Safe Harbor Win for Solar and Wind Projects: Court Vacates IRS Notice That Had Eliminated Beginning-of-Construction 5% Safe Harbor for Wind and Large Solar Facilities

Client Alert
DC District Court Vacated IRS Notice 2025-42 in Full

In Oregon Environmental Council v. IRS, issued on June 6, 2026,¹ the US District Court for the District of Columbia held that IRS Notice 2025-42 (the “Notice”)—which eliminated the longstanding 5% safe harbor method for establishing “beginning of construction” for wind and large-scale solar facilities—is arbitrary and capricious under the Administrative Procedure Act, and accordingly the Court vacated the Notice in full and remanded the matter to the IRS for further administrative action.

The available methods for wind and solar projects to establish a beginning-of-construction date are particularly important right now, because under the One Big Beautiful Bill Act of 2025² (the “OBBBA”), wind and solar projects must begin construction by July 4, 2026 in order to avoid a new provision that denies a project’s eligibility for the Section 45Y production tax credit or the Section 48E investment tax credit unless the project is placed in service by December 31, 2027.

The Court criticized the IRS for failing to adequately explain (i) how taxpayers could misuse the 5% safe harbor to circumvent statutory deadlines or manipulate eligibility, (ii) why it rejected alternative, narrower anti-circumvention measures suggested by commenters, and (iii) why it limited the 5% safe harbor for wind and large-scale solar projects and not any other green energy technologies.

Because the Notice was vacated “in full,” the Court’s decision has the potential to restore (at least temporarily) the pre-Notice framework for determining the beginning-of-construction date for wind and solar projects—although the IRS may respond with revised guidance on remand and/or appeal the Court’s decision.

Background

The Notice and the OBBBA Timing Rules

Following enactment of the OBBBA, wind and solar projects became subject to new timing deadlines with respect to qualification for the Section 45Y production tax credit and the Section 48E investment tax credit. Under the OBBBA, wind and solar projects that begin construction after July 4, 2026 are subject to a new requirement that the project must be placed in service by December 31, 2027 in order to remain eligible for the tax credits.

Since 2013, taxpayers have been able to establish “beginning of construction” through either (i) the physical work test, under which construction begins in the year that physical work of a significant nature begins, or (ii) the 5% safe harbor, under which construction begins in the year that at least 5% of the total cost of construction is paid or incurred.

In July 2025, the Trump Administration issued an Executive Order³ instructing the Treasury Department to “strictly enforce” the termination of Section 45Y and Section 48E tax credits and to issue new and revised guidance “to ensure that policies concerning the beginning of construction are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.”

In furtherance of the Executive Order, the Notice eliminated the 5% safe harbor for all wind projects and large-scale solar projects, leaving the physical work test as the sole method for those projects to establish a beginning-of-construction date (effective for facilities that did not begin construction before September 2, 2025). Under the Notice, a “low-output” solar facility (defined as a solar facility with a maximum net output of 1.5 megawatts or less) can still rely on the 5% safe harbor.

The Court’s Decision

In Oregon Environmental Council v. IRS, the Court held that the Notice did not satisfy the “reasoned decision-making” standard for administrative decisions established by the US Supreme Court in 1983.⁴ Under this standard, an administrative agency must show that its decisions are “the product of reasoned decision-making.”

The Court found that the Notice fell short of this standard because the IRS invited reliance on the existing methods to establish a beginning-of-construction date by repeatedly restating those provisions in subsequent items of guidance, and because the IRS failed to provide an explanation from which its path could reasonably be discerned in light of all the facts and circumstances. Accordingly, the Court found that the Notice is arbitrary and capricious.

In light of the “serious reliance interests” of industry participants, the Court found that the IRS needed to give due consideration to the facts and circumstances that underlie or were engendered by the policy that was in effect before the Notice was issued. The Court found that the IRS’s contention that the Notice would “prevent taxpayers from circumventing the statutory credit termination date” and “ensure that a substantial portion of any relevant project is built by the beginning of construction deadline” was inadequate, because the IRS did not explain (i) how it concluded that some projects satisfying the 5% safe harbor might be circumventing statutory cutoff dates or engaging in artificial manipulation of eligibility, (ii) why it chose to eliminate the 5% safe harbor for wind and large-scale solar projects instead of adopting alternative measures proposed by commenters, and (iii) why it chose to treat wind and large-scale solar projects differently than other kinds of clean energy projects, even though the tax credits themselves are technology-neutral and commentators expressed concerns about applying different standards to different technologies.

The Court Vacated the Notice in Full

The Court held that the appropriate remedy was vacatur in full, because the Court found that the Notice was not a product of reasoned decision-making and the IRS did not fully consider all the relevant interests and alternatives before acting. The Court also found that the potential for “disruptive consequences” from the vacatur would be a concern regardless of how the Court held.

In addition, the Court rejected the IRS’s argument that the vacatur should be limited to the Plaintiffs in the case and their members, finding that “because the prevailing Plaintiffs’ injuries flow not from their own tax treatment but from readily foreseeable economic consequences of the Notice's treatment of others, it is not possible to redress their injuries with a vacatur that is ‘limited to’ them and their members.”

Practical Considerations

The Court’s rejection of the Notice could have significant effects on wind and solar developers, tax credit seekers, investors, financing parties, and others. The following considerations may be relevant going forward:

1. Consider how to establish “beginning of construction” in light of additional uncertainty. With the Notice vacated, market participants financing or constructing solar or wind projects and seeking tax credits should consider whether (and how) to document “beginning of construction” for solar and wind Because of the uncertainty resulting from the Court’s decision, it is unclear whether the 5% safe harbor will be available for all projects going forward. It may be prudent to backstop a position that a project meets the 5% safe harbor by also documenting compliance with the physical work test. Market participants should consult with their advisors to determine the best way to substantiate a particular project’s beginning-of-construction date.

2. Expect possible IRS response. The Court remanded the matter to the IRS for further administrative action. Clients should anticipate the possibility of revised guidance that addresses the Court’s concerns, as well as the possibility of an appeal. At this point, the nature of future developments is difficult to predict.

3. Timing remains critical under the statute. Even with the Notice vacated, under the OBBBA wind and solar projects must still begin construction by July 4, 2026, to qualify for either the Section 45Y production tax credit or the Section 48E investment tax credit without being subject to a placed-in-service deadline of December 31, 2027. The elimination of the Notice only affects the method of establishing the beginning-of-construction date.

Conclusion

The Court’s decision vacating the Notice removes a major restriction on how wind and large-scale solar facilities establish “beginning of construction” under the relevant provisions of the OBBBA. However, near-term uncertainty remains given the remand to the IRS and potential further administrative or judicial developments. Wind and solar projects must begin construction by July 4, 2026, to qualify for either the Section 45Y production tax credit or the Section 48E investment tax credit without being subject to an additional requirement that the project be placed in service by December 31, 2027. To learn more about establishing “beginning of construction” for solar and wind projects under either or both the physical work test or the 5% safe harbor, please contact the following partners or the Chapman attorney with whom you regularly work.

1. Or. Env't Council v. IRS, Civil Action No. 25-4400 (CKK), (D.D.C. June 6, 2026).
2. P.L. 119-21.
3. Executive Order #14,315, “Ending Market Distorting Subsidies for Unreliable, Foreign‑Controlled Energy Sources” (July 7, 2025).
4. Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Co., 463 US 29 (1983).

Relevant Documents