Overview
On June 6, 2026, the US District Court for the District of Columbia, in Oregon Environmental Council v. IRS,[1] vacated IRS Notice 2025-42 which had modified IRS guidance for determining when wind and solar projects begin construction for purposes of qualifying for the section 45Y and 48E clean electricity tax credits following changes enacted by the One Big Beautiful Bill Act (OBBBA).
Under the OBBBA, wind and solar projects must either begin construction before July 4, 2026, or be placed in service by December 31, 2027. Projects that meet the beginning of construction requirements by July 5, 2026, effectively gain more time to be placed in service rather than having to meet the December 31, 2027, deadline.
Notice 2025-42 eliminated the long-standing 5% Safe Harbor Test, which renewable energy developers had used for more than a decade to establish the beginning of construction.
The court held that the IRS acted arbitrarily and capriciously under the Administrative Procedure Act (APA) by significantly changing established guidance that taxpayers have previously relied on and by treating wind and solar projects differently from other types of projects without sufficient justification.
As a result, the court vacated Notice 2025-42, effectively restoring the prior beginning of construction framework. Nevertheless, uncertainty remains. The government may appeal the decision or issue revised guidance consistent with the court's opinion. In addition, the OBBBA's July 4, 2026, deadline for beginning construction remains in effect.
Background
This case arises from the OBBBA's acceleration of the phaseout of the sections 45Y and 48E clean electricity production and investment tax credits. The OBBBA terminates these credits for wind and solar projects placed in service after December 31, 2027. However, wind and solar projects that begin construction before July 4, 2026, may claim the amount of the credit for the original phase-out period.
Under prior long-standing IRS guidance,[2] taxpayers generally could satisfy the "beginning of construction" statutory requirement through either of two methods:
- the "Physical Work Test" which required commencement of physical work of a significant nature; or
- the "5% Safe Harbor Test," under which a taxpayer could establish the beginning of construction by paying or incurring at least 5% of total project costs.
In both cases, taxpayers must satisfy applicable continuity requirements.
IRS Notice 2025-42
Shortly after enactment of the OBBBA, President Trump issued an Executive Order instructing the Secretary of the Treasury to take action to "strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E of the Internal Revenue Code for wind and solar facilities," including by adopting policies to ensure that the "beginning of construction" requirement is not circumvented.[3]
In August 2025, the IRS issued Notice 2025-42 which eliminated the 5% Safe Harbor Test for wind projects and for most utility-scale solar projects over 1.5 MW, leaving the Physical Work Test as the primary means of establishing beginning of construction for tax credit eligibility.[4]
District Court Decision
The court held that Notice 2025-42 was arbitrary and capricious under the APA.[5] The IRS failed to provide a reasoned basis for abandoning the longstanding dual-track framework under which taxpayers could rely on either the Physical Work Test or the 5% Safe Harbor Test.
Specifically, the court noted:
- The elimination of the 5% Safe Harbor Test represented a significant policy change affecting "serious reliance interests." The IRS failed to adequately explain why it was departing from guidance that taxpayers had relied upon and that the IRS has repeatedly reaffirmed for more than a decade.[6]
- The IRS did not sufficiently support its conclusion that projects relying on the 5% Safe Harbor Test were circumventing statutory deadlines or improperly preserving credit eligibility through stockpiling equipment.[7] The IRS also did not explain why it chose to eliminate the 5% Safe Harbor Test rather than adopt any anti-circumvention measures that commenters had suggested.
- The IRS failed to justify treating wind and solar projects differently from other technologies eligible for sections 45Y and 48E credits, for which the IRS retained the 5% Safe Harbor Test.[8]
Therefore, the court vacated the Notice and remanded it to the IRS for further consideration.
It is not clear what the impact of the court's decision will be. Although the ruling could open up use of the 5% Safe Harbor Test for solar and wind projects, as a practical matter, it will likely not have much impact. Most solar and wind projects have already planned to meet the beginning of construction deadline using the Physical Work Test, and given the proximity to the July 4, 2026 deadline and the continued uncertainty as to what will happen on appeal or on remand, that is not likely to change.
Potential Implications Beyond Sections 45Y and 48E
Although the court's decision is limited to the beginning of construction requirements applicable to sections 45Y and 48E, the opinion may have broader significance for future Treasury and IRS guidance affecting other energy tax credit programs.
The court repeatedly emphasized that the IRS had reaffirmed the Physical Work Test and 5% Safe Harbor Test for more than a decade and that taxpayers had developed significant reliance interests based on that guidance. The court concluded that the IRS could not abandon a longstanding interpretation without adequately addressing those reliance interests, responding to comments submitted by stakeholders, and explaining why alternative approaches were rejected.
As a result, the decision may be viewed as reinforcing established APA principles requiring Treasury and the IRS to provide a reasoned explanation when modifying long-standing guidance on which taxpayers and investors have relied. The opinion also underscores the importance of developing an administrative record that addresses stakeholder comments, evaluates reasonable alternatives, and explains the basis for any departure from prior agency positions.
The decision is noteworthy because the court treated the IRS's beginning of construction framework as an established body of administrative guidance that had been repeatedly reaffirmed and relied upon by taxpayers and investors. The court's analysis suggests that longstanding IRS interpretations in the energy tax credit area may receive substantial weight in future APA challenges where taxpayers have made significant investment decisions in reliance on those interpretations.
[1] No. 1:25-cv-04400 (D. D.C. June 6, 2026).
[2] See, e.g., Notice 2013-29; Notice 2013-60; Notice 2014-46, Notice 2015-25, Notice 2016-31, Notice 2017-4, Notice 2018-59, Notice 2019-43, Notice 2020-12 (begin construction guidance for section 45Q), Notice 2020-41, Notice 2021-5, Notice 2021-41, and Notice 2022-61 (affirming that existing begin construction guidance applies to the IRA's prevailing wage and apprenticeship rules).
[3] Exec. Order No. 14,315, 90 Fed. Reg. 30,821 (Jul. 10, 2025), https://www.govinfo.gov/content/pkg/FR-2025-07-10/pdf/2025-12961.pdf.
[4] Notice 2025-42, https://www.irs.gov/pub/irs-drop/n-25-42.pdf.
[5] Oregon Environmental Council at 47.
[6] Id. at 49-51.
[7] Id. at 51.
[8] Id. at 51-52.
