The dispute between solar energy finance companies and the state’s revenue department has reached court.

Georgia-based Monarch Tax Credits filed a lawsuit Thursday, Sept. 26, in Wake County Superior Court against the N.C. Department of Revenue and its secretary, Ronald Penny. The lawsuit claims NCDOR is breaking N.C. law in rejecting state tax credits claimed in recent years by the company’s clients.

The General Assembly’s now-expired 35% state income tax credit played a major role in the growth of solar generating facilities in N.C.

“After the state received the investments inspired by legislation, NCDOR caused the state to renege on the underlying promise of tax credits to investors,” the lawsuit says.

The lawsuit claims Monarch’s partnership structures invested in more than 80 renewable energy projects representing at least $900 million in new investments.

The day after the lawsuit was filed, Gov. Roy Cooper joined other state officials in Raleigh at a meeting of the Climate Change Interagency Council for an update on the N.C. Clean Energy Plan. The plan calls for a significant expansion of solar and other renewable energy sources.

“The department supports tax credits for renewable energy as allowed by law. While we have not seen this filing, we cannot comment on audits or litigation,” NCDOR spokesman Schorr Johnson said in an email.

Monarch says, in January 2018, NCDOR placed nearly all investors in Monarch-sponsored investment partnerships under audit. In September 2018, NCDOR issued a notice disallowing some tax credits claimed by some partnership arrangements used to finance solar projects.

Some lawyers with expertise in tax law reject DOR’s interpretation. A version of the tax credit program had been around for roughly two decades.

In August, Monarch asked NCDOR to formally justify the tax credit rejections. NCDOR turned down Monarch’s request.

Monarch says NCDOR has exceeded its authority. The agency is attempting to make tax law, rather than administer and interpret it. The dispute also involves tax credits for mill restoration and historic redevelopment.

Monarch lawyer Joseph Dowdy told Carolina Journal NCDOR’s position could threaten credits claimed by at least four other financing companies. More than $500 million in tax credits could be at risk.

Monarch says the General Assembly created the tax credit program. Taxpayers could claim credits as members of either partnerships or other pass-through entities. The General Assembly chose not to copy the federal tax law involving federal tax credits. N.C. law alone sets the rules that apply to state tax credits.

Monarch says if NCDOR’s conduct stood, it would rewrite N.C. tax law. Monarch customers have faced burdensome audits, harming the company’s ability to do business in N.C.

Monarch says it wants NCDOR to issue a declaratory ruling stating why it denied the credits and wants the court to review the ruling. It has asked the court to declare NCDOR’s conduct unconstitutional. It wants the court to order NCDOR to pay Monarch damages.

Partnership structure

The lawsuit states Monarch developed business structures letting taxpayers invest in partnerships for developing renewable energy projects, mill restorations, and historic redevelopments. The structures also allowed smaller investments to be pooled.

Monarch began investing in N.C. renewable energy projects in 2012. In 2013, NCDOR rulings indicated investors in Monarch-sponsored partnerships could claim the tax credits. Several taxpayers then invested in the partnerships.

Monarch established the Master Fund, a limited liability company. Its main purpose was investing in N.C. renewable energy projects. The Master Fund typically acquired a 99% interest in another LLC, called the Project LLC.

All Master Fund investments were made before 2017. The renewable energy tax credits were generated and claimed over a five-year period. During each year the Project LLC allocated roughly 99% of its tax credits to the Master Fund. Each year, Monarch established an LLC, the Annual Fund, which invested in the Master Fund. Each Annual Fund admitted third-party investors and the tax credits were transferred to those investors.

Monarch says the Master Fund, the Project LLC, and the Annual Fund were formed as limited liability companies under Georgia law and are valid under U.S. and N.C. law.

NCDOR disagreed. It said partnerships like those Monarch created weren’t consistent with federal law and began rejecting tax credits those partnerships claimed.

Monarch’s position supported

Some attorneys familiar with tax law say NCDOR’s interpretation is wrong.

NCDOR’s ruling on partnerships is “a new and extremely restrictive interpretation that is taking investors, developers, and the market by surprise,” wrote Kay Hobart of Parker Poe in an April article for “Bloomberg Daily Tax Report.” She said hundreds of millions of dollars in anticipated tax credits were at risk. She said the ruling appears to be at odds with the General Assembly’s intent.

Before joining Parker Poe, Hobart was a special deputy attorney general leading a team of lawyers representing NCDOR.

In July, N.C. Chamber General Counsel Ray Starling also criticized NCDOR’s ruling. In a Triangle Business Journal article, Starling said the promise of a 35% tax credit made many of the projects economically feasible.

He said NCDOR’s actions threaten other tax credit programs, including the one for rehabilitating historic structures. By “changing the rules of the game on taxpayers after the game was over, the DOR is threatening North Carolina’s favorable tax climate,” Starling said.