Court Vacates IRS Notice 2025-42: "5% Safe Harbor" for Wind and Solar Facilities Reinstated
Highlights
- A federal court vacated IRS Notice 2025-42, finding the agency failed to adequately justify eliminating the "5% Safe Harbor" for most wind and solar facilities.
- The decision restores availability of the 5% Safe Harbor for wind and solar projects unless and until the IRS issues revised guidance or a court overturns the ruling on appeal.
- The court emphasized that the IRS did not adequately address industry reliance on the long-standing safe harbor or respond to proposed alternatives raised during the rulemaking process.
The U.S. District Court for the District of Columbia issued a memorandum opinion on June 6, 2026, in Oregon Environmental Council v. IRS, No. CV-25-4400 (D.D.C. June 6, 2026), vacating IRS Notice 2025‑42, which had curtailed the ability of taxpayers to rely on the long-standing "5% Safe Harbor" to establish the beginning of construction for wind and solar facilities seeking Internal Revenue Code Sections 45Y and 48E tax credits.
The court held that the IRS acted arbitrarily and capriciously under the Administrative Procedure Act (APA) and set aside Notice 2025-42 in its entirety, remanding the matter to the IRS.
Background
Sections 45Y (Production Tax Credit) and 48E (Investment Tax Credit), enacted under the Inflation Reduction Act, provide incentives for zero-emission electricity generation. Under the One Big Beautiful Bill Act (OBBB), wind and solar facilities must either (1) be placed in service by December 31, 2027, or (2) "begin construction" within one year after enactment of OBBB (i.e., before July 4, 2026).
More than a decade ago, the IRS established two methods under which a taxpayer can demonstrate the facility had "begun construction," both of which were consistently available:
- Physical Work Test (commencement of physical work of a significant nature)
- 5% Safe Harbor (paying or incurring, as applicable, at least 5 percent of total project costs)
IRS Notice 2025‑42 departed from this framework by eliminating the 5% Safe Harbor for wind and solar facilities (except for smaller solar projects (less than 1.5 MWac)). For more information on IRS Notice 2025-42, see Holland & Knight's previous alert, "Beginning of Construction for Solar and Wind Facilities: What's Changed?," September 3, 2025.
The Court's Decision
On June 6, 2026, the district court concluded that the IRS failed to provide a reasoned basis for the policy shift of eliminating the 5% Safe Harbor for only wind and solar facilities as included in IRS Notice 2025-42 and therefore, violated the APA. Key aspects of the decision include:
- vacatur of Notice 2025‑42, with the court finding the notice "arbitrary and capricious"
- remand to the IRS for further consideration
- application of the vacatur to all taxpayers, not just the plaintiffs in the case
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Key Takeaways from the Court's Analysis
The court found that the IRS offered only a cursory justification for eliminating the 5% Safe Harbor and did not meaningfully explain its concerns about circumvention or manipulation of eligibility. The decision emphasizes that industry participants have relied on the 5% Safe Harbor for more than a decade. The IRS failed to account for these "serious reliance interests," which is required when an agency changes long-standing policy.
Although commenters proposed targeted anti-abuse measures (e.g., limits on certain transactions or enhanced reporting) and provided other relevant comments, the IRS did not address these alternatives in its final guidance. For example, the court noted the following comment from Holland & Knight (which was consistent with the court's decision):
The Treasury Department also considered a presentation by the law firm Holland & Knight that addressed the Executive Order and how the IRS might implement it. 15 What Does it Mean to Begin Construction Post-OBBBA and EO, Presentation by Holland & Knight (July 24, 2025), J.A. at 294–316. This presentation opined that if the Treasury Department were to adopt different beginning-of-construction rules for wind and solar projects as compared to other technologies, "that would be in contrast to" the Executive Order's requirement that the new guidance "must be 'in accordance with applicable law'" because the OBBBA applies the same beginning-of-construction language to all technologies.
Id. at 314.
The court highlighted the lack of explanation for applying different rules to wind and large-scale solar projects, notwithstanding the technology-neutral nature of the underlying credits.
The court held that most plaintiffs had standing based on anticipated economic impacts, including higher electricity prices and project disruptions, and rejected the IRS' "argument that the injuries that ratepayers will suffer from higher electricity prices are not fairly traceable to Notice 2025-42."
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