, and the Endangered Species Act.

Additionally, the Energy Act of 2020 (Division Z, known as the “Energy Act”) and Division S of the Appropriations Act collectively appropriate billions of dollars to accelerate the development, deployment, and commercialization of carbon-capture technologies. Pursuant to Title IV, Section 4002 of the Energy Act, the Department of Energy (“DOE”) must establish a competitive, merit-reviewed process through which the DOE will enter into cooperative agreements with industry stakeholders for the construction and operation of six facilities that will use emerging technologies to capture carbon dioxide from coal electric generation facilities, natural gas electric generation facilities, and industrial facilities. The projects will be financed both by the private sector and the DOE, which will also provide technical support and publish studies and reports about the efficacy of the projects. Additionally, Title IV, Section 4003 of the Energy Act directs the DOE to provide funding for demonstration projects focused on collecting and validating information on the cost and feasibility of commercial deployment of large-scale carbon sequestration technologies.

The Appropriations Act includes other incentives for CCUS development. For example, the tax credit for carbon capture and sequestration projects under Section 45Q of the Internal Revenue Code was set to expire at the end of 2023, but Title I, Subtitle B, Section 121, of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of the Appropriations Act) extends the tax credit for two years through 2025 for any projects which commence construction by January 1, 2026. Additionally, Section 102 of Division S of the Appropriations Act commissions the development of a program through which parties may compete for financial awards for direct air capture projects that capture more than 10,000 tons of carbon dioxide per year.

Listing the Greater Sage-Grouse

Division G of the Appropriations Act limits Interior’s ability to list the greater sage-grouse and the Columbia basin distinct population segment of greater sage-grouse as threatened or endangered under the Endangered Species Act. Specifically, Title I, Section 116 prohibits Interior, including the U.S. Fish and Wildlife Service, from using federal funds to draft or issue a proposed rule to list these species as threatened or endangered. Prior spending bills have similarly limited on the use of federal funds to list these species.

Other Notable Components of the Appropriations Act

Division R of the Appropriations Act, known as the “Protecting Our Infrastructure of Pipelines and Enhancing Safety Act of 2020,” includes mandates regarding pipeline safety and requirements to mitigate methane emissions from gas infrastructure. It also makes allowances for operators to pilot new technologies and processes on existing systems and sets various new requirements for large scale liquified natural gas facilities.

Section 103 of Division S of the Appropriations Act aims to significantly reduce the use of hydrofluorocarbons, a widely used refrigerant in air conditioning and refrigerators that when released into the atmosphere is a significant greenhouse gas. By directing a shift to next generation technologies, while also allowing exceptions for essential uses where no substitute is available, the legislation targets an 85 percent reduction in the use of hydrofluorocarbons over a 15-year period.

If you have further questions, please contact Katie Schroder, Shalyn Kettering, or Courtney Shephard.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (H.R. 133) (“Appropriations Act”) became law. In addition to incentives for renewable energy projects, this densely-packed government spending bill and stimulus package contains provisions that extensively update federal policy regarding carbon capture, removal, use, and storage (“CCUS”), continue to limit the U.S. Department of the Interior (“Interior”) from listing certain species as threatened or endangered, and continue to limit oil and gas leasing on federal lands surrounding the Chaco Cultural National Historic Park in New Mexico.

Carbon Capture, Removal, Use, and Storage

The Appropriations Act commissions numerous research and development programs and directs the publication of reports and establishment of task forces focused on various aspects of CCUS. Notably, Section 102(d) of Division S (“Innovation for the Environment”) of the Appropriations Act directs the Council on Environmental Quality (“CEQ”) to develop a report on CCUS projects that focuses on streamlining the permitting process. The report should identify existing CCUS permitting frameworks, clarify the permitting responsibilities among federal agencies, and identify best practices and templates for permitting in an efficient, orderly, and responsible manner. Based on this report, the CEQ must develop guidance on how federal agencies should review CCUS projects and address the interplay between CCUS projects and various federal acts, including the National Environmental Policy Act, the Clean Air Act, the Safe Drinking Water Act, and the Endangered Species Act.

Additionally, the Energy Act of 2020 (Division Z, known as the “Energy Act”) and Division S of the Appropriations Act collectively appropriate billions of dollars to accelerate the development, deployment, and commercialization of carbon-capture technologies. Pursuant to Title IV, Section 4002 of the Energy Act, the Department of Energy (“DOE”) must establish a competitive, merit-reviewed process through which the DOE will enter into cooperative agreements with industry stakeholders for the construction and operation of six facilities that will use emerging technologies to capture carbon dioxide from coal electric generation facilities, natural gas electric generation facilities, and industrial facilities. The projects will be financed both by the private sector and the DOE, which will also provide technical support and publish studies and reports about the efficacy of the projects. Additionally, Title IV, Section 4003 of the Energy Act directs the DOE to provide funding for demonstration projects focused on collecting and validating information on the cost and feasibility of commercial deployment of large-scale carbon sequestration technologies.

The Appropriations Act includes other incentives for CCUS development. For example, the tax credit for carbon capture and sequestration projects under Section 45Q of the Internal Revenue Code was set to expire at the end of 2023, but Title I, Subtitle B, Section 121, of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of the Appropriations Act) extends the tax credit for two years through 2025 for any projects which commence construction by January 1, 2026. Additionally, Section 102 of Division S of the Appropriations Act commissions the development of a program through which parties may compete for financial awards for direct air capture projects that capture more than 10,000 tons of carbon dioxide per year.

Listing the Greater Sage-Grouse

Division G of the Appropriations Act limits Interior’s ability to list the greater sage-grouse and the Columbia basin distinct population segment of greater sage-grouse as threatened or endangered under the Endangered Species Act. Specifically, Title I, Section 116 prohibits Interior, including the U.S. Fish and Wildlife Service, from using federal funds to draft or issue a proposed rule to list these species as threatened or endangered. Prior spending bills have similarly limited on the use of federal funds to list these species.

Oil and Gas Leasing Surrounding Chaco Culture National Historic Park

Title IV, Section 430 of Division G of the Appropriations Act continues to limit oil and gas leasing in an area surrounding the Chaco Cultural National Historic Park during fiscal year 2021 or until Interior completes a cultural resources investigation to identify culturally and historically significant areas and sites in areas of high energy development potential within the Chaco Canyon region of the Southwest. Congress similarly limited Interior from leasing in this area during 2020.

Other Notable Components of the Appropriations Act

Division R of the Appropriations Act, known as the “Protecting Our Infrastructure of Pipelines and Enhancing Safety Act of 2020,” includes mandates regarding pipeline safety and requirements to mitigate methane emissions from gas infrastructure. It also makes allowances for operators to pilot new technologies and processes on existing systems and sets various new requirements for large scale liquified natural gas facilities.

Section 103 of Division S of the Appropriations Act aims to significantly reduce the use of hydrofluorocarbons, a widely used refrigerant in air conditioning and refrigerators that when released into the atmosphere is a significant greenhouse gas. By directing a shift to next generation technologies, while also allowing exceptions for essential uses where no substitute is available, the legislation targets an 85 percent reduction in the use of hydrofluorocarbons over a 15-year period.

If you have further questions, please contact Katie Schroder, Shalyn Kettering, or Courtney Shephard.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (H.R. 133) (“Appropriations Act”) became law. In addition to measures to promote carbon capture technology, this massive government spending bill and stimulus package includes significant tax and other incentives for renewable energy projects through the incorporated Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“Taxpayer Act”) and the Energy Act of 2020 (“Energy Act”).

Extension of Renewable Energy Tax Credits

The Taxpayer Act (Division EE of the Appropriations Act) includes a number of renewable energy provisions. With respect to wind and solar power facilities, the Taxpayer Act extended several time-based requirements or amount limitations pertaining to the production tax credit (PTC) under Section 45 of the Internal Revenue Code (the “Code”) and the investment tax credit (ITC) under Section 48 of the Code.

Wind Power Facilities. The Taxpayer Act extends the 60% PTC for eligible wind power facilities that “begin construction” after December 31, 2019, and prior to January 1, 2022 (extended from January 1, 2021). PTCs at 60% of the full rate are currently $15 a MWh. The Taxpayer Act makes corresponding one-year eligibility extension changes to the ITC to permit wind power facilities beginning construction prior to January 1, 2022 (extended from January 1, 2021) to elect to apply 60% of the ITC (i.e., 18% of eligible tax basis) in lieu of the PTC.

In addition, the Taxpayer Act creates new extended eligibility rules for applying the ITC to offshore wind facilities. These rules provide that a 30% ITC applies to a “qualified offshore wind facility” (an otherwise PTC/ITC eligible wind facility located in the inland navigable waters of the United States or in the coastal waters of the United States) that begins construction prior to January 1, 2026. Consistent with the PTC phaseout, offshore wind projects will not have the option to claim PTCs on the electricity output, instead of an ITC, on projects that start construction after 2021.

Solar Power Facilities. For eligible solar power facilities, the Taxpayer Act extends the ITC phasedown schedule by two years, such that the 26% ITC (applied to eligible tax basis) now applies to property that begins construction after December 31, 2019, and prior to January 1, 2023 (extended from January 1, 2021), and the 22% ITC now applies to property that begins construction after December 31, 2022, and prior to January 1, 2024 (extended from January 1, 2022). Solar power facilities that begin construction after 2023 remain eligible for a 10% ITC. The placed-in-service deadline for otherwise increased ITC percentage amounts to be reduced to 10% is also extended two years from January 1, 2024, to January 1, 2026.

Incentives for Renewable Energy R&D and Development on Public Lands

The Energy Act (Division Z of the Appropriations Act) contains the first major update to renewable energy policies for federal public lands in more than a decade. Most significant, by 2025, the Secretary of the Interior (“Secretary”) must issue permits to authorize production of at least 25 GW of electricity from wind, solar, and geothermal energy projects on public lands. See Title III, Subtitle B, Sec. 3104. Additionally, by September 1, 2022, the Secretary must establish national goals for renewable energy production on public lands. Id.

The Energy Act also authorizes the Secretary to reduce acreage rental rates, capacity fees, and other recurring annual fees on public lands to make existing and new wind and solar projects more attractive. See Title III, Subtitle B, Sec. 3103. To use this authority, the Secretary must either determine that existing rates and fees exceed fair market value, impose economic hardships, limit commercial interest, or are not competitively priced compared to non-public lands, or the Secretary must determine that the reduced rates or fees are necessary to promote the greatest use of wind and solar energy resources. Id.

The Energy Act also seeks to streamline federal permitting for geothermal, solar, and wind energy projects on public lands by requiring the Secretary to establish a national Renewable Energy Coordination Office and state, district, or field offices, as appropriate. See Sec. 3102. The Energy Act further directs the Secretary to enter into a memorandum of understanding with the Secretary of Agriculture, the Administrator of the Environmental Protection Agency, and the Secretary of Defense, as well as state governors and tribal leaders, if appropriate, to improve permit coordination. Id.

In addition to encouraging renewable energy projects on public lands through targets and new incentives, the Energy Act generally expands and incentivizes carbon capture and storage and carbon removal technologies, energy storage, and grid modernization, supports nuclear energy research, and establishes new energy efficiency programs for schools and federal buildings. Title III, Subtitle A reauthorizes the Department of Energy’s research, development, demonstration, and commercial application (RDD&CA) programs for hydropower research and development, geothermal energy, wind energy, solar energy, and extends production incentives for hydroelectric production. The RDD&CA programs for wind and solar include a focus on extending the life of facilities, decommissioning, and recycling and reusing facility materials. Additionally, by September 1, 2022, the Secretary of Energy must submit a report to Congress on the national strategic vision, progress, and goals of the wind energy and solar energy programs, including market and manufacturing assessments. See Secs. 3003(b)(6) (wind), 3004(b)(6) (solar).

If you have further questions, please contact Courtney Shephard, Michael Snider, or Katie Schroder.

On December 17, 2020, the U.S. Environmental Protection Agency (EPA) announced that it had entered into a Consent Decree with Home Depot U.S.A., Inc., to resolve alleged violations of the EPA’s Lead Renovation, Repair and Painting (RRP) Rule, 40 C.F.R. Part 745, at home renovation projects that Home Depot’s installation contractors performed across the country. Under the Consent Decree, which was lodged with the U.S. District Court for the Northern District of Georgia, Home Depot will pay a $20.75 million penalty, the largest civil penalty ever assessed for a settlement under the Toxic Substances Control Act; $750,000 of the penalty will be paid to Utah, $732,000 to Massachusetts, and $50,000 to Rhode Island.

The Consent Decree requires Home Depot to implement a comprehensive, corporate-wide program to ensure that its contractors performing renovation work are certified and trained to use lead-safe work practices (LSWP) to avoid spreading lead dust and paint chips at home renovation sites. Under the settlement, Home Depot will implement an electronic compliance system to verify that its contractors are properly certified, and it will require its contractors to use a detailed checklist to document LSWP compliance that will be provided to the customer. Home Depot will also conduct thousands of on-site inspections of prior renovation work sites to ensure compliance with LSWP. Where contractors did not comply with LSWP, Home Depot will perform lead dust hazard inspections and provide specialized cleaning where warranted.

Although EPA adopted the RRP Rule in 2008 and it became fully effective in 2010, it was not until the last several years that EPA has made a particularly strong push to enforce it. With a 2016 Sears Home Improvement Products consent decree and multiple enforcement actions against both large and small renovation contractors, EPA is sending a strong message that compliance with the RRP Rule is not optional, and enforcement is a very high priority.

Though the Toxic Substances Control Act (TSCA), 15 U.S.C. §§ 2601-2629, has been around since 1976 and the Consumer Product Safety Commission banned lead-based paints from residential use in 1978, it was not until 2008 that EPA issued the RRP Rule specifically to address lead-based paint (LBP) hazards through required work practices for renovation activities in “target housing” (residential structures built before 1978) and “child-occupied facilities.”

EPA promulgated the RRP Rule to ensure that individuals conducting renovation, as opposed to abatement, activities in target housing and child-occupied facilities are properly trained and certified, that RRP training programs are accredited, and that renovation activities that disturb LBP are conducted according to effective and safe work practice standards. Required LSWP include occupant protection through containment of work areas, plastic sheeting over doors, windows, floors, and the ground surface for exterior renovations, and dust-control measures, among other things. Additionally, renovators must post warning signs and follow specific cleanup requirements upon the completion of the work. The RRP Rule also prohibits certain work practices that present a heightened risk of exposure, such as open-flame burning or torching of LBP, and the removal of LBP through high-speed abrasion, such as power sanding and grinding without the use of high-efficiency particulate air (HEPA) vacuums to collect lead dust.

Another important aspect of the RRP Rule that has been a focus of both EPA and state enforcement is the rule’s documentation requirements. The rule requires reports certifying a determination that LBP was not present, and if it was present, records of an inspector or risk assessor showing that testing was done with an EPA-recognized test kit or laboratory paint-chip testing. Also required is proof of delivery to, or acknowledgement of receipt by, building owners or occupants of EPA’s “Renovate Right” pamphlet. The acknowledgement of receipt must be signed by the homeowner prior to, but no more than 60 days before, commencement of work. For multi-family housing, the RRP Rule requires signed, dated statements regarding notifications to occupants of work in common areas. Renovators also must document compliance with the required work practice standards. These records must be kept for a minimum of three years after the renovation is completed.

It is important to remember that many states and tribes may have their own, more-stringent RRP programs. The National Center for Healthy Housing maintains a listing of states with authorized RRP programs to more readily identify and comply with their different and possibly more stringent requirements.

Civil penalties for RRP Rule violations under TSCA can be significant. Even for simply failing to maintain required documents, penalties can be up to $40,576 per violation, per day. 15 U.S.C. § 2615(a)(1); 85 Fed. Reg. 1751 (Jan. 13, 2020). There also are potential criminal penalties under TSCA for “knowing violations,” with penalties of up to $50,000 per violation per day, or imprisonment for not more than one year, or both, in addition to or in lieu of civil penalties. Id. § 2615(b)(1). “Knowing endangerment” under TSCA carries penalties of up to 15 years imprisonment or a fine of not more than $250,000, or both, and an organization convicted of knowing endangerment may be subject to a fine of not more than $1,000,000. Id.
§ 2615(b)(2)(a).

Lead exposure has long been known to be linked to a host of adverse health effects, and children are most at risk of permanent harm from lead exposure. The adverse effects of lead toxicity during childhood include a variety of sensory, motor, cognitive and behavioral impacts. Children six years old and under are most at risk from exposure to LBP and, because their bodies are still growing, they tend to absorb more lead than adults.

Perhaps the most important thing a company can do to ensure compliance with the RRP Rule, and any other environmental programs, is to establish and maintain a culture of compliance. Of course, establishing such a culture requires strong support from top management. As was the case for so many years with the quality management function, environmental performance and compliance can’t take a back seat to production and sales. Not only are the potential monetary and criminal penalties of non-compliance a deterrent, but protecting workers and the public from the hazards of LBP is an essential part of engaging in the renovation business.

Davis Graham & Stubbs attorneys have substantial experience dealing with EPA and state investigations of LBP-related TSCA and state law compliance. Please contact John Jacus or Dean Miller if you have questions about LBP-related environmental compliance requirements for renovations and remodeling.

On Monday, October 26, 2020, the Small Business Administration requested the Office of Management and Budget to approve information collection that would require each for-profit borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater, to complete and submit Form 3509, along with supporting documents required in the form, to the lender servicing borrower’s PPP loan. It is expected that Borrowers would receive this request from their lender in connection with the loan forgiveness process. A borrower would be required to complete and submit the Form 3509 to their PPP loan lender within ten (10) business days of receipt of the form from their lender. The SBA would also be able to request additional information after the submission of the form.

The information would be used to evaluate a borrower’s good-faith certification that economic uncertainty made the loan request necessary to support such borrower’s ongoing operations, but the form states that receipt of Form 3509 by a borrower in and of itself does not mean that the SBA is challenging that certification. Form 3509 states that the “SBA’s determination will be based on the totality of your circumstances.”

Failure to complete the form and provide the required supporting documents may result in the SBA determining that the borrower was ineligible for the PPP loan, the amounts of such PPP loan, and/or any forgiveness of such loan, and the SBA may seek repayment of the loan or pursue other remedies.

Form 3509 asks for information about business activities of the borrower, including the borrower’s gross revenues for the second quarter of each of 2020 and 2019, whether the borrower was required by a state or local authority to shutdown due to COVID-19, and whether borrower was ordered to significantly alter its operations by a state or local authority due to COVID-19. Form 3509 also asks for information about the borrower’s liquidity, prepayment of debt, and payments to employees and owners.

A similar form for non-profit borrowers (Form 3510) can be found here.

If you have further questions, please contact Jeff Brandel.

On October 5, 2020, the North Dakota Department of Environmental Quality (“NDDEQ”) issued a Compliance Alert intended to explain ongoing compliance expectations within the state for the oil and gas production sector. The Compliance Alert initially notes that the “overall compliance rate” at North Dakota oil and gas production facilities has improved significantly following the issuance of the Environmental Protection Agency’s (“EPA”) September 2015 Compliance Alert. Broadly speaking, EPA’s 2015 Compliance Alert noted the potential compliance concerns associated with the design, maintenance, and operation of storage vessels at oil and gas production facilities. EPA has used its 2015 Compliance Alert as the basis for several high-profile enforcement actions within the last several years.

NDDEQ’s Compliance Alert notes several additional potential compliance concerns observed by NDDEQ inspectors in 2019 and 2020. Among other items, NDDEQ notes that inspectors observed:

• Inoperable air pollution control equipment;
• Open or leaking thief hatches on tanks; and
• Smoking flares.

In addition to the observations of inspectors, NDDEQ notes that EPA’s National Enforcement Investigations Center Division conducted a Geospatial Measurement of Air Pollution (GMAP) survey of North Dakota’s oil and gas fields in August of 2020. According to NDDEQ, the initial findings are “consistent” with NDDEQ’s inspector observations. The Compliance Advisory notes that these are “preliminary findings.” NDDEQ’s interpretation of this study, while vague, seems to indicate that NDDEQ believes that oil and gas facilities are potentially out of compliance, specifically when flares are not in operation or facilities have “excessive” leakage.

The Compliance Alert encourages operators to “revisit” the EPA’s 2015 Compliance Alert and “identify and correct deficiencies at production facilities.” NDDEQ further encourages operators to ensure proper design of air pollution control equipment and proper maintenance at such facilities. Finally, NDDEQ also notes that it is open to continued dialogue with operators to discuss the Compliance Alert and associated issues.

Moving forward, the Compliance Alert puts operators on notice that there may be additional compliance issues within the categories identified by inspectors. This potentially creates compliance and enforcement liability from NDDEQ and EPA. Of particular note, a change in a presidential administration may allow EPA to use NDDEQ’s Compliance Alert in a manner similar to how it used EPA’s 2015 Compliance Alert for future enforcement. Operators may wish to consider beginning a self-audit of their current their compliance with EPA and NDDEQ requirements and regulations. Such an effort, followed by self-disclosure of potential violations, would likely be received by NDDEQ in the spirit of the agency’s offer of continued discussion on the issues highlighted in the Compliance Alert.

Davis Graham attorneys have substantial self-audit and disclosure experience and would be happy to provide additional guidance or further discuss these issues. If you have further questions, please contact Randy Dann, John Jacus, or Will Marshall.

The Committee on Foreign Investment in the United States (CFIUS) is an interagency body tasked with reviewing foreign investments into the U.S., which could threaten the country’s national security interests. Established under Section 721 of the Defense Production Act and its implementing regulations, CFIUS’s role is to review proposed transactions and, when warranted, make recommendations to the president to block or unwind transactions that are deemed to present irresolvable national security concerns.

Historically, CFIUS’s scrutiny focused on military contractors, producers of defense articles, aerospace manufacturers, and similar types of companies engaged in the industries most commonly associated with “national security.” In more recent years, as technology has evolved, CFIUS expanded its interests to encompass the information technology space, with specific attention being paid to manufacturers and providers of semi-conductors and other electronics components that could be used by agents of an unfriendly state to surveil U.S. citizens or sabotage government activities.

Regardless of the industry, until 2018, CFIUS jurisdiction was limited to corporate-level transactions involving the acquisition of existing U.S. businesses by foreign parties. But under the 2018 amendments to the Defense Production Act, as implemented by regulations that took effect in February 2020, CFIUS now has the authority to review transactions involving the purchase of U.S. real estate by foreign parties. The 2018 amendments broadly expanded CFIUS’s jurisdiction in a number of other areas as well, including “critical technology” and “critical infrastructure.” This article is intended to give readers a high-level understanding of how the real estate provisions of the amendments can affect renewable energy siting.

CFIUS’s historic concerns with location

Although the question of geography was never explicitly addressed in the CFIUS regulations prior to 2018, it was well known that CFIUS had siting concerns when foreign parties acquired U.S. businesses that were located within some unspecified proximity to sensitive government facilities. In fact, the only published case concerning CFIUS’s jurisdiction involved the location of a wind farm that had been purchased by investors who had ties to the Chinese government. The decision in that case, Ralls Corp. v. CFIUS, held that the investors’ acquisition of a U.S. renewable energy company whose assets included a project site within restricted naval air space presented insurmountable security issues, and the court upheld the president’s plenary authority to force a divestment and order the removal of construction. The upshot is that CFIUS’s authority to investigate a transaction – and the president’s authority to block or unwind a transaction – are essentially non-reviewable, and parties to real estate transactions with foreign investors should make use of the information the government has made available to determine if their transaction might present concerns.

Defining “covered real estate transactions”

The CFIUS regulations governing the foreign acquisition of real estate (the “Real Estate Regulations” at 31 C.F.R. Part 802) contain detailed definitions and procedures, which will not be addressed here. Instead, this section offers an overview of the key terms and considerations parties should think about before entering into real estate transactions in certain areas of the U.S.

A “covered real estate transaction” is a transaction involving the purchase or lease by, or concession to, a “foreign person” of “covered real estate,” in which the “foreign person” obtains at least three of four listed property rights, and which is not otherwise an “excepted real estate transaction” as defined in the Real Estate Regulations. The listed property rights are (i) physical access, (ii) the right to exclude, (iii) the right to improve or develop the real estate, or (iv) the right to attach fixed or immovable structures or objects to the real estate. Most real estate transactions involving renewable energy project sites would likely include at least three, if not all four, of the listed property rights.

The term “foreign person” is broadly defined to include any foreign national, foreign government, foreign entity, or any entity over which control can be exerted by a foreign national, foreign government, or foreign entity. In other words, a U.S. company that is subject to control by a foreign party is considered a “foreign person” for CFIUS’s purposes. This was the problem for the investors in Ralls, which was a U.S. corporation that was ultimately subject to control by Chinese citizens.

The term “covered real estate” is geographically defined as any property that (i) is, is within, or is part of, a “covered port”, or (ii) is located: (a) within “close proximity” (1 mile) of certain listed military installations, (b) within the “extended range” (100 miles) of certain other listed military installations, (c) within certain counties or portions of counties where the U.S. houses ballistic missile facilities, or (d) within the territorial sea around certain listed military installations. To allow parties to identify the military installations in a given area, CFIUS has developed a user-friendly mapping tool, which enables parties to input street addresses, intersections, or geographic coordinates to get a rough estimate of the military installations in the vicinity.

Once parties have determined that the object of their transaction is “covered real estate,” they should think hard about whether they qualify for one of the exceptions under the Real Estate Regulations. A number of exceptions are listed in the Real Estate Regulations, but, in most cases, for a large-scale renewable energy project to qualify as an “excepted real estate transaction,” either the real estate must be located in Indian country or Alaska native lands, or the acquirer must be an “excepted real estate investor” – a status that can be difficult to establish.

In principle, an “excepted real estate investor” is any party of Australian, Canadian, or UK origin (the “excepted real estate foreign states”), who does not also have citizenship in any other countries, but in practice, establishing “excepted real estate investor” status for entities can be a lengthy and convoluted process. As mentioned in the case of Ralls, a U.S. entity that has foreign ownership is considered a “foreign person” under CFIUS, so to establish “excepted real estate investor” status, both the acquiring entity and all of its “parent” owners must satisfy a number of criteria, with the end result being that the acquiring entity is ultimately owned and controlled by citizens of the U.S. or any of the three “excepted real estate foreign states.” In the case of publicly held companies, the analysis can be particularly challenging. Even if the citizenship test is passed, there are a number of caveats and disqualifying factors that impact whether an investor is an “excepted real estate investor,” so out of an abundance of caution, many investors in real estate transactions that involve “covered real estate” are opting to file with CFIUS, even when they think they might qualify as “excepted real estate investors.”

Options for parties to “covered real estate transactions”

As is the case with the longstanding rules on CFIUS “covered transactions,” in which a foreign person acquires corporate-level control over a U.S. business, parties to “covered real estate transactions” may elect to file a full notice with CFIUS, an abbreviated short-form declaration, or no filing at all, depending on the risk tolerance of the parties. There are no mandatory filings for “covered real estate transactions.” However, as the investors in Ralls found out, the consequences of not filing can be severe.

If you have further questions, please contact Almira Moronne or Joel Benson.

If an employee or customer contracts COVID-19 at a place of business, should that business be held liable? Even though the business followed every bit of health and safety guidance from relevant authorities? These questions are likely top of mind for most business operators, especially as communities reopen and employees return to work. The answers may depend on whether the U.S. Congress passes legislation to limit businesses’ liability related to COVID-19.

While legislation is always an uncertain proposition, there is at least some possibility that Congress will pass a liability protection bill in the coming weeks, as Senate Republicans have said that such legislation must be included in an expected new round of COVID-19 relief measures. On September 8, Senate Republicans introduced a proposed relief package, which includes a robust liability-limiting bill styled as the SAFE TO WORK Act (“STWA”).[1] The Senate’s first vote on the package garnered a majority (52 votes) but failed to meet the 60-vote threshold to overcome a filibuster; even so, negotiations over a COVID-19 relief bill are expected to continue, including discussion of liability protection.

Initially proposed by Senator Cornyn in July, the STWA is seen by many as the liability-related legislation most likely (even if still far from certain) to pass in Congress at some point this year—or at least to serve as the starting point for a negotiated piece of legislation as part of a compromise package. By its proposed terms, the STWA’s liability-limiting provisions, if enacted, will be retroactive in nature. This means that businesses can act now to take appropriate measures that may maximize the benefit of this potential legislation.

This article will (1) summarize the key features of the STWA, and (2) suggest what businesses should do now about potential liabilities relating to COVID-19 given the possibility of the STWA’s enactment.

I. Key Features of the Proposed “Safe to Work Act”

At a high level, the STWA creates an exclusive federal cause of action for claims that a person suffered injury by being exposed to COVID-19 in a workplace or other business setting. This federal cause of action would preempt and supersede state law tort claims and provide various forms of protection against liability for businesses that make reasonable efforts to comply with applicable government standards and guidance.

Scope: The STWA liability provisions would apply to all “coronavirus exposure actions,” which include any civil action (i) brought by a person who suffered personal injury or is at risk of suffering personal injury, (ii) against an individual or entity engaged in businesses, services, activities, or accommodations, (iii) alleging that an actual, alleged, feared, or potential for exposure to coronavirus caused the personal injury or risk of personal injury that occurred in the course of the businesses, services, activities, or accommodations of the defendant individual or entity.[2]
The STWA excludes from its scope claims brought by the federal government or by any state, local, or tribal government as well as any claims alleging intentional discrimination on the basis of various enumerated protected classes, including sex (which specifically includes pregnancy).[3]

Federal Cause of Action and Preemption: The STWA would create a federal cause of action as an exclusive remedy for coronavirus exposure claims, which would preempt and supersede other federal, state, or tribal laws that otherwise govern claims for personal injuries related to coronavirus exposure.[4] The STWA would not, however, preempt state and local laws that “impose[] stricter limits on damages or liabilities” or provide “greater protection to defendants” for coronavirus exposure claims. [5]
The STWA also would not preempt or affect (i) a claim for benefits under workers’ compensation programs; (ii) governmental actions under criminal, civil, or administrative enforcement laws; (iii) certain intentional discrimination claims under federal, state, or tribal law; and (iv) a seaman’s right to claim maintenance and cure benefits.[6]

Federal Court Jurisdiction and Removal: The STWA would grant the federal courts concurrent jurisdiction over coronavirus exposure actions and would permit removal to federal court of any such claims initially filed in state court, even if the claim had been filed prior to STWA’s enactment.[7]

Statute of Limitations: The STWA would require that a coronavirus exposure action be filed within one year of the date of actual, alleged, feared, or potential for exposure to coronavirus.[8]

Heightened Pleading Standards and Other Complaint Requirements: For any coronavirus exposure action filed in or removed to federal court, the STWA would require any complaint to plead “with particularity:”

• each element of the plaintiff’s claim;
• “all places and persons visited by the [plaintiff] and all persons who visited the residence of the [plaintiff] during the 14-day-period before the onset of the first symptoms allegedly caused by coronavirus,” and the factual basis for the belief that the defendant’s place of business, rather than all other potential sources of exposure, was the actual source of the plaintiff’s exposure to coronavirus; and
• “each alleged act or omission constituting gross negligence or willful misconduct” that caused the plaintiff’s injury.[9]

The STWA would also require a plaintiff to file certain other documents with the complaint, including specific information describing “the nature and amount of each element of damages and the factual basis for the damages calculation;” a statement of facts demonstrating the defendant acted with the required state of mind; an affidavit of a medical expert who did not treat the plaintiff explaining the basis for the expert’s belief that the plaintiff suffered the alleged injury; and certified medical records documenting the alleged injury.[10]

Heightened Standards of Proof, Including Requirement to Prove Business Failed to Comply with Government Standards: To prove liability for exposure to coronavirus, the STWA would require a plaintiff to prove by clear and convincing evidence that:

• the business operator “was not making reasonable efforts in light of all the circumstances to comply with the applicable government standards and guidance in effect at the time of [the alleged exposure-related injury]”;
• the business operator “engaged in gross negligence or willful misconduct that caused an actual exposure to coronavirus”; and
• “the actual exposure to coronavirus caused the personal injury of the plaintiff.”[11]

If the business operator is subject to conflicting, non-mandatory government standards and guidance, the plaintiff would have to show by clear and convincing evidence that the business operator failed to make reasonable efforts to comply with “any of the conflicting … standards and guidance.”[12]

Benefits of a Written Policy: The STWA would provide heightened protections for business operators that establish a written policy to prevent coronavirus exposure. If the business operator “maintained a written or published policy on the mitigation of transmission of coronavirus” at the time of the alleged exposure that complied with, or was more protective than, applicable government standards and guidance, the business operator would be presumed to have taken reasonable measures to comply with applicable government standards and guidance, unless the plaintiff proves the business operator was not complying with its written or published policy.[13]

Damages Limitations: The STWA would limit recoverable money damages in most cases to actual economic losses incurred, with damages for noneconomic losses possible only if the business operator’s conduct was willful rather than just negligent.[14] Punitive damages would also be limited to instances of willful misconduct and could not exceed the amount of compensatory damages awarded.[15]
Further, the amount of monetary damages would be reduced by any amount received by the plaintiff from a collateral source, such as his or her health insurance provider—i.e., the collateral source rule would not apply.[16]

Limitation on Joint and Several Liability: The STWA would, with limited exceptions, provide for proportional—rather than joint and several—liability allocation. As such, a defendant would be liable “solely for the portion of the judgment that corresponds to the relative and proportionate responsibility of that individual or entity,” with the trier of fact considering the nature of each responsible party’s conduct and the nature and extent of the causal relationship between each individual’s conduct and the damages to plaintiff.[17]

Discovery Limitations: In federal court actions, the STWA would not permit discovery prior to the deadline for the defendant to file an answer or motion to dismiss and would stay discovery until the court ruled on any motion to dismiss.[18] It would also allow an immediate interlocutory appeal of any denial of a motion to dismiss and stay discovery pending resolution of the appeal.[19] Once discovery proceeds, it would be limited to matters “directly related to material issues contested” in the action.[20]

Class Action and Multidistrict Litigation Limitations: The STWA would require individual plaintiffs to affirmatively “opt in” to a class action, and would require greater transparency of class counsel’s fee and financing arrangements.[21]
For any multidistrict litigation, the STWA would prohibit transferee judges from trying cases assigned to them absent consent of all parties, and would permit immediate interlocutory appeals of any orders the resolution of which could materially advance the ultimate termination of one or more cases in the multidistrict proceeding.[22]

Protection Against Meritless Demands: The STWA would seek to deter meritless demands by creating a federal cause of action allowing defendants to recover compensatory damages and attorneys’ fees incurred in responding to a meritless demand, and would also authorize punitive damages in limited circumstances.[23]
The STWA would also permit the U.S. Attorney General to seek civil penalties against anyone engaged in a pattern or practice of making meritless demands for payment for coronavirus exposure.[24]

Retroactive Application: The STWA’s liability protections would be retroactive to any actions alleging coronavirus exposure after December 1, 2019 and would apply going forward for alleged exposures occurring until at least October 1, 2024 and possibly later.[25]

Protection from Federal Employment Claims and Enforcement Proceedings and Public Accommodation Liability: The STWA would protect an “employer” (defined to include essentially all private and public employers)[26]
from being “subject to any enforcement proceeding or liability under any provision of a covered Federal employment law” in connection with coronavirus if the employer:

• “was relying on and generally following applicable government standards and guidance”;
• “knew of the obligation under the relevant provision”; and
• “attempted to satisfy any such obligation by … (i) exploring options to comply with such obligation[] and with the applicable government standards and guidance (such as through the use of virtual training or remote communication strategies); (ii) implementing interim alternative protections or procedures; or (iii) following guidance issued by the relevant agency with jurisdiction with respect to any exemptions from such obligation.”[27]

“Covered Federal employment laws” include many of the key federal employment statutes, such as Title VII of the Civil Rights Act of 1964, Title I of the ADA, the ADEA, the OSHA Act, and others (but notably not the Family and Medical Leave Act).[28] The STWA would also limit businesses’ liability and the actions they are required to take to modify their policies, practices, or procedures under federal public accommodation laws (Title III of the ADA and Title II of the Civil Rights Act of 1964)[29]
during a “public health emergency period.”[30] Notably, however, it appears the STWA’s protections against federal employment and public accommodation claims would not extend to similar state laws, which exist in most states to varying degrees. This could make the STWA’s protections in this regard somewhat hollow for many businesses.

The STWA would also circumscribe liability (whether arising under state or federal law) related to workplace coronavirus testing and would prohibit plaintiffs from using as evidence of an employment or joint employment relationship various coronavirus related measures, including testing, training, or temporary assistance, taken with respect to a business’s independent contractors or workers employed by another employer.[31]

II. What Can Businesses Do Now to Take Advantage of the STWA if It Is Enacted?

Because the STWA, if enacted, would apply retroactively, there are several steps businesses can take now that will ensure they can maximize the liability-limiting benefits of the STWA. Importantly, some of these recommended steps will help businesses limit their potential liability for coronavirus exposure even if STWA never becomes law.

1. Identify and Seek to Comply with Applicable Government Standards and Guidance

Perhaps the most impactful feature of the STWA is the requirement that a plaintiff prove a business failed to make reasonable efforts to comply with applicable government standards and guidance to mitigate coronavirus exposure. Under the STWA, a business will have a good chance of prevailing if the evidence shows it made good faith, reasonable efforts to adhere to relevant governmental health and safety guidance.

To do so, a business will first need to identify the relevant government standards and guidance, which will depend on the jurisdictions in which the business operates, the type of industry it is in, and other factors, including type of worksite and employee count. Relevant government standards may come from a combination of statutes, regulations, and guidance documents from various federal agencies as well as state and local authorities. The relevant standards for any given business will likely change from time to time as agencies update their guidance based on still-developing scientific information and as communities pass through various phases of economic closure and reopening. Moreover, the relevant standards might intersect or conflict with other bodies of law, including employment and public accommodation laws. Given the wide range of potential sources of applicable guidance and potential conflicts between such guidance and other law, businesses should consult legal counsel to help identify the standards that apply to them.

After identifying relevant standards and guidance, businesses should be sure not only to comply, but to document their compliance efforts in a way that will produce admissible evidence that can be used to defend against any potential claims. Again, businesses should consult legal counsel to determine appropriate ways to implement health and safety standards and to create and maintain admissible records of such activities.

2. Create and Implement a Written Policy to Mitigate Coronavirus Transmission

As noted above, the STWA provides its maximum liability-limiting benefits to businesses that create and adhere to a written policy to mitigate the transmission of coronavirus. Such a policy must be consistent with, or more protective than, applicable government standards and guidance, and the business must comply with its written policy. Legal counsel can assist businesses in developing a written policy that incorporates the appropriate standards and guidance and in documenting their compliance with such a policy.

3. Consider Strategies in Pending Litigation

Due to the STWA’s retroactive application, businesses that are currently facing demands or claims for coronavirus exposure should consider how the prospect of the STWA’s enactment might affect its litigation or settlement strategy. For example, if a business is optimistic that the STWA will be enacted, it might consider postponing discussions to settle current claims until after enactment. For claims that are already in active litigation, businesses should consider opportunities to extend the litigation timeline to allow for the possibility that the STWA will pass and apply retroactively. Current litigants should also consider appropriate opportunities to preserve arguments and defenses that would be available under the STWA, while being careful not to rely on a prospective law to the detriment of any protections available under existing law.

4. Utilize Existing Protections Under Federal and State Law

Businesses should also be sure to take advantage of existing liability protection measures under federal and state law. At the federal level, for example, the Public Readiness and Emergency Preparedness (PREP) Act limits legal liability for those who administer certain specified “countermeasures” during a declared public health emergency.[32] Under current declarations and guidance by the U.S. Department of Health and Human Services, the PREP Act’s protections generally apply to businesses that manufacture, distribute, or administer specific pandemic countermeasures—such as medicines, vaccines, testing equipment, and personal protective equipment (“PPE”)—that have been approved or otherwise authorized by the Food and Drug Administration. Separately, the CARES Act—enacted earlier this year—grants liability protections to volunteer health care providers engaged in certain health care services in response to COVID-19.[33] Neither the PREP Act nor the CARES Act, however, provide the kind of broad protection from exposure claims that is contemplated in the STWA.

Many states have also implemented liability-limiting protections relating to COVID-19. Some of these laws, like the PREP Act and CARES Act, focus on health care services and businesses providing PPE, medicines, and other materials that directly support the health care response to the pandemic. But some states—including, for example, Utah, Wyoming, Oklahoma, North Carolina, and Louisiana—have also enacted broad protections against coronavirus exposure liability for businesses, employing some of the same tools that are proposed in the STWA. The core concept of many of these laws—as with the STWA—is that a business operator’s liability to coronavirus exposure claims should be limited where the evidence shows that the business reasonably complied with applicable health and safety standards and guidance. As such, even in the absence of broader federal liability protection in the form of the STWA or similar legislation, businesses should consult legal counsel to ensure they can receive the full benefit of any other liability-limiting provision under federal or state law.

5. Understand that the STWA May Not Be Enacted or May Be Modified

Finally, businesses should never put all their eggs in a basket that depends on the U.S. Congress to do something. Although it is prudent to take certain measures now to maximize the STWA’s benefits if it is eventually enacted, businesses should also prepare for the possibilities that the STWA is never enacted or that it passes with significant modifications from the current version. In that respect, businesses should prioritize risk reduction strategies that are based on the current state of the law and avoid any conduct inconsistent with those strategies that is premised only on a hope that current laws will be changed. Legal counsel can help businesses develop such strategies and ensure that they can be adapted in the event Congress enacts STWA or some other form of liability protection relating to coronavirus exposure.

If you have any questions, please contact Mark Champoux, Sterling LeBoeuf, or Daniel Richards.

[1] S. Amdt. 2652 to S. 178, available at https://www.congress.gov/amendment/116th-congress/senate-amendment/2652/text.

[2]
Sec. 2003(4)(A). The STWA separately provides certain liability protections for coronavirus-related medical liability claims against health care providers. This article, however, focuses on the STWA’s proposed protections for exposure claims against businesses and employers.

[3]
Sec. 2003(4)(B).

[4]
Sec. 2121(a)-(b).

[5]
Sec. 2121(b)(2).

[6] Sec. 2121(b)(3)-(6).

[7]
Sec. 2161(a), (b)(1).

[8]
Sec. 2121(c).

[9]
Sec. 2163(a).

[10]
Sec. 2163(b)-(c).

[11]
Sec. 2122(a).

[12]
Sec. 2122(b)(1)(A).

[13]
Sec. 2122(b)(2).

[14]
Sec. 2162(b)(1).

[15]
Sec. 2162(b)(2).

[16]
Sec. 2162(b)(3).

[17]
Sec. 2162(a).

[18]
Sec. 2163(e)(1).

[19]
Sec. 2163(f).

[20]
Sec. 2163(e)(2)(A).

[21]
Sec. 2163(g)(1).

[22]
Sec. 2163(g)(2).

[23]
Sec. 2164.

[24]
Sec. 2164(e).

[25]
Sec. 2003(4)(A)(iii)(II).

[26]
Sec. 2003(8).

[27]
Sec. 2181(a)(2).

[28]
Sec. 2181(a)(1).

[29]
Sec. 2181(b)(1)(B).

[30]
Sec. 2181(b)(2).

[31]
Sec. 2183.

[32] See 42 U.S.C. § 247d-6d.

[33] See Coronavirus Aid, Relief, and Economic Security Act (Pub. L. 116-136), Sec. 3215.

On July 16, 2020, the Court of Justice of the European Union (CJEU) invalidated the European Commission’s decision establishing the Privacy Shield framework for international personal data transfers from the European Union to the United States. Other data transfer mechanisms, in particular the Standard Contractual Clauses adopted by the European Commission (SCCs), remain valid. But the SCCs are on shaky ground. That’s because the reasons invoked by the CJEU to invalidate the Privacy Shield – relating to U.S. government surveillance practices – apply to any data transfer mechanism. Below is an analysis of the specific implications of the CJEU ruling on Privacy Shield and an assessment of what happens next with SCCs.

How did we get here?

Max Schrems, an outspoken privacy activist in the EU, lodged a complaint with the Irish Data Protection Commissioner (DPC) in 2013 alleging that Facebook Ireland was unlawfully transferring his personal data to Facebook Inc. in the U.S. because the U.S. did not ensure adequate protection of personal data against government surveillance activities. The matter was referred through the Irish courts to the CJEU, which ruled, in October 2015, that the Safe Harbor framework (Privacy Shield’s predecessor) was invalid. When the matter went back to the DPC, the plaintiff reformulated his complaint to question transfers based on SCCs. Again, the matter was referred to the CJEU by way of the Irish High Court with questions covering both Privacy Shield and SCCs.

Before addressing the specific impacts on Privacy Shield and SCCs, it is important to highlight several significant clarifications provided by the CJEU in its ruling:

• First, absent an adequacy determination (that is, a conclusion by the European Commission that a third country’s laws ensure “an adequate level of protection” for personal data), the standard to be applied is whether the level of protection adopted (by law or by contract) is “essentially equivalent” to that which is provided under the EU’s General Data Protection Regulation (GDPR). And this level of protection must be guaranteed despite the legal mechanism relied upon.
• Next, EU supervisory authorities cannot invalidate the standard contractual clauses adopted by the European Commission (only the CJEU can do that and the court found no grounds for doing so here); but the supervisory authorities can suspend or prohibit transfers based on SCCs if they conclude that the clauses cannot be complied with.
• Lastly, the European Commission’s determination that the U.S. provided an adequate level of protection was flawed because U.S. law “does not provide for the necessary limitations and safeguards with regard to the interferences [authorized] by its national legislation and does not ensure effective judicial protection against such interferences.” The CJEU found that EU residents would not have effective redress in the U.S. against the government’s lawful surveillance activities.

Based on this third conclusion, the court invalidated the Privacy Shield, but left open the question whether data transfers to the U.S. pursuant to SCCs could meet the “essentially equivalent” standard.

What happens to Privacy Shield?

The Privacy Shield framework has now been invalidated, effective the date of the decision. And the CJEU concludes this will not create a legal vacuum because the GDPR provides alternatives to the Privacy Shield data transfer mechanism. So, companies relying on Privacy Shield can no longer do so and must adopt an alternative (like SCCs, discussed below). But their Privacy Shield commitments remain binding and are enforceable by the Federal Trade Commission. Companies self-certifying to the framework must therefore continue to satisfy their respective obligations including the requirements for transparency and dispute resolution.

It’s possible that the European Commission and the Department of Commerce will go back to the drawing board for an updated framework. But they cannot accomplish this task alone, as the CJEU’s decision suggests this will require U.S. legislative action, either to revise surveillance norms or provide for effective redress mechanisms.

What happens to SCCs?

SCCs will undoubtedly become the default data transfer mechanism. But now they will require more than the administrative effort of filling in the blanks and executing. Instead, as the CJEU’s decision indicates, the contracting parties will now have to analyze each data transfer to determine whether essentially equivalent protections are provided for. And this analysis must be documented consistent with the GDPR’s accountability principle.

Adopting SCCs will require the data exporter to determine whether the data importer has been or is likely to be the subject of a foreign surveillance data request and whether the data involved in the transfer is of the type typically subject to such a request. In practical terms, though, it will fall upon the data importer to provide sufficient guarantees that it (or the data) is unlikely to be the target of a government data request. Certain data sets may more easily allow for such guarantees, but others – and especially if used in certain sectors – may not.

Last, the CJEU decision will prompt the European Commission to update the SCCs, which predate the GDPR. This may be a welcome development.

Conclusion

In ruling that the Privacy Shield is invalid, the CJEU called into question U.S. law surrounding government surveillance activities. And those questions exist despite whether a data transfer is conducted under Privacy Shield or any of the other data transfer mechanisms provided for in the GDPR. Companies will have to be thoughtful in their approach to data transfers and assess those transfers to ensure an “essentially equivalent” level of protection as provided under the GDPR.

If you have any questions, please contact Camila Tobón.